Startups are yet to unlock the funding pool closest to home in Africa’s biggest economy

High networth individuals like Aliko Dangote, Africa’s richest men, are yet to be publicly wooed by startups.
High networth individuals like Aliko Dangote, Africa’s richest men, are yet to be publicly wooed by startups.
Image: Reuters/Akintunde Akinleye
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The common sentiment about funding among Nigerian tech startup founders is that there simply isn’t enough of it.

This is despite the fact that Nigeria typically ranks alongside Kenya and South Africa as the biggest startup investment destinations on the continent. In 2018, only South Africa ranked higher than Nigeria by funding raised as startup investment across the continent reached record levels.

But just as consistently, much of the funding raised by Nigerian startups has come from Silicon Valley-based and European venture capital (VC) firms. And while there’s been a growing pool of Africa-focused funds in recent years, a majority of them are backed by international institutional and individual investors.

As such, for Nigerian startups seeking funding to fuel growth in pursuit of scale and profits, there’s a latent source closer to home that has not yet been maximized: high net-worth individuals (HNIs).

In fact, the steady growth of the local tech ecosystemdrawing millions of investment dollars and winning validation from global tech titans like Mark Zuckerberghas not proven enough to loosen the purse strings of local HNIs on a scale similar to their contemporaries in more developed ecosystems.

A commonly held view is wealthy Nigerians’ reluctance to publicly invest and champion local startups is rooted in a lack of understanding. “They’re just not used to the asset class,” says Tayo Oviosu, founder of Paga, a leading Nigerian mobile money service, and 2017 Quartz Africa Innovators honoree. That attitude, Oviosu says, “contrasts heavily” with wealthy persons in more advanced economies who are active in startup investment.

As Africa’s largest economy, Nigeria is home to some of the continent’s richest people including industrialist Aliko Dangote and oil tycoons like Folorunsho Alakija and Femi Otedola. There are also hundreds of low-profile millionaires who are largely used to investing and dealing in traditional asset classes like the oil industry, real estate and commodities. While some might be privately backing startups or Africa-focused venture funds, Nigeria’s super-wealthy are rarely public or vocal with their support for local startups. Victor Asemota, Africa partner at Alta Global Ventures, a US-based VC firm, also suggests these HNIs are more comfortable investing in foreign private equity funds “because the risks of devaluation and loss of investment due to unfavorable policy are lower.”

Tomi Davies, co-founder of Lagos Angel Network (LAN), a group of active local angel investors and a tech industry veteran, says changing that reality is his life’s work. Part of Davies’ focus includes leading masterclasses sharing his knowledge with prospective angel investors and also working with founders to fine-tune their pitches through initiatives and resources.

The tasking work is yielding results as LAN has outpaced similar angel investor groups (pdf) across the continent by number of investments. But with a total of around $1.5 million invested by LAN so far, there’s significant room for growth.

While Davies acknowledges having more wealthy investors active in startup funding will see the ecosystem “benefit tremendously,” he insists there’s too much focus on their financial resources. “There’s a much bigger case to be made for [their] experiential involvement: being there not just as investors but more importantly as mentors,” he says. As startups are inadvertently looking to create thriving, profitable businesses in the same business climate where HNIs have had significant success, ”mentoring capital,” as Davies describes it, can prove invaluable. In contrast, understanding and navigating the nuances of local markets is not a need foreign investors can meet.

Spreading the gospel

A common concern among some industry insiders is that in the absence of local players on a major scale, Nigeria’s tech ecosystem will be “exclusively” built with foreign capital. If that happens, local investors will miss out “when value is created,” says Olumide Soyombo, founder of Leadpath, a Nigerian seed capital fund. Davies, however, prefers to focus on the upside: “It will be a better thing if we have more local participation but the fact that the ecosystem is being built at all is commendable”.

For his part, Soyombo actively operates in the business of boosting local participation and getting wealthy individuals to back local startups. Following success with his first venture, Bluechip Technologies, a data management and analytics firm with a client base consisting of banks and telecom operators, Soyombo is taking advantage of a wealth of business contacts. As such, Leadpath’s model is partly based on shopping opportunities to fund local startups to a network of wealthy contacts. It’s a tactic that has yielded some success: last year, a Leadpath-led consortium sealed a $1.1 million investment round in Piggybank, a savings app that has grown popular among Nigerian millennials.

But deals like that remain the exception rather than the norm. The long journey to turning things around, Soyombo says, will require high net-worth individuals getting “an education” on the different investment culture for startups including the funding rounds and valuation metrics. Part of that education must also focus on managing expectations of quick returns as well, says Davies: “It’s a message I carry to every angel investing masterclass I run.”

As he operates more in the space, Soyombo broadly splits the wealthy into two groups: ”There are those who are aware of tech success and don’t want to miss out” and “those who don’t bother with ‘tech talk’.” Getting broader participation will require “people who have the credibility of success in business to bank on” to do “more of the evangelism,” he says. But some of the evangelism must also come from within the ranks of active HNIs as well, Oviosu says. “Those who have had an opportunity to invest in startups should be talking about it,” he says. It’s a tip Oviosu takes to heart: with the stake of the first Nigerian investor in Paga already worth over ten times more, Oviosu plans to encourage the investor to publicize a likely profitable exit whenever it happens. “People need to see the opportunity,” he says.

Asemota predicts successful tech entrepreneurs will lead the charge of publicly backing and supporting tech startups given their more nuanced understanding of the space. He also agrees success could be a driver for more participation: “If there are a lot of successes, local high net-worth individuals will start learning,” he says.

But the definition of success requires some context. While Silicon Valley startup culture largely defines success by billion-dollar valuations and exits via acquisitions or initial public offerings, Davies stresses the Nigeria’s ecosystem is still in its early days and suggests measuring successes by metrics like the expansion of tech hubs, continued investment in local startups and growth of the startups themselves. “There’s more to come but it will take its time,” he says.

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