In the past couple of years, there’s been huge disproportionate interest from VCs in fintechs globally and Africa which has also led to a lot of start-ups coming up. So many incubation hubs bias their services towards fintechs because those are the businesses most likely to raise capital.
Expatiating on the reason for drop in investment in the Fintech sector, Emeka Ematarom a Fintech CEO has this to say:
“What tends to happen generally is that when you have an economic downturn, it makes investors more cautious. It’s not that investment is not happening, just that investors are more cautious. Two issues came together to cause the economic downturn.
“Firstly, the Covid-19 pandemic kept most of the world grounded for 18 to 24 months. Many countries implemented stimulus packages; just pumping money into the economies to keep them going and to avoid a recession. I feel they may have gone overboard with that, and the whiplash effect from that has been inflation.
The way central banks rein in inflation is to increase their interest rates. But the impact of increasing interest rates is that suddenly, investors can make better returns from safe investments. For example, if you had $10 million and your money was sitting in the bank where the interest rate was essentially zero, it doesn’t make sense to keep it there.
You need to find some venture to put it in to get some return so that money goes into private equity and venture capital and so on.
But the moment the central banks decide to increase rates, all those rates start going up, and then suddenly, people would see no reason to put their $10 million in a risky investment, if they can just keep it in the bank where it will be safe and secure, and they can get good returns. So that sucked out liquidity on the one hand.
But sucking out liquidity, if not properly managed, can impact consumer spending and cause a slowdown in growth. So, investors analyzing the mid-term economic outlook would have been thinking “this is not the best time to take risks”. Nobody wants to invest just before a downturn. The best time to invest is when you are at the base when things are starting to go up because then you get a good return on your investment.
Also Read: Venture Capital Funding For African Fintech Start-ups Drops In End Of Q3.
Also, it didn’t help that the Russia and Ukraine war caused other supply chain problems and just exacerbated the overall economic outlook problem. Gas prices went up and you have currency devaluations and all that. Essentially most investors are waiting till the storm blows to start investing again. I’m optimistic that this will start to happen sometime towards the end of 2023.”
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