Nigeria Tech: Are we in a bubble?

This is all new, and just evolving. I have always held the belief that the Tech industry will one day have its day in the sun after Nollywood and the Music industry. The indigenous tech industry has the potential to dominate Africa and beyond just as Nollywood and the Music industry have done.

But before we get ahead of ourselves, a note of caution; the glamour of the global tech industry is sustained by an ecosystem made up of those who have the ideas and those who fund, buy and sell the ideas and make a business out of it.

Let me explain. Facebook became Facebook not just because Zuckerberg was the first to have an idea of a social network. Remember Myspace? It had at its peak over 300m users and was there before Facebook. The difference was that Facebook was supported by the guys who had money. From Angel investors to venture capital companies to banks who could underwrite their way to an IPO.

Secondly, it’s not all startups in Silicon Valley that make it to an IPO. An equally important market exists for startups that may be as big as or bigger than the IPO market. Lots of startups in the US target being bought by bigger and older tech companies: the Microsoft, IBM, Google of this world. Those startups end up as breakfast for the older and bigger boys, essentially acting as external R&D for those companies to explore newer and faster technology. Without this ecosystem, only few startups would make it big as only a small fraction make it to a successful IPO.

So, let’s come back to Nigeria. Despite the buzz of Yaba, we are yet to see the way through which the high-flying tech companies will make money for founders and early investors. IPO? Except Interswitch that was rumored to be heading for IPO, there is little or nothing happening in this space. What of bigger companies buying smaller companies? Again, Interswitch bought Vanso and Hotel.ng was involved in something with OgaVenue. A few other deals under the table may be out there but this is a trickle.

These are the two quickest paths for startup stardom in Tech. Otherwise, you must be lucky that your idea berths a company that is profitable from day one and churns out super profits for you and your investors.

What will happen if we have startups piling into the space and only few exiting with deals that make money for founders and their early investors? A bubble? Not in the classical senses of wild valuations and little market value. But a bubble in which the promise of tech stardom vanishes with disappointment for the young men and women who are creating what they believe will be the big companies of the near future.

We cannot will IPOs until our economy improves and the stock market creates appetite for new company listings. Last time this happened was in 2008 when a few tech companies took the opportunity to list. Time for that will come but no one can predict how soon. The other exit path seems to be the cross-border deals that see international companies buying up local startups as entry strategy for Nigeria or Africa. This is good but only few investors are rushing to Nigeria these days. That also will change at some point and more deals will happen.

However, the path less explored which holds the best potential in my view is local deal making among tech companies. I like the deal Interswitch did to acquire Vanso. We need to see more of that. The bigger tech companies should learn to acquire smaller companies to diversify and get into new businesses. The Vanso deal was worth N15 billion. That’s huge by local standard.

But we don’t need all the deals to be that big. If a startup looking to raise N10m stays in the market for too long trying to raise that sum, possibility of early death will rise. Why not look for a suitor from older tech companies and become part of a whole. Maybe the deal will be worth N50m or N100m. What do you have to lose if it keeps your dream alive and makes you rich, not very rich but better than where you started? And for the older tech firms, the capacity to grow internally most times is limited as the company gets older. Bringing in new expertise and entrepreneurship from outside may help rejig your company and set it on the path for growth again. So, it’s a win-win for startup and incumbent if the deal is managed well.

It’s true that local expertise in deal making at this level is scarce. Expertise exists for large deals where the merger fees make sense for the large companies that broker such deals. But I think that there is opportunity in this space for some of the local firms that play in the mergers and acquisitions space to make a play here. And for startups, it’s important to realize that the way to building the company of your dream is not necessarily through a Silicon Valley type exit.

Coming together to broaden exit paths for founders will help the industry continue its fast growth and create rewards for stakeholders in the industry.