Thursday, March o4, 2021 / 09:30AM / Oped by Adebola Peter Arojojoye* / Header
Image Credit: PharmaBoardroom
Venture capital investment refers to a type of private equity investment in which investors provide capital and mentorship in a startup that is still in its development phase in exchange for equity in the company. The rise in venture capital investments in Nigerian startups depicts how the investment process in companies has evolved. Before now, companies heavily relied on funds from commercial banks to run their business activities. Sadly, this comes with a lot of unfavourable conditions such as high-interest rates on loans, banks demand for collateral and the pressure on companies to pay up the loan. Thus, startups often opt for venture capital firms which often render financial, managerial, and technical assistance needed to build tech products and scale their operations.
In a report published by Techpoint Africa, Nigerian startups received 86.3% of over $1.8 billion venture funds that were contributed to "West African Millionaire Startups" within 2010 and 2019. According to the 2020 Africa Tech Venture Capital Report, Nigeria remains the number one hub for venture capital investment in Africa as Nigerian startups raised a total of $307 million in 2020. It suffices to mention that this report only covers Venture capital deals that worth over $200,000. Though some may belittle the amount of these funds and the number of companies targeted by comparing it to the amount being raised by startups in developed nations, Nigeria has come a bit far with fund raising.
These venture capital investments in Nigerian startups are a form of impact investment. Asides from generating financial returns on these deals, research shows that investments from venture capital companies tend to bring about a measurable social impact in the country. Most startups in the country focus on solving trivial problems with innovation. These solutions range from education (Andela, Utiva, ulesson), funding of agricultural production (ThriveAgric, FarmCrowdy), wealth management (Piggy Vest, Cowrywise), online payment solutions (Paystack and Flutterwave), healthcare (54gene, Lifebank, Helium Health) amongst others. More startups emerge every year all in a bid to solve a particular problem Nigerians are embattled with. For these startups to realize their potentials, they will need funds to scale their operations. Thus, funds gotten from venture capital firms contribute a great deal in helping these companies innovate their product and kickstart their operation.
Venture capital firms also provide funds for startups to invest in branding and marketing of their products. In the words of Tara Nicholle Nelson, "you cannot buy engagement, you have to build engagement." Thus, building a product is not enough. Startups do engage in implementing a lot of marketing strategies for user acquisition, engagement, and retention. This requires a lot of funds which most tech entrepreneurs do not have. This is more difficult to do in a market like Nigeria which is reported to have a population of over 200 million people. Thus, making the product a well-known brand and preserving the same, costs a fortune and also requires establishing partnerships with stakeholders in key areas. These are issues venture capital firms can help with as they have the right resources and network.
Additionally, companies that have received funding in the past through venture capital investment are equipped with the means to expand their operations and create new market opportunities for their product. Subsequent funding received by startups also confers a form of goodwill in terms of financial capabilities and human capital which is often needed to expand operations and improve their technological innovation.
Thus, it is no doubt that Nigerian startups stand a lot to benefit from the investment opportunities, mentorship and the network, venture capital firms do offer. Sadly, most of these investments are foreign venture capital funds. However, the recent efforts of companies like Future Africa through the Future Africa Collective and Co-Creation Hub through the CcHub Syndicate programme must be commended as these are innovative funding models through which more tech startups can be backed. Though there is the need for more venture capital investments in Nigerian tech startups as techpreneurs in Nigeria never stop to serve their fatherland with all their talents and hard work in a bid to fix the deep-lying issues that are affecting the various sectors of the Nigerian economy.
Would it not then be a smart decision for more high-net-worth individuals and enterprises within the country to invest in these innovative ideas? Would it not then be right for the Nigerian Government to create more strategic policies and enable the environment to attract more funding in the tech ecosystem? These are the multimillion-dollar questions that demand attention.
*Adebola Arojojoye is a 5th year law student of the University of Ibadan, with keen interest in the intersection of Corporate Advisory and Sport.