The Thriving Nigerian Startup Market And Its Myriads Of Problems

Nigerians are business people and I will dare go forward to say it’s in our blood. You can hardly find a household in Nigeria that hasn’t [produced a business person or is raising kids with one or two interested in business. Before the startup era, the cities and villages of Nigeria always had small and medium scale businesses scattered around. This led to various governments creating some kind of entrepreneurial support agency to grow these businesses as as well create new ones. But how has this impacted the general economy especially in the area of job creation which is evidently lacking in Africa’s biggest economy? The fee who have succeeded though have told us the same story we have always heard which is hard work, dedication and all manner of motivational bullet points.

For startups at least by a general rule of thumb, funding stages determine growth outlook and stability and the ability of any startup to scale through them makes them a success.

• Pre-seed: to build a prototype
• Seed fund: to test the model
• Series A: to consolidate the product and try an expansion
• Series B: for growth
• Series C: to establish a proper business

The following appeared in the African Business Roundtable sometime ago and I feel its still relevant.

Andrew Akangbe could be regarded as one of such eager and enterprising Nigerians.
Early in 2015, he finally made headway with the prototype of an idea he’d conceived several months before. He couldn’t wait to get to his uncle who had promised him ₦1 million should he get the prototype right. Andrew’s uncle delivered on his promise and soon, J-gears was incorporated. Unfortunately, the startup barely lasted two years. Overhead costs, human resources, technology, logistics, and stringent economic policies are chief among the expenses that forced Andrew out of business in mid-2017.

“The economy wasn’t friendly and we also couldn’t raise more money,” Andrew laments.
Interestingly, Andrew isn’t the only one bearing this hit. Just 2 months before closure, he had signed an MoU with a company in Djibouti to expand J-gears operations across Africa on a 75-25% profit share. This alliance was supposed to employ over 450 workers in Nigeria and Djibouti. Also, a software development training programme J-gears was subsidising for 1000+ graduates is facing the threat of closure.
Obviously, foreign investments play a major role in averting situations similar to Andrew’s. However, this isn’t just about Andrew or J-gears, there’s a much bigger picture.

The Big Picture: Nigeria’s Economy vs. Startups’ Effect
The death of Andrew’s startup, J-gears, has had an indirect pervasive downturn on the economy — more than 1000 people have just lost the chance of getting jobs. And going by the fact that employment is one of the key drivers of a sustainable economy, this isn’t good news at all. As big as Nigeria is, its economy hasn’t had a linear growth. Rather it has only experienced fluctuations and imbalance for more than 3 decades, mostly due to the crude-oil market collapse of 1985.
Thankfully, Nigeria’s mixed economy gives entrepreneurs and businesses a free hand — despite government’s major income reliance being on oil — which explains why enthusiasts like Andrew do not think twice about launching potential businesses. The nation’s estimated 37 million SMEs contribute a lot to its economic growth (in terms of employment, logistics, and utility bills) and currently contribute 48% to its GDP.

However, in 2016, another situation surfaced as inflation and recession began romancing the economy, both further decreasing the GDP. But in what looked more like a pyrrhic victory, there was a triumphant cheer by all who bore the direct hit of the situation and a general relief when the Federal Government (FG) announced in 2017 that the monstrous recession had finally been conquered.

The sad story above paints a picture we see often. In my opinion mentorship is a big problem in today’s startups and I see it as a problem before the overhead costs, location, technology etc issues that are also relevant when thinking about a startup. You see we can all learn a thing or two from the mentorship program of the Igbos. In the early days of Nigeria and especially after the civil war, the Igbos began spreading to different parts of the country using the mentorship style. Mr. Emeka builds a provision store in Lagos, he goes to his village in Anambra state to bring Uche and Nnamdi to come and assist him in the new business. They stay there for say five years learning and in the process of learning, Mr. Emeka gradually hands control of the business to them while he focuses on expansion and new business opportunities. Just before the five years is over, he goes again to the village this time to bring Chiwendu and Okoro as replacements to Uche and Nnamdi. Meanwhile, he puts together say about 5 million Naira for Uche and Nnamdi to establish their own businesses independent of his and the cycle continues as Uche and Nnamdi will do the same in different locations across multiple locations in the same city. Then in 20 years, you see that they have dominated virtually every area of small and medium scale business. They don’t burden the employment workforce by looking for jobs as they earn sufficiently enough from these businesses over the years to sustain their families. They have used this method to become self sufficient in business and again in my opinion, this is another form of education that we must begin to think of how to formalise.

The Igbos are not alone in this. Look at the big tech companies today, you will find some kind of mentorship in their stories. Bill Gates learned a lot from IBM when he used to do some work and that gave rise to the PC era. WhatsApp was founded by Jan Koum and Brian Acton who had previously spent 20 years combined at Yahoo. Their business was eventually sold to Facebook for $19b in 2014 and the cycle of founders having learned from a system to go on to establish theirs continues.

