SILICON VALLEY AND VENTURE CAPITALISTS ARE IN A SECOND SCRAMBLE FOR AFRICA
From Fintech, logistics, Health-tech, Agro-tech to B2B marketplaces, Nigerian startups have seen a massive influx of capital injection and venture backed funds, especially in the past twelve months. The investors taking part in these fundraising rounds include international institutions like global startup accelerator giants Ycombinator and Techstars, African focused venture capitalists like Atlantic Ventures, Future Africa and Microtraction, and startup incubators like CCHub and Wennovation. The list continues to grow with every fundraising event, and the funding rounds and valuations keep getting bigger.
Some of the biggest funding rounds the ecosystem has witnessed lately include internet bank Kuda, which raised $25 million in a series A led by US venture capital firm Valar Ventures, Wealth Management startup Cowrywise recently raised $3million led by Gumroad CEO Sahil Lavigia, TradeDepot, a B2B e-commerce platform also raised US$10 million led by International Finance Corporation, and Tiger Global led the $170million funding round for Flutterwave, which drove the startup to unicorn status. The latter is an unprecedented feat, accomplished in just five years.
WHAT ARE THE FACTORS THAT FUELED THIS INTEREST?
It should first be noted that tech and startup ecosystems, are still very unconventional and complex structures. Even the most mature ecosystems are still prone to chronic startup failure- in the US for example, 90% of new startups fail, while 75% of venture-backed startups fail. Under 50% make it to their fifth year while only 33% of startups make it to the 10-year mark. As a result, even in the most mature markets, it is still very uncommon for founders to exit (sell their company at a successful valuation), and even more unusual for them to go public either through an IPO or a direct listing. This is because a mature ecosystems needs more than just funding; consistent publicity and visibility, technical support, room for collaborations, exit channels and talent funnels are essential to the sustained growth of a startup ecosystem.
In Nigeria, the chances are much steeper. A draconian regulatory and economic system, an increasingly devaluing currency and a hostile business environment means the chances of startups even successfully launching are much lower compared to developed markets and ecosystems; they have to be twice as dogged with much less resources. Yet, millions of dollars is still being poured into these startups and fundraising opportunities are more accessible than ever.
This interest in an otherwise nascent market, could be said to have been largely fueled by two primary factors- expansive broadband/cellular penetration and mass adoption of technological solutions by a teeming youth population; Nigeria has a median age of 18.4. They have become the backbone and core user base for these startups. This, coupled with the proliferation of affordable smartphone brands, particularly android phones, meant the stage was set for the growth of these Nigerian startups to thrive despite the unfavorable circumstances.
In April 2012, Tiger Global, a leading US investment company backed Nigerian startup IrokoTV with $8million, a huge fundraising round at the time. IrokoTV was also already the largest distributor of Nigerian digital media and content at the time. Jumia, the African focused e-commerce platform went public on the New York Stock Exchange in 2019 in an unprecedented IPO listing for a Nigerian startup, and also notably, talent accelerator Andela received funding from the Chan-Zuckerberg initiative.
However, a major breakthrough for the Nigerian startup ecosystem came in the summer of 2016. Paystack, a Lagos based Payments Company became the first Nigerian startup to be admitted to Global startup accelerator YCombinator, an important global stamp of approval of the budding tech scene in Nigeria. The effect of such an accomplishment was that foreign backers now not only sought to merely invest and provide funding, but were now taking a keen interest in the talents of Nigerian founders, bringing them onto the global platform. YCombinator has now funded and backed 22 Nigerian startups since then.
It can be seen that a common theme running through these trends is, foreign institutional investors do not only see Nigeria as an emerging market whose vast opportunities can be tapped through funding startups, they are now increasingly aware of the need to grow local communities to help nurture the immense talents that exist in the market. Startup accelerators, angel investors and venture capitalists are no longer the only ones leading this drive. Tech giants are also setting up programs aimed at supporting talents and disruptive startups to achieve high-growth potential through community support, funding and assisting technical knowhow. Examples include Google for Startups Africa and Microsoft startups accelerator.
