Nigerian tech startups’ dominance of funding activities in the African tech ecosystem in recent years may paint a picture of a thriving space filled with investors who can’t wait to sign off cheques to the next innovative founders, but that is hardly the case.
Founders tell a different story. On one end are founders who appear to have cracked the investors’ happy code, giving them access to seemingly unending funding opportunities anytime the need arises. However, there are founders who are not so fortunate and can’t get an investor to fund them for different reasons.
Emaye Victor, co-founder and CEO of Chekker, a digital health platform that is democratising access to laboratory and diagnostics services, says he was once in the second group of founders. He said while trying to raise funding for his company, which launched on 7 February 2022, he wrote up to 100 cold emails to investors and received no funding.
According to him, getting funded is a function of many factors including the size of the addressable market. This could mean two things. First, it means that startups in some sectors where the market is considered not big enough are often passed over in preference for others.
For example, fintech is a large market, hence, the huge funding going to the segment. This is not the case for EdTech or HealthTech or BioTech or Agritech or Autotech startups.
This is also the reason more entrepreneurs are more inclined to open a fintech business than go to other segments. Victor said there is only one startup providing similar services as Chekker.
The addressable market could also mean where the startup is located. For example, over 90 percent of investors would do a deal with a startup located in Lagos than in other parts of the country. Lagos has the highest population of mobile device owners and internet penetration, and it’s the epicentre of the thriving tech ecosystem. Although Chekker is located in Lagos, Victor says being in Lagos does not guarantee a startup will secure an investor’s signature.
“The people you know are also important,” Victor says. His first startup Medipal struggled to raise funding for a long time and was only able to survive on grants until it pivoted to Chekker.
He later learned all he needed was a connection or a venture scout that would introduce him to other investors. Having secured a scout, he feels very confident about his next round of funding.
But Babatunde Lawal, CEO of Aisiki, an agritech company, says location matters. His company is currently looking to raise venture capital funding and grants but its location in Benin poses a challenge.
“Some investors don’t invest if you are from a certain part of Africa or a country. Some won’t invest if your margins are not beyond a certain percentage. Some won’t invest if you are yet to clock 2-3 years in business, while some others won’t invest if you are solving a similar problem as any of their portfolio companies. And the list goes on,” Lawal said.
He agrees with Victor that most investors only deal with startups within their network or they have a relationship. Uche Aniche, convener of StartupSouth and director of SSE Angel Network, said experience plays a significant role in investors’ decisions. In essence, founders who have prior work experiences before starting their companies tend to do better than those without these experiences.
“I highly recommend founders having prior experience, especially young people. But I don’t believe in absolutism,” he said.
These experiences align with a survey by the Harvard Business Review, which shows that more than 30 percent of funding deals come from leads from venture capitalists’ (VCs’) former colleagues or work acquaintances. Other contacts also play a role as the survey shows that 20 percent of deals come from referrals by other investors, and 8 percent from referrals from existing portfolio companies. Only 10 percent result from cold email pitches by company management.
Fortune Ikokwu, CEO and founder of Ikokuonline, who runs his autotech startup from Port Harcourt, says the company has faced several rejections while trying to raise less than $500,000 as an early-stage startup. This time the investors said they only invest in series A and B or funding from above $500,000 to over $1 million.
However, Ikokwu says expanding to Lagos would give them a better chance of raising the money they want. Already 70 percent of the company’s online traffic comes from Lagos.
But that plan is not as easy as working in a commercial city and renting an office.
“Entering the Lagos market will need huge financial backing as there are so many players in the space and the terrain of the Lagos market and her customers are very difficult to navigate,” Ikokwu said. “One will need the best talents, great marketing, and awareness as well as proper infrastructure,” Ikokwu said.
Getting into investors’ network
Victor says getting a venture scout was one of the best decisions he made. Venture scouts are typically considered interns or work completely outside the fund. They act as a bridge, connecting a fund to promising companies in their network in hopes of making a deal happen.
Victor, who is in the process of raising $500,000, says he is making more progress after a venture scout introduced him to an investor who was interested in investing in the diagnostic market segment.
Outside Nigeria and Africa, scouts are easy to find because of companies that have established themselves to provide these services. Here in Nigeria, scouts are either highly networked entrepreneurs or known angels used by a VC firm to maintain and scale deal flow and gain an edge at the earlier stages of the investment lifecycle.
One of the advantages startups in Lagos gets is access to tech conferences and programmes where they have the opportunity to meet and interact with potential investors on a one-on-one basis. Nearly 100 percent of the biggest tech conferences are held in venues across Lagos State.
Founders who connect with others or are part of a vibrant accelerator also have a greater chance of getting introduced to the investors’ networks.
Why investors’ networks are potent
Henry Azubuike Ojuor, founder in residence and program director of Startupbootcamp, an accelerator that has funded many early-stage Africa-focused tech startups, says investors would not knowingly invest in companies they know nothing or little about.
Tapping into the investors’ network to aid funding decisions is part of due diligence on the part of the investors. Ojuor notes that this practice is not peculiar to Nigeria.
“If the tables were turned, I’m not going to Pakistan or any country I haven’t been to before to invest in any startup I see. I need to consult with those who have done it in those countries,” he said.
The Harvard Business Review survey also buttresses this point:
“Few deals are produced by founders who beat a path to a VC’s door without any connection. Some of the VC executives we interviewed acknowledged the downsides of this reality: that the need to be plugged into certain networks can disadvantage entrepreneurs who aren’t white men.”