Funding

Funding is a major challenge of businesses but there is a lot of questions to answer in this area? Questions like why is that Nigerian commercial banks make hundreds of billions of Naira in profit every year and yet their commitment to startup funding is still very low? Another question is what do foreign investors see that drives them to invest in startups in Nigeria while the Nigerian billionaires stay away from startups springing up in major cities across Nigeria?

Still quoting the report cited above,

Pleading anonymity, an economist and stock exchange broker, believes the retarder of Nigeria’s economy lies within. “The Nigerian economy only has one wolf which saps its life — the CBN itself.”

According to him, the Central Bank of Nigeria, which is supposed to be the wheel that pioneers economic growth, has a critical level of rigidity and extreme bureaucracy. As such, certain policies restrain the dealings of entrepreneurs raising millions of dollars with local banks. Unfortunately, commercial banks tend to be worse.

For instance, he continues, “why can’t our local banks give loans to Internet startups? No, they’d rather buy government bonds and impose several hidden charges even on SMEs”.
If one is to go by Tunde’s reasoning, startups registering their companies outside of Nigeria might be justified.

At the maiden edition of Techpoint Inspired, Iyin Aboyeji was asked if the registration of Flutterwave in the US gave it any edge in securing international investments; he didn’t dispute. In fact, he admitted that bureaucracy of Nigerian financial agencies is a clog that blocks smooth sailing of Internet startups with high potential.
James, another local startup founder agrees with Iyin’s thesis.

“He is right. Startups that have particularly gone beyond the seed funding round can’t afford to risk dealing with Nigerian banks. When we saw how difficult they proved, we had to register in Finland.”
Pleading anonymity, an entrepreneur playing in the fintech space says, “So, if our impact as startups is not vivid on the economy, blame the banks, not the investors, not the startups, but the banks. Startups are more like the economic freedom fighters, while our banks are the wolves”.

All of these coincide with Jason Njoku’s Medium post that addresses his frustration with Nigerian banks, which forced him to close out his account with one of the banks to seek a better alternative.

Foreign Software/Equipment
A lot of startups still import (usually) very expensive foreign infrastructure and technology to power their operations. From all indications, Nigeria hasn’t gotten to the stage where it will be solely reliant on consumption of local technology. Nkemdilim Begho, MD, Futuresoft Nigeria affirms this.

“There are a lot of local solutions,” she remarks, “however, oftentimes, companies with local solutions lack in support, customer care, and other service delivery areas where their foreign counterparts are good. For clients, these count more.”

According to Nkemdilim, infrastructure and poor policy are key problems that impede the thriving of local software. Onyeka Akumah, founder of FarmCrowdy, has a similar opinion.
“Startups impact the economy by creating jobs. However, the bulk of the money could go to purchasing the technology and software needed by the startups to function, which might not be present in Nigeria. Therefore the money which comes in, still goes out.”

But you see, the Central Bank of Nigeria (CBN) has recently been trying to pour money into the economy via various social programs. An example is the 140b Naira/$340m for solar projects which is still sitting there. From reports, only a very small number of companies have applied to use the funds to address the big electricity gap that exists in the Nigerian economy. The problem here is the difficulty in getting an agency of government in the power sector to help with the process is a nightmare and then when you even get them to the table, the other challenge is the commercial bank through which the money will come.

Nigeria has over eight dollar billionaires and well over 1,300 Naira billionaires and we can’t point to more than 10 of these individuals supporting any startup with seed capital. Tony Elumelu of UBA Plc whose net worth Forbes puts as $700m is a notable one. Other reports say he is worth over $1.5b but in any case, he has set up an entrepreneurial support channel that has helped over 5,000 entrepreneurs across Africa so far. For the others, its been a blind eye to the ingenuity of the Nigerian entrepreneur.

In 2020 alone, Nigerian startups raked in over $170m/70b Naira in funding from overseas sources and meanwhile in the nine months of 2020 financial results of 12 commercial banks, they recorded a combined profit of N677.149bn (about $1.8bn) for the period that ended on September 30. They need to partner more with viable startups instead of making money easily available to the political class for short term gains. Economies thrive on long term plans and that is what is obtainable when Nigerian banks and startups come together.

Five Nigerian banks have signed up as pioneer members of a new initiative that aims to increase partnerships between corporations and startups in emerging markets.

The initiative is called the Circle of Corporate Investors and is organised by Catalyst Fund, an accelerator operating in Africa, Asia and Latin America. As noble as this sounds, its still not a purely local initiative which is why we suggest that the CBN instead of setting up funds that are not bad in themselves should rather convene a committee of wealthy Nigerians and banks to fund startups aggressively so that Nigeria can have some sense of ownership, The risk of not doing this early is that, big foreign companies will buy them over for huge sums that may end up not being domiciled in Nigeria.

Infrastructure

We are not inventors of the critical technology needed for startups to grow but we can be right users of these technologies. In many cases, the infrastructure is not even available for startups that depend on a robust broadband, electricity and security outfit. Security is at a breaking point in Nigeria, broadband penetration is still very low while electricity supply is still very much epileptic. If these can be addressed as is being done at some levels of government, Nigeria can indeed become the a tech hub on the continent.