Nigerian VC firms are still willing to invest—but they’re asking harder questions

"There is now a flight to fundamentals," Olu Oyinsan, of Oui Capital, said.
54Gene's investors are raising more money
54Gene's investors are raising more money
Photo: 54Gene
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After making a handful of investments over the years to test their theses, Nigeria’s venture capitalists are raising follow-on funds to strengthen their portfolios for an evolving economic climate.

Ventures Platform, Oui Capital, and Microtraction are among the firms that have reached the first close of new funds. Others in the process include Future Africa, run by the ex-Andela and ex-Flutterwave founder Iyinoluwa Aboyeji, and Ingressive Capital owned by Maya Horgan-Famodu, according to people familiar with both firms. Ingressive Capital is said to be raising $50 million for its second fund. The company declined to comment.

Microtraction was one of the first investors in 54Gene, the genomics research startup building a DNA bank of people of African descent. With $15 million raised so far, Microtraction’s second fund trumps the $1 million with which the firm launched in 2017. Investors in its new fund include early backers like Michael Seibel, an executive at the US accelerator Y Combinator, and new parties like Alexis Ohanian, the Reddit founder and husband of the ex-tennis star and venture capitalist Serena Williams.

Why are Nigerian VCs raising new funds?

A larger fund enables Microtraction to increase its minimum check to $100,000 for 7% equity, and it is already investing out of the new fund, Dayo Koleowo, the firm’s managing partner told Quartz. “As a fund, nobody will take your $15,000 like we used to give five years ago,” he said, citing rising costs of operations including hiring engineering talent.

Without much of a playbook to learn from, Microtraction’s 2017 fund was launched to bridge a perceived pre-seed funding gap, Koleowo said. “We wanted to test our hypothesis of ‘can we find remarkable, exceptional twenty-somethings looking to solve the biggest challenges in Nigeria?’”

Today, the firm boasts over 20 startups, the majority being in fintech, Africa’s most funded tech sector. The combined valuation of the firm’s portfolio is close to $600 million. It is paper money but Koleowo says it shows they have achieved “micro traction” and can pick winners, hence justifying raising a new fund. They have not received pressure from their investors to exit some of their investments, he said.

Oui Capital wants to raise $30 million for its second fund. “Our first close of this fund is already double the size of our first fund,” which was $5 million, says Olu Oyinsan, Oui’s founder and managing partner. One of its flagship investments from the first fund was in TeamApt, a company at the core of Nigeria’s vast agency banking system. Oui is raising a larger fund to lead funding rounds and will increase its check size to up to $750,000, ten times its previous standard.

More questions will accompany checks

But larger checks will come with additional scrutiny. “What has changed and is going to continue is that investors are asking harder questions,” Oynisan says. “Where is the user growth? Where is the revenue? Are the users you’re acquiring valuable? What’s the plan for profitability? There is now a flight to fundamentals.”

This year’s prickly economic climate of high inflation and war-distorted supply chains have started affecting African startups too. It is manifesting in a wave of employee layoffs in at least seven companies including 54Gene, which reportedly laid off 95 people due to a decline in its pandemic-era covid testing business, and francophone Africa’s first unicorn, Wave.

Reacting to the layoffs, one high-ranking logistics startup executive said the moment calls for a return to the basics of offering services demanded by customers, not investors, while ensuring actual money is being received towards profitability. “It is shocking how we thought about businesses in any other way.”

Will early-stage investments maintain its pace in Africa?

The average size of an African startup’s seed stage raise grew from $770,000 to $1.2 million between 2015 and 2021, according to Partech Partners, based on a database of deals above $200,000. The $617 million raised by seed stage startups last year was more than the combined total from 2015 to 2020.

Typically dominated by local players who use their close ecosystem ties to fund potential founders, African seed stage investing has been shaken up by big pockets like Tiger Global. The firm has led seed rounds in Zambia-based Union54 and Ghana-based Float in the last 12 months, the latter being a $17 million round. Tiger has increased competition for deals in Africa.

Still, Oyinsan says local VCs maintain a collaborative relationship, “since we have an ecosystem to build.” Some factors might differentiate one from another, “a network that can be tapped into, domain expertise and reputation, speed amongst other things.”

But these firms will still share deals and co-invest on rounds, Koleowo says. Ultimately, that’s a win for startups that will need money to ride out the current climate, and hopefully customers who will be served.