Attracting investment for economic recovery and the Lagos potential
In 2008/2009, Accenture, the firm that I led was privileged to support the Ministry of National Planning in the Vision 2020 transformation project. This initiative was borne out of a prediction by Jim O.Neill a partner in Goldman Sachs that Nigeria could be one of the top 20 economies in the world by the year 2020.
However this was not just going to happen by accident, the country had to be deliberate, intentional, co-ordinated and well-funded to achieve this goal. So the Vision 2020 project was centred around what needed to happen to get to this position and also the stark realization that other countries would not be standing still. I recall very vividly that one of the outcomes of the work that was done by thousands of Nigerians working together. And this was that to achieve this goal the economy needed to have double digit GDP growth (13% I think) for about 7 – 10 years.
Policies strategies and plan were put in place to ensure that this could happen. Well, as many of you in the room now know, we never achieved that rate of growth, in fact for a number of years after 2009 – GDP actually declined and I think today we are struggling with single digit growth that is actually lower than population growth. It is therefore no wonder that we have now been labelled as the poverty capital of the world with poverty rates at 70% of the population. According to the bureau of statistics almost one in three Nigerians is unemployed or underemployed. These are very sobering statistics.
Unfortunately our ability to exit this dire situation is constrained by many factors – insecurity, naira devaluation, high inflation, quality of education to name a few.
I am not an economist but I do understand that one of the ways to exit a recession or declining economic growth is to spend your way out of it. Quantitative easing, the trillion-dollar infrastructure bill that was recently passed by the US congress. And Nigeria has not been left out of the spending spree. We have seen an increased emphasis on spend on infrastructure projects (rail, airport, roads) to stimulate economic activity; CBN making billions of naira available to SMEs at low interest rates. These are all good but it is unfortunately nowhere near enough. There needs to be additional capital coming from other sources – foreign direct investment and alternative sources of funding beyond loans from DFIs and bonds.
The ICT sector in Nigeria has consistently stood out as one that has and continues to be attractive for investment. The sector has been fuelling the country’s GDP growth, double-digit growth when the country was growing at single digit.
Nowhere is this more evident than with technology enabled companies. Companies that are solving what I like to call grand challenges in Nigeria and Africa and using technology to do that. Accelerating access to large underserved markets in education, health, agriculture and financial services to name a few; discovering and engaging the African consumer of whom very little is known to enable small and large businesses serve them better and deliver higher revenues for themselves; fixing broken industries and value chains – procurement for small businesses, commerce, logistics.
In the last three years, two Nigerian companies (Flutterwave and Interswitch) have been valued at over $1bn, three if you count Andela, which has very strong Nigerian antecedents. These companies have been funded by what is now known as alternative finance. These are financing methods outside of traditional bank led debt and collateral based finance and they include venture capital and private equity finance. Specifically I would like to speak about venture capital. Venture capital are pooled investment funds that manage the money of investors who seek equity stakes in start ups and small to medium sized enterprises with strong growth potential. Let me just give a very quick and very simplified overview of what a VC does before I continue.
Say, for instance you invest $1m in a company that is valued at $10m. You now own ten percent of the company. You work with the company to grow and scale the business – new products, new services, new markets and provide additional funding for this growth. Each funding round results in a higher valuation of this business because it is growing and scaling and delivering value. The company grows and continues to be successful , it requires more funds to deliver that growth, it becomes increasingly valuable but your ownership decreases as you not only manage your risk (fast growing companies can still fail) but you could be constrained by your capacity to invest money to defend your ownership. After five years, revenue has grown from $10m to $100m, the company is in 12 African countries, is a leader in the market, serving millions of consumers, is a known and respected brand and is now valued at $1bn dollars. Because of dilution, your ownership in the company is now say 7%. But your stake in a $1bn company is now worth $70m for your $1m investment.
