Is there a market for homegrown technology in Nigeria?
Recently, we were having a lunch event organized by Ingressive on Co-creation Hub’s rooftop at Yaba with investors in the local technology investor community and a few start-ups. What was most unsettling to me at that event was that while the YCombinator guys were talking about the market and potential demand, the rest of “us” were talking about the money. We were arguing about who is giving it and who is not getting it. I think we miss the point of sudden investor interest in Nigeria. It is all about the market. We should be selling demand and showing market potential, instead of making the conversations all about money and location of start-up offices.
There seems to be some implied assumption all around these days that a huge technology market exists locally in Nigeria. The belief is that the only requirement is the right mix of entrepreneurs, developers, and capital. I think the reality is more nuanced than the assumption.
Sam Altman, President of YCombinator, the Silicon Valley Accelerator, once famously said: “Bad investors ask about market size. Good investors ask about market growth rates. Great investors believe new markets get created.”
Silicon Valley investors believe that the opportunity to build new markets exist in Nigeria and Africa. Local investors and entrepreneurs believe that there is a lot of money to be made from technology. There is a difference in both perspectives. The reality is that not all technology ventures will survive. Quite a lot will die, in spite of best efforts. Seasoned investors in more mature markets know this and will make bets even on ventures deemed to be risky as long as they believe that they will be creating new markets with future exponential upside.
Nigeria is an “Emerging Market” nation. Emerging markets have had similar patterns in a lot of industries. Alonso Martinez and Ronald Haddock in their 2007 article titled “Flatbread Factor” made the observation that: “Markets in emerging countries tend to follow the same path of development. These emerging markets exhibit a natural life cycle — a predictable pattern of consumer demand.”
They observed that it is easy for multi-nationals who have succeeded in other emerging markets to be familiar with and have a greater chance of success in others. The other most interesting observation they made is that smaller companies originating from emerging markets can also use the same knowledge of similar markets to achieve global scale. I think the real market for Nigerian technology is not just Nigeria; it is Global. Socketworks, Swifta and recently, Andela are proving that to be true.
Is there a local market for technology?
There are two possible markets for technology in Nigeria. Existing markets and New Markets. Each type of market requires a different approach when it comes to technology opportunity. The Silicon Valley investor, Larry Cheng provided the best description of both types of markets in an essay he wrote last year:
“An existing market is a market where customers already spend money buying more or less the same product or service that a given company is selling.”
“A new market is a market where the end product or service is new — in other words, there isn’t really existing demand, but there could be.”
A lot of investments were made recently into Nigerian e-commerce companies. The belief was that the recipients of these investments were creating new markets, which they did in a way. New markets can come from consumer aspiration. Retail was also already an existing market with people already spending money in physical stores. Socketworks created a new market for technology, outsourcing inside Nigeria and also created an export market for Nigerian technology services. Socketworks did this long before a company like Andela existed. Nigeria has gone through several phases of technology, and if we forget history, we will be repeating mistakes.
Dr. Alloy Chife had worked with some of the largest Silicon Valley companies and had a Ph.D. He decided to come back home to Nigeria early last decade and founded the software company — Socketworks. Socketworks was a software start-up, and its primary product at inception was a product called cPortal (College Portal). The first customer was a private university in Edo state, and it was using an Application Service Provider Pay-As-You-Use Model.
The larger plan of Socketworks was to go into business process outsourcing (BPO) and the main sectors targeted locally were banking as well as oil and gas. The company planned to grow competence locally before export. They needed funding for growth and approached the IFC’s (International Finance Corporation) African Project Development Facility for assistance. The IFC approached us to assess the opportunity and the market.
As at that time, very little was known about the size of the local software market in Nigeria. We had just gone through a phase where the locally-built software enterprises were replaced by softwares from outside Nigeria, especially India. My company Swifta was a casualty of that. We lost a client of 7 years to an Indian company. The banks led this local carnage. Successful Nigerian-built core banking platforms were replaced by softwares from India. Resellers of software from Indian companies became the largest local technology companies. The Nigerian software market moved from the building phase to the reselling phase. We all mostly became consultants and businesspeople instead of product builders.
At that same time, Alloy Chife came back to Nigeria and was trying to take the fight to the Indians on their turf of outsourcing. He was an outlier, and it seemed insane. We had to do a logical analysis with very limited data to come up with a crude market maturity analysis. We looked at both existing and new markets. We looked at the strategic importance of technology and plotted it against the availability of resources to come up with a two by two matrix to show where there was more opportunity for local BPO. We overlaid it with sector data, and it was clear that Education, Healthcare and Government were the areas that required BPO.
The entrepreneur on the other hand already had a clear idea of the existing market he wanted to target. We were asking him to look at a new market where he had no interest. Thankfully the investor backed us up as they were also looking at impact. The result was that Socketworks became very successful tackling those sectors and also got what was probably the first multi-million dollar fundraise by a Sub-Saharan African start-up — Seven Million Dollars. Socketworks took the fight to India and had clients as far away as Sri Lanka. They are still fighting till today.
Market opportunities for technology in Nigeria may be counterintuitive. Both existing and new markets in Nigeria come with their unique barriers to opportunity. People may easily assume that new markets are hard to address even without trying. The government is seen typically as corrupt and who would have thought twice about government owned Universities when the real money spenders were in the private sector? Socketworks didn’t think so but eventually it became a massive market for their products and services.
The reality is that the government is the largest spender in the economy and it is also the most inefficient. According to Venture Capitalist, Mark Suster, “Most of the Internet’s Greatest Successes Have Been Deflationary”. SocketWork’s ASP model of Pay-As-You-Use was disruptive as it changed the cost dynamics while increasing efficiency.
The government is also the largest aggregator of revenue in Nigeria. The most successful payments companies already work with the government in some form. I met someone at the airport recently running the technology unit for a Nigerian State Inland Revenue Service. They are now doing 500 million Naira monthly in collections because of efficient technology and are still hungry for more.
Gerald Ilukwe, the former CEO of Microsoft Nigeria, started Galaxy Backbone, an infrastructure company that is a Public Private Partnership or “PPP”. I believe there is still room for a lot of private sector technology partnerships with the public sector. The greatest technology opportunities may, however, lie outside Nigeria. Solving local problems are stepping stones for going Global. Once you can succeed in solving a Nigerian problem, you can succeed in solving it anywhere else. The South African technology companies have mastered this. They saw Africa as the first opportunity for scale. MTN is a South African company that is now in 22 other countries. Their largest operation is in Nigeria. There is no reason why a Nigerian company cannot also do business in 21 other countries. Iroko TV is doing exactly that.