Why venture capitalists ask for ‘The Nigeria discount’

By Victor Asemota, Contributor |   12 September 2018   |   3:25 am  

Many years ago, I was sitting inside an investor’s office in Redwood City in Silicon Valley, and he asked me a question that threw me off-guard. He wondered if the returns on real-estate in Africa were not better than the returns on startups?

His family had bought a lot of land in Tanzania for farming, and he was of the belief that the land or property would yield higher returns than any potential startup investment.

His theory was that weak and unstable economies would not allow tech startups to thrive. 

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I tried my best to make a case for startups using the popular “Africa Rising” narrative at that time.

The Arab Spring uprising and terrorist attacks all around Africa that happened shortly after that did not help.

The fish in the desert

“There is nothing more nervous than a million dollars – it moves very fast, and it doesn’t speak any language.” – Joseph Jacques Jean Chrétien. Former Canadian Prime Minister.

Venture Capital is NOT stupid capital, in spite of the implied risk in the term “Venture”. Venture money can also get nervous.

Venture capitalists typically invest in “venture” and “growth stage” companies who have survived the perilous early stage and with proven potential.

The bet made by venture capital at that stage is on the speed of growth and size of the market.

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One other thing venture capitalists take into consideration when investing are the ecosystem and institutions available to support rapid growth.

I remember asking a panel that included Jessica Livingston (co-founder of YCombinator) and Naval Ravikant (the founder of Angellist) a question at a Google event many years ago.

I asked why investors were not leaving the crowded markets in Silicon Valley to places with new opportunities in the emerging markets?

Naval’s answer was simple; You fund ecosystems. If there is no ecosystem to fund, “you can’t fund a fish in the desert”.

Naval’s “fish in the desert” comment got to me.

Whatever we thought we were doing in Africa and the ecosystems we felt we were creating at that time was not yet good enough to get the attention of serious investors.

All of this changed when YCombinator came visiting a few years later and led the funding of many local companies.

Our Oasis in the desert has now been established, and we have an ecosystem trying to grow around it now.

I also realised that there were different types of venture capitalists.

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There are those who are patient enough to invest in creating ecosystems, and there are others who only invest in fast-growing and mature ecosystems.

Someone like Paul Ahlstrom of AltaGlobal invests in building ecosystems and was primarily responsible for creating what Mexico has today.

He did it by starting everything from scratch and engaging all the key players including the government in creating the ecosystem. He created the oasis.

Risk Premium

One truth that I have learned the hard way is that Nigeria may be a great market, but it is not a great location to run a business.

There is the problem of “friction” then the problem of “perception”.

You can become very successful in addressing the Nigerian market, but starting and operating your business from Nigeria alone sometimes brings some disadvantages.

I have seen investors ask for much lower valuations (The Nigeria Discount) from startups because they have the “Fish in the desert” perception about Nigeria. 

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It is interesting that the same investors pay for higher valuations in companies operating from places like Kenya and South Africa who have a presence or partnerships in Nigeria.

I know people who have raised millions of dollars in funding in the past based on signing agreements with us as local Nigerian partners.

I have been tempted to believe that “Country Risk” was an excuse for pattern matching.

After the recent flurry of funding announcements by local startups, I have seen a lot more investor excitement about investing in Nigeria from outside. 

Fear of missing out (FOMO) is now intense. People even discuss it openly on Twitter and solicit for possible investment opportunities. 

The problem is that these people who are now so eager to invest don’t see potential, they only see opportunity.

They are speculating. They talk to each other about “cheap investments” in Nigerian tech. They are very aware of exchange rate advantages.

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There is nothing at all wrong with speculation or buying cheap, that is the way investment markets work.

The only question that I ask is why the right type of “building capital” is not being invested at reasonable valuations?

I have seen some offensive and unfair term sheets being passed on to some founders by both local and foreign investors.

I think these terms are wrong because these investors believe that these founders don’t have a choice.

The lack of opportunity seems to be true on some level as there is a lot of founder desperation and minimal local investor participation in venture capital.

Domestic investment, exits and returns are a crucial part of growing ecosystems.

There is also another explanation. The way we treat existing foreign investors in other sectors like telecommunications will not inspire confidence.

Arbitrary fines and bullying tactics make potential foreign money nervous.

The nervousness could easily reflect in lower startup valuations and risk premiums.

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