Nigerian technology investment outlook

Private Equity
Late Chief Michael Ibru had once told me to go and sell fish instead of doing consulting. His reason was that “everyone eats fish”. He was right, I have come to realise over time that consulting services and software are much harder to sell than fish. I also discovered along the way that there is a difference between creating a fish market and deriving maximum value from it than retailing fish in the market. Someone first has to catch the fish; another person will transport the fish then sell the fish to the market retailers who would, in turn, sell to most of the buyers. There is a fish value chain. In his time, Chief Ibru created a “new market” and supply-chain for frozen fish with refrigerated stores. Dangote is another example of a wealthy Nigerian entrepreneur who creates markets and controls his supply chains from end to end. He has scaled his cement business now beyond Nigeria.

Most successful technology venture investors look at creating new markets and the potential upside of such markets.
I have a theory on why it is harder to get more wealthy individuals in Nigeria to invest directly into technology ventures. Most old wealth came from infrastructure monopoly opportunities. The entrepreneurs profited from having a market advantage over others by controlling both their supply and distribution. Infrastructure monopoly in technology is much harder to achieve locally as most technology ventures depend on 3rd parties. The infrastructure owners have the upper hand over technology companies. That is why private equity flows more towards infrastructure projects than software enterprises.

I believe that is going to start changing with Internet ubiquity. The Internet is the ultimate backbone. More money will flow into infrastructure no doubt, and startups who learn to build platforms that become “soft infrastructure” will be the first to get investments. Distribution is infrastructure. Those who create more efficient delivery mechanisms for existing and potential ventures will turn out to become winners. Payments is also an infrastructure business; local technology startups have not even begun to scratch the surface of what is possible. The exchange rate crisis may also create more opportunities for local Internet hosting infrastructure companies to become commonplace.

Corporate Venture Capital
Some years ago, I discovered that the UK government had created an entity (in partnership with the private sector) called “Growth Accelerator”. Its purpose was to jumpstart small business growth. Growth Accelerator not only helped to shape government policy with feedback, but it was also its execution arm for microenterprise growth as well. They initiated a unique program to match technology startups with corporates. The corporates got tax incentives for investing in startups, while the startups got mentorship, funding and sure exit opportunities. These startups supported by the brands were part of an actual technology incubator/accelerator called “Collider”. I realised that this would probably be the most useful model to mentor and fund African technology startups. We tried to replicate Collider in Ghana as Afrinnova.

The Ghana Angel Investment Network (GHAIN), took up the challenge just as Growth Accelerator did, to get the Ghanaian government to change their laws to allow similar investment incentives for local corporates. It was, however, a Nigerian company, Interswitch, that led big business involvement with startup ventures in that country.

Interswitch decided to partner with Meltwater Entrepreneurship School (MEST) in Ghana to sponsor the first batch of Nigerian entrepreneurs they admitted into their “Entrepreneur In Training” program. The result was so successful that MEST decided to set up an incubator in Nigeria as well. MTN Group has also invested in African Internet Group the parent company of Jumia.

I think this trend will grow if similar taxation incentives for startup investment in the UK and Ghana apply to Nigerian corporates. Startups can create jobs quickly and innovate faster than corporates. Closer partnerships between startups and corporates are not just a net positive for the economy; they also would ensure fewer failures with proper support and mentorship. I expect more Nigerian companies to follow Interswitch’s footsteps.

Foreign Investment
2016 was a great year for foreign investment in Nigerian technology. A lot of us all got excited about foreign investors coming in, while some people were also against it with good reason. A nuanced look at what was happening will reveal that most, if not all of those investments were for the offshore entities that owned the Nigerian technology companies. Some went as far as calling it a “new kind of colonisation”. The reality is that local investments in startups are still perilous propositions. Operationally, it is easier and probably more prudent for a Nigerian startup to raise money as a foreign entity than for a foreign investor to send the money to Nigeria. With all the recent problems with exchange control, a Nigerian startup is also much better off leaving any money they raise outside Nigeria to pay for infrastructure bills.

My personal theory is that two main triggers led to all the investment activity in 2016. The first was “Signal”. There was a gradual build up from money raised by IrokoTV, Konga and Jumia then Andela’s rapid fund raise took Silicon Valley by surprise. The second was fear of missing out “FOMO”. FOMO is a real impetus for investment in new markets by Silicon Valley. “Nigerian FOMO” became a thing.

Some investors will tell you honestly that they don’t understand the Nigerian market entirely or even know what they are investing in but they believe that from seeing the quality of the people involved in the startups, the potential to create Billion dollar companies exist in Nigeria.

Nigerian FOMO could turn out to be the saviour of Nigerian Technology. It could also be what wakes up the sleeping giant that sent $35 Billion Dollars back home in 2016 – “The Nigerian Diaspora”.