How local investors can leverage startups for returns
In the last decade, conversations surrounding Africa are shifting away from deficit and aid to opportunities, ventures and innovation. Across Africa, spurred by an increasing Internet and smartphone penetration, there has been a steady rise in the number of startups successfully leveraging technology to transform how Africans generate and consume media content, use financial products, navigate cities, access healthcare, grow food, socialize and run businesses.
African tech entrepreneurs have shown great prowess in building global, scalable businesses, leveraging technology to solve real problems. According to Disrupt Africa’s African Tech Startups Funding Report 2016, African tech startups in the innovation space raised funding in excess of US$129 million last year, most of it from foreign investors.
Nigeria has been at the forefront of this tech revolution. Despite Nigeria being in the midst of an economic recession, the startup ecosystem in Nigeria continues to record rapid growth and attract significant attention from investors. At US$2 billion, Nigeria’s startup ecosystem is the most valuable startup ecosystem on the African continent.
The rapid growth of the Nigerian ecosystem has not gone unnoticed. Successful startups like BudgIT, Andela, IrokoTV, and Konga have managed to amass over $100 million in funding.
While this is laudable, it is also worrisome when you consider that most of the funding is coming from foreign venture capitalists and investors.
Recently, full validation of the place of Nigerian tech in the global scene came in the form of visits to Nigeria – first from Mark Zuckerberg; the founder and CEO of Facebook then from prominent Silicon Valley venture capitalist companies such as, Y Combinator, Techstars and most recently, 500 startups (all three firms having invested in at least one Nigerian startup). These are only a few of the many notable Silicon Valley investors that have shown great interest in Nigerian innovative ventures.
Last month in Lagos, 500 startups visited bringing along a couple of tech geeks – executives and investors. The trip to Nigeria marked the first stop on the 500 startups’ Geeks on a Plane tech tour to 33 countries around the world. Geeks on a Plane (#GOAP) is a tour for startups, investors, and executives to learn about (and possibly maybe even find a few local startups to invest in) high-growth technology markets worldwide.
As part of the tour activities, Dave McLure, Bedy Yang and Monique Woodard made presentations at a VC Unlocked session, which held in Ikoyi, Lagos. Conversations that day focused on startups and opportunities in Nigeria, stage financing, disruption, investment thesis, how to predict a unicorn (you can’t), and branding and marketing for VCs.
It was agreed that Nigerians hesitate to invest in local startups out of fear and impatience to wait several years for returns. Economists agree that businesses do not tend to break even before the first 5 years of operation. Local investors do not have such patience.
Take 500 startups for example, it’s taken them over 8 years and $300M+ in committed capital to grow an investment portfolio of 1700+ companies that includes 3 unicorns (over $1 billion valuation) and 30+ centaurs (over $100 million valuation). They’ve had to be patient and stomach a lot of losses along the way but are now seeing huge returns on investment, with at least one company within their portfolio expected to IPO every year for the next few years.
While the American and other similar cultures and market allow for and forgive wild investments and losses, this cannot be directly applied to the local Nigerian investment market. What Dave McClure has suggested is that there should be small but numerous injections of money into any and all startups. The small amounts of money injected insulate the investors from any great loss should the start up fail, but because there are so many of them; the start-ups get enough money to get afloat. This is akin to the philosophy behind such great start-ups as Kickstarter and GoFundMe.
In addition, the small amounts mean anyone can be an investor, making it easy to gather large amounts of money from numerous, small contributions and to pay out gains on profits later on. It also allows for the founders to retain control of their company. Something they are generally unable to do given the terms currently offered by Nigerian based VC’s.
Dave McLure expressed his confidence in the Nigerian tech ecosystem’s ability to achieve in the next 5 – 10 years the same results it took Silicon Valley 50+ years to achieve, provided Nigerian tech entrepreneurs are armed with more than sufficient capital. He mentioned that talent is evenly distributed around the world but opportunity is not and cited the lack of access of tech startups to capital funding as the number one hindrance to the massive growth of the Nigerian tech ecosystem.
Since Nigerian entrepreneurs have so far shown prowess in building successful, innovative businesses despite the little they’ve been given, it is only logical that more pervasive access to funding will yield accelerated progress. It is worth mentioning that Nigerian tech founders have a part to play in ensuring that they are creating businesses that solve real challenges faced by the average Nigerian. Founders who succeed are those leveraging technology to solve real problems. Local investors looking to profit from this boom must get into the game now and make lots of little bets in early stage startups when they’re getting started, and over the next 5 years double down on the top 20 – 30 per cent.
Current profitable sectors to invest in include Edtech, Fintech, AgTech, Healthcare, e-commerce, supply chain, delivery and logistics.
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