Investment in start-ups in Nigeria is steadily picking up. Last year investors poured over $400 million into start-ups in Nigeria alone, making them the most attractive in the continent for the first time since 2015. Fintech companies in Nigeria were particularly outstanding, as firms like Interswitch and OPay were the most dominant in the year.
However, Aruma Oteh, former Treasurer and vice president of the World Bank said it is not enough to confer a title of maturity on the investment space in Nigeria, for obvious reasons, one of which is the lack of patient capital.
Patient capital is another name for long term capital. With patient capital, the investor is willing to make a financial investment in a business with no expectation of turning a quick profit. Instead, the investor is willing to forgo an immediate return in anticipation of more substantial returns down the road.
For starters, 2019 was the first time Nigeria would overtake South Africa in the amount of funding raised in a calendar year. South Africa has led the continent since 2015 when venture capital investment began to grow. In 2018, Nigeria overtook South Africa in the number of start-ups that received funding but failed to replicate same in the amount of money received.
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Nigeria, which recorded the highest amount of deals with 136, only drew in $133.5 million compared to South African startups which roped in USD 241.1 million in 108 deals.
Secondly, over 90 percent of the funds that have gone to start-ups in Nigeria from 2015 to 2019 have come from foreign investors. Foreign investment accounted for 98 percent of the total funds raised by Nigerian Internet startups in the second quarter of 2018, according to a report by TechPoint Africa. The ratio of foreign to local investors for this period was 7:2 but in value, the ratio was about 13:1.
To be fair, the local side is tepidly picking up and only made some milestones in 2019. For instance, for the first time an indigenous startup (TeamApt) secured $5 million from a local private equity firm (Quantum Capital) owned by a Nigerian billionaire. The last time a Nigerian startup (Piggyvest) secured funding from local investors exceeding $1 million, it took three Nigerian venture capital companies (LeadPath Nigeria, Village Capital and Ventures Platform) to pull it off.
All in all, local investment has yet to show up as a sustainable source of funding for start-ups seeking investments to expand their businesses. Most early stage start-ups often have to turn to family and friends for initial capital but eventually look towards Silicon Valley investors for expansion capital.
“The investment space in Nigeria is primarily from two sources; banks and government,” Oteh told BusinessDay.
The banks are notorious for their short term outlook and low risk appetite towards small businesses. In their bid to protect depositors and shareholders’ funds banks are known to have come up with stringent timeframes. This is unlike venture capitalists whose interest in startups is to invest rather than just being the lenders; a position banks prefer to take.
The Central Bank of Nigeria tried to force banks to lend to small businesses by increasing lending to deposit ratio, and barring individuals and start-ups from OMO transactions. While that is paying off, the pace of banks lending to start-ups has yet to change significantly.
Most startups also see banks as being overly concerned about interests and the need to meet debts deadline instead of showing actual interest in the growth of companies.
Government funding on the other hand is irregular giving the massive infrastructure developmental deficit they have to shoulder. Faced with the problem, Nigeria’s Vice President, Prof Yemi Osinbajo had tried to directly woo Silicon Valley investors by embarking a tour of big firms in the Bay Area.
Oteh told BusinessDay that it doesn’t really matter where the investment comes from so long as start-ups are able to use them to scale their innovation and push their presence on the global scene.
“I think considering the state of the economy, they deserve every encouragement they get,” she said.