This is exciting but is the very best case scenario and there is a very serious health warning. This is a high risk and high return business. At least 90% of the companies that receive this capital will fail and the money invested will be lost. But the few that succeed will deliver returns that more than make up for the losses incurred. So as a VC you need to make sure you are investing in the right companies and to do that you need a very large number of companies to look at. For every investment we at Tlcom make I can assure that we have looked at, at least 100 companies. Keep this in mind as I bring this keynote back home to Lagos State.
The three companies that I referred to earlier have all had their growth financed by venture capital and private equity. Collectively Interswitch, Andela and Flutterwave have raised over $500m to fuel their growth – half a billion dollars to just three companies. But look at their growth and look at what they are doing, the impact they are making and the jobs they are creating. Flutterwave is operating in 33 African countries processing billions of dollars of financial transactions every year, Andela is deploying thousands of African software engineers to companies in the US and other emerging markets, we are all very familiar with Interswitch brands – the millions if verve debit cards in circulation, quickteller that facilitates online payments. Tlcom’s portfolio of 11 companies is employing directly and indirectly over 3000 highly skilled Africans, many of them Nigerians. Imagine if we were able to scale this.
None of this could have been possible without venture finance. And this is not just a flash in the pan. Venture finance is gaining traction in Nigeria and Africa and taking its place as a viable source of finance for small and medium sized businesses. In 2020, Nigerian startups raised $307m, and had the highest investment size across the continent. As at Q3 2021 African tech start ups have raised over $3bn, with about 44% of this money coming to Nigeria. A comparison of VC investments to foreign direct investments puts this into even better context. In 2018 VC investments into Nigeria was 26% of FDI, 80% in 2019, 30% in 2020 (covid issues), and as at q3 2021 VC investments stands at 546% of FDI. This growth is expected to continue with more mature companies emerging, and more investors raising money and deploying to meet the market demands.
So why is this happening? Three reasons:
There is a lot of global capital looking for high returns and high-risk emerging markets such as Nigeria and Africa can deliver this
Nigeria is a large country with millions of unserved and underserved consumers in almost every sector of the economy who can be effectively served and included because of the near ubiquity of the mobile phone
Nigeria has a large pool of driven, ambitious entrepreneurs who are innovating on business models to solve the everyday challenges that they face. Most of their businesses are borne out of personal pain and inconvenience
Why is this important for Lagos State?
With a few exceptions, many of these companies have their beginnings in Lagos and are able to scale in Lagos because of its size and prominence in the Nigerian and African economy. The GDP of Lagos State is larger than the GDP of quite a few African companies
In the tech start up world, geographic expansion is city based and not country based. Lagos is both a starting point and a destination for tech start ups – start in Lagos, expand to Nairobi, Accra, Kampala…..start in Nairobi, expand to Lagos, Accra, Abidjan etc. Lagos is one of the most attractive cities on the continent to start a start up or scale a start up
I would like to end with a few suggestions as to what Lagos State can do to not only support the growth of tech entrepreneurship but to ensure that it takes full advantage of the collateral benefits of this important and growing industry.
Prioritise and resuscitate the Yaba project – innovation hubs, digital skills development to increase the number of tech start ups that VCs can invest in. High and quality deal flow (companies that you can invest in) make you an attractive destination for investment
Make Lagos a safe and secure place for young Nigerians and the international community that is willing to support and finance the growth of their business
Collaborate with the Federal Government on issues that require FG intervention e.g. visa procurement for VC investors – these are people that are bringing in more money than FDI,
Secure tax and other regulatory breaks for start ups in the early years
Continue to facilitate the growth of digital infrastructure e.g. metro fibre deployment with reduced or waived right of way charges – this is the lifeblood of the tech enabled industry. The better your digital infrastructure the more attractive you are to tech entrepreneurs and tech companies that literally live online
Provide innovation grants, catalyse local currency VC funds that don’t carry devaluation/fx risk and can support seed financing of very early companies
I know that Lagos State is doing a lot of this already but my charge to you is that you do much more and see Lagos fly.
Dr Johnson, a former Minister of Communication Technology is senior partner at TLcom and she delivered this paper at a recent Lagos state government convening in Lagos.