WHERE WE ARE NOW
Nigerian startups are run by young ambitious people coming up with innovative ways to solve local problems, and with funding and networking opportunities becoming increasingly accessible, they are also invariably creating a new and thriving set of middle class of Nigerians.
Paystack’s exit was a major win not only for the ecosystem but also for the economy; and Flutterwave’s recent unicorn status is testament to the fact that startups are not only raising money and employing scores of working class Nigerians, but are actually creating real value. Nigerian startups raised over 17% of the over $1billion funding in startups in 2020 alone at nearly $200 million raised, with Flutterwave and energy startup Lumos leading the funding rounds with $35million each.
For context, at an estimated N75bn, Nigerian startups pulled in more funding than the IGR of oil producing states like Delta State (59bn) and trading centers Kaduna State (50bn) for the 2020 fiscal year. In fact, they raised foreign direct investment than the entire IGR of the North East (58bn) and very close to the full year IGR of the South East (96bn).
These numbers are staggering and unprecedented, and they are more highlighted by the fact that bigger funding rounds are expected; just yesterday, Okra a Fintech startup in Lagos raised $3.5million to expand its data infrastructure across the country. Twitter CEO Jack Dorsey had announced his plans to permanently move to Africa, which were halted due to the Covid 19 pandemic outbreak, and African focused venture capital Atlantic Ventures recently raised a $50 million round to invest solely in African startups. Payment giant PayPal, which has long overlooked Nigerians and blocked them from access to its services recently made a U-turn, partnering with Nigerian payments company Flutterwave to empower Nigerian e-commerce merchants. Fintech giant Stripe recently made its biggest acquisition to date; it is Lagos based startup Paystack in an estimated $200 million deal.
These numbers point to one obvious fact; Nigeria is now being viewed seriously by every major foreign tech and investment institution. The youthful demographic, smartphone and broadband penetration, a strong sense of community and collaboration and a globally competitive talent pool has propelled Nigeria to the forefront of technological innovation, investment and a thriving ecosystem.
PERSPECTIVES ON THE FUTURE
From all indications, the startup ecosystem in Nigeria is only going to get bigger. More funding rounds will be closed and more sophisticated mechanisms for investment, debt financing, equity and acquisition will be adopted. It is also noteworthy that the legal industry is catching up with the fast changing world of startups, as no ecosystem can grow independently of strong and competent legal, compliance and representative backbone. The prospects are huge, the conditions are (mostly) good and the mood is always fast paced. There is no letting up and ideas are being executed at break neck speed.
The relevant question- is this growth sustainable? On one hand, skepticism is quite justified. Despite the plethora of fundraising, there has not really been much by way of notable exits or IPOS- Paystack and Jumia being an exception. There is also the question of Nigeria really having the resources to create an actual unicorn in its current economic and sociopolitical state, not merely in speculative valuations, but in actual tangible billion dollars’ worth of growth and economic value. The 1990s dotcom bubble comes to mind. Startups were being created and funded as such speed (anyone with “dotcom” at the end of his company could literally secure millions in funding), that when the roof came crashing down, it swallowed over 90% of the companies. People realized that they were merely throwing money at worthless enterprises with flashy presentations and no real monetary value or revenue.
There are also notable cracks in the relationship between regulators and startups. The CBN, SEC and traditional banks at best, have a frosty relationship with these startups and while the latter simply choose to innovate around these hurdles, there is only so much you can innovate around. Penetration is also still very low; just over 40% of Nigerians have access to the internet, internet cost are still too high, one of the highest in the world, and just over 38% of Nigerian adults even have a bank account. These are the challenges, and they are very daunting ones.
Still, the prospects look favorable. Innovation and entrepreneurship spirit is at its peak and there is still much collaboration and work to be done. There are huge prospects for growth; the ecosystem still needs more exits, unicorns and maybe IPOs. All these will be merely a revalidation of the impressive collective work done so far. There is no doubt that these startups are touching and transforming the lives of thousands; from merchants, vendors and retailers, money operators, the agriculture value chain, investing and wealth generation opportunities, freelancing, healthcare services and so on. The money will no doubt keep coming in, the interest is real and optimism is high… it is really only forward from here for the Nigerian startup ecosystem.