By Rolake Akinkugbe-Filani
The incredible search for innovation and returns amongst global providers of early-stage, venture and growth capital is all the more astonishing when you consider the nascent nature of their target industries, such as Fin-tech.
2018 and 2019 were big years for start-up finance for Africa-focused businesses. Founded by a Norwegian company, Opera, Fin-tech and Nigeria-focused platform, Opay, raised $50mn from a consortium of Chinese Venture Capital investors in July 2019. In the same quarter, distributed solar energy company, Anergy, raised $9million in series A funding, led by Breakthrough energy ventures, which brought together funders – Norfund, All On, and Electrifi. About 6 months later, another clean energy start-up Rensource, raised more than double that amount in Series A funding, again from another consortium, this time led by CRE Venture Capital.
The 2020 start-up funding rota, is already stacking up on the back of innovative Fin-tech Flutterwave’s $35mn Series B round in January 2020, to name just a few. The profile of the investor consortiums is diverse; European, Asian, North American, African and Middle Eastern.
According to Crunchbase, globally, 2018 saw a total of $254 billion invested into almost 20,000 businesses using Venture capital financing. Although more than 50% of these VC investments were made in the US, VC love is starting to spread rapidly in the developing world.
It is widely acknowledged that start-up failure rates are still high – running at 90% according to most global observer consensus – but this natural filter means that the ones that do succeed, are in a much better position to raise VC funding. Research by Toptal also shows that the geographic footprint of ‘unicorns’ (coined in 2013 by venture capitalist, Aileen Lee, and typically used to describe a start-up with a valuation in excess of $1bn) is actually broadening, with approximately 26 countries home to such unicorns, including in Africa.
The search for yield and returns is a factor. As many advanced economies, including the OECD, started the era of quantitative easing, post the 2008 global financial crisis debt yields in the past decade or more, have generally trended south, rendering equity investments, a relatively more attractive prospect, given the right conditions, market and business.
Moreover, the venture capital model of investing in early-stage and growth-stage companies has not always been the preserve of venture capital funds. Corporate VCs, with excess cash balances and reserves, have also joined the party, thus expanding the potentially available pool of funds for start-ups. Nigerian freight logistics startup, Kobo360, in 2019, raised a $20 million Series A round led by Goldman Sachs acting as Corporate VC investor, alongside other like Asia Africa Investment, TLcom Capital, Y Combinator and the IFC.
A decade or more ago, many Nigerian startups complained about the lack of capital to scale or innovate, while providers of capital smacked at the lack of bankable and investable entrepreneurs. However, investors’ interest in the Nigerian market has run parallel to the emergence of innovative start-ups particularly in the technology space – outside of technology 100% of VC investments made in Africa in the past 3 years even in the non-tech space, have been in tech-enabled sectors. In fact, the budding Fintech industry has almost singlehandedly been responsible for the new tide of interest VCs have shown in the Nigerian and wider African market, spilling over into agriculture, energy, transportation, communications, and even real estate. A key driver of this is that Fintech as an industry, acts as an enabler of business models in other industries, providing channels for businesses to reach a broader market and grow customer bases exponentially in some cases.
Two key beneficiaries of this new wave of investing have been the Cleantech (i.e. alternative or renewable energy) and Fintech industries, and they both have a common characteristic that has aided the VC, foray into the continent. Both technologies have provided alternative solutions to established business models in incumbent industries i.e. financial services and conventional power and utility-scale electricity networks.
For instance, decentralized and distributed solar energy, either as single-user solar home systems or as mini-grid solutions to commercial clusters, are gradually positioning for a good chunk of the electricity supply market share, providing viable and cheaper consumption options for end-users. Many of their market solutions are actually Fintech enabled and asset-light, compared to conventional energy technologies thus making them more attractive investment prospects. Globally, VC’s are shunning hardware-focused clean energy companies, to those that are software-driven.
The Rensource model in Nigeria for instance also incorporates a B2B element for supply chain and business analytics, anchored by a software development team. While clean energy sources still constitute less than 30% of Nigeria’s power supply, the ecosystems of companies, solution-providers, manufacturers, evolving around the sector have contributed to the sector’s attractiveness to early-stage investors.
In 2018, 25 Africa-focused VC funds launched, with a capital base of approximately $1 billion, and that number has since grown, mirroring global trends. The best in class start-ups while few and further between, are attracting significantly larger sums of capital in one single round of investing than they ever did in the previous years.
Another factor influencing this influx of VC investors is the evolving ecosystem of support that the Nigerian start-up community is receiving. Outfits like Naija Start-Ups, a virtual hub and support organization for entrepreneurs, founded by Aramide Abe, or the Tony Elumelu Foundation (TEF) Entrepreneurship Program, are laying the foundation for building a pipeline of investment-ready businesses for the VC universe. VC’s are actually themselves aided by the growth of other stakeholders in the investment value-chain, such as angel investors, incubators, seed funds and syndicates, who essentially can help to signal or ‘crowd in’ VC interest.
As most investment theories go, the rise of local investor networks is an important means of attracting outside investor interest, and Nigeria’s local VC investor landscape is growing rapidly with the emergence of new players and their increasing willingness to bet on local entrepreneurs
The Nigerian and indeed the African market are still some way-off from seeing the rapid increase in the ‘supergiant’ VC deals, that we see in North America or even China where deals with ticket sizes of $100mn or more in one fell swoop are common. However, with single deal volumes now running in excess of the $10mn market, Nigeria may not be a long way off from its own supergiant deals and unicorns.