Nigeria, once the uncontested leader of African tech startups, is grappling with a surprising turn of events in 2023. The nation’s tech ecosystem, which had consistently ranked as the top destination for startup funding on the continent, now finds itself in fifth place for funding volume in the first half of this year. Behind Kenya, Egypt, South Africa, and Rwanda, Nigeria’s position as a tech giant is shifting, prompting questions about the reasons behind this shift.

According to the H1 Africa Investment Report 2023 by Briter Bridges, Nigeria managed to close more deals (101) than any other African country. Still, its funding volume fell short compared to its counterparts. Kenya, with 80 deals secured, claimed the top spot, followed by South Africa with 60 deals, and Ghana (35) and Egypt (15) rounding out the list.

Despite this funding decline, Nigeria’s tech sector remains robust and vital to its economy. The National Bureau of Statistics (NBS) reported that Nigeria’s Information and Communication Technology (ICT) sector experienced its most significant growth in three years, recording an impressive 8.6% increase. This sector contributed 19.54% to Nigeria’s GDP in the second quarter of 2023.

Moreover, there is optimism within Nigeria’s tech ecosystem surrounding the appointment of Bosun Tijani as the new Minister of Communications, Innovation, and the Digital Economy. Many believe that his leadership will accelerate the sector’s growth. However, the question remains: why did Nigeria’s ranking in startup funding decline?

Nigeria is not alone in facing funding challenges. Briter Bridges’ data reveals that African startups raised $1 billion in H1 2023, a substantial drop from the $1.8 billion raised in H1 2022 and $1.5 billion in H2 2022. The report highlights a 26% decrease in funding volume, prompting investors to shift their focus from growth-stage startups to early and late-stage ones. As a result, some startups have shut down, funds have struggled to meet their targets, and others have undergone significant valuation cuts, while some have turned to crowdfunding for equity.

Several factors may explain Nigeria’s descent in the funding ranks. Firstly, the country’s currency has experienced a consistent devaluation against the US dollar, the currency of choice for most startup funding from venture capitalists. With most startups earning revenue in naira, it becomes challenging to report their financials in dollars, introducing additional risk, especially when the Central Bank of Nigeria loosened its control over foreign exchange rates in June.

Additionally, 2023 marks the first time in years that Nigeria hasn’t seen substantial rounds of funding from its startups. Companies like Flutterwave played a pivotal role in securing large portions of Nigeria’s funding in 2021 and 2022, but their absence in 2023 has been noticeable.

Another intriguing aspect is the rise of “unspecified” funding rounds, where startups announce fundraising activities without disclosing the actual amounts. This trend hints at startups navigating the complexities of securing capital, with many of these unspecified deals potentially serving as bridge financing to sustain operations amid challenges.

As African startups celebrate a milestone of surpassing $20 billion in funding over the past 15 years, questions arise about the future of investing in Africa. The current landscape, characterized by funding challenges and evolving dynamics, prompts the investment and innovation ecosystem to contemplate what lies ahead for the continent’s entrepreneurial spirit.