Last year, startups in Nigeria cut a large slice of the investment cake in Africa as less than 25 of them accounted for nearly $500 million in funding led mostly by foreign investors. While that may not be the best measure of the state of their health, it is certainly an indicator of the opportunities that are available for investors.
But despite the promise, there is still a dearth of big-spending local investors. Tech startups are seen as high-risk assets.
The $5 million investment in TeamApt from Quantum Capital, a private equity firm owned by Nigerian billionaire and investment banker Jim Ovia, is arguably the only significant equity investment that came from a local source to a local startup in 2019.
Experts say, often, the lack of interest isn’t because investors in Nigeria do not want to invest. Being a relatively new space with little to show in terms of profitability and customer acquisition numbers, local investors with no idea of how to begin, tend to shy away from the space.
Experts, however, say they could be missing out on great opportunities.
Around the world, early investments in tech startups have proven a life-transforming event for many people. Investors in big winners like Google, Amazon, Facebook, Tesla, Apple, etc have had their lives changed as a result of the current valuations of their assets. Peter Thiel, co-founder of PayPal invested in Facebook and sold most of it for over $1 billion just a few years after.
Africa is seen as the last frontier hence investors from abroad with endless resources and patience are increasingly seizing the opportunities that abound on the continent.
Local investors can be part of the party.
Over 10 years, the right portfolio mix could give an annualized 30 percent per year in Nigeria. However, Adedeji Olowe, CEO of Trium, a Nigerian-based venture capital firm, said it is unlikely to happen in a single investment but from a fund or portfolio, as putting all investment in a single startup would probably lead to loads of heartbreak.
The Nigerian tech startup space is not for the fainthearted.
“We have romantic stories of young techs starting out of some garages and going on to dominate the world. Yes, that’s true. But it’s only true for maybe 0.5% of startups,” said Olowe. “If you are an angel investor in tech companies, you have to see it from a portfolio point of view. Probably 80% of your investments would go up in flames, about 19% would just be there. But if you are consistent and have a portfolio-wide enough, only 1 out of 100 could give you over 1000 returns. Yes, it can be profitable in the long run.”
Pamela Anoliefo, cards and payments expert, says the startup space is a “hit or miss” for investors. It explains, she says, why traditional banks are unfriendly when it comes to lending to startups with no actual product in the market.
Ife Ojobanikan, a startup consultant at Microtraction, a venture capital firm, advice investors not to get carried away by the hype in the market. The media has done a fabulous job of following closely the majority of the funding successes of the startups, even to the extent that increasing valuations are mistakenly being used to determine the health of a tech startup’s financial wellness, growth, and future success.
“Valuations determine if you are a unicorn, decacorn, hectacorn or not. Undisclosed amounts and your firm is shrouded in mystery. High and it is assumed you are thriving. Low or not growing astronomically and it’s assumed you are bound to crash and burn,” she noted.
Investing in a tech startup requires due diligence.
Any hope of becoming a successful investor in tech startups requires being very knowledgeable. Ojobanikan says due diligence does not stop when you have made the investment commitment. Still check up on the startups where you have your investment. Are they fulfilling orders? Are they meeting predefined milestones? Are they accountable for their expenses? What about customer acquisition are they still as passionate in meeting the customers’ expectations?
“And more importantly; how can you help?” Ojobanikan said.
In any case, if you are not committed to going through the process, it is best to make your investment through venture capital (VC). In fact, experts advise that you do not directly invest in individual startups.
Olowe says although using a VC isn’t foolproof you are making a lot of money anytime soon it will save you a lot of heartaches.
“Investment in a VC’s fund is a long game – from 10 to 13 years,” Olowe said. “So it is not like a mutual fund that you can get in and out in a beat. Getting into bed with a VC is like a marriage but where there isn’t a divorce judge.”
Part of the advantages of going with a VC is their ability to spread your money, therefore reducing yours. Also, they have better expertise in spotting winners, and they are not going to be emotional in making investment decisions. Emotion is one of the most significant risk factors in investment.
Investing with VCs also requires doing due diligence. One of the things to look out for when looking into a VC is the pedigree of the partners. Have they done this before and performed? Have they previously worked in a fund that performed?