BrandArena: Tech start-ups in Nigeria lead African seed funding

Thursday 10 August 2017

Tech start-ups in Nigeria lead African seed funding

Nigeria’s start-up scene is expanding rapidly, securing the most seed funding of any country in Africa and attracting increased international support.

Since March three Nigerian tech start-ups have received $8.35m in seed capital from local and foreign investors: Wi-Fi provider Tzeti ($2.1m), e-commerce start-up Cars45 ($5m) and fintech firm Lydia ($1.25m).

Seed funding is on the rise across the continent, increasing by 16.8% last year to reach $129m, according to Disrupt Africa, a Nairobi-based tech media outlet. As per the company’s calculations, the biggest recipients were fintech businesses, followed by e-commerce, e-health and agri-tech. Geographically, about 80% of all seed funding went to firms in Nigeria, Kenya and South Africa.

While a number of other large cities in Africa host similarly vibrant start-up scenes – including Cape Town and Nairobi, the latter of which is often nicknamed the “Silicon Savannah” – it is Lagos, Nigeria’s economic hub, where the value of start-ups is highest, at $2bn, according to Startup Genome’s “Global Start-up Ecosystem Report 2017”.

However, Lagos lags behind Cape Town in terms of start-up output, with an estimated 400-700 firms to the latter’s 700-1200.

Ecosystem challenges

Start-ups in Nigeria face a number of challenges to further expansion, including reaching beyond their home market. Startup Genome calculates that foreigners only account for 6% of the country’s customer base, far below the global average of 23%, and just 11% of companies have plans to globalise their operations.

One reason for the scarcity of expansion plans could be the sector’s large domestic customer base: as of March the country had some 90m internet users, yielding the continent’s highest penetration rate at about 53%, according to the Nigerian Communications Commission. The average for Africa was roughly 20% in 2015, according to Statista, a Germany-based research firm.

Another obstacle to start-up growth is the cost of infrastructure: the expense of setting up and maintaining a server, as well as accessing advanced technologies, has generally meant larger enterprises have had an easier time growing in Africa.

One way start-ups could reduce the cost of servers is through cloud services, according to Rex Mafiana, CEO of FPG Technologies and Solutions.

“Why would a company operate off infrastructure if it can have its own cloud service that can be switched on and off and save costs?” he told OBG.

As major mobile operators such as MTN Nigeria, Globacom and Airtel Nigeria have begun offering mobile cloud services targeted at small businesses, start-ups may soon see these costs fall.

Similarly, a number of firms are moving into hosting and data centre services. According to Mafiana, hosting companies are “springing up” in Nigeria as SMEs look to make use of more affordable – and easier to access – servers and storage facilities.

However, it is still early days for cloud computing in Nigeria, with much of the demand being provided by large institutions, including banks and insurance companies.

Indeed, according to Mafiana, for now the more established financial services sector is largely leading the way in terms of cloud services investment. “Banks in particular have started investing a great deal in IT security, as the risk related to cyberattacks is growing together with the utilisation of cloud services,” he said.

Fintech on the rise

As well-established financial services providers look to modernise operations, the volume of interest in Nigeria’s fintech industry is growing. According to Asoko Insight, an Africa-focused corporate data company, Nigeria has roughly 50 domestic fintech companies, excluding banks, with inbound investment last year tripling over the previous year to reach $151m.

A number of fintech start-ups have received global recognition. Paystack, the first Nigerian graduate of Silicon Valley-based accelerator Y Combinator – together with Paga, another online payments firm – became two of five fintech start-ups to make it onto the Fintech 250 list drawn up by CB Insights, a research firm that ranks fintech companies globally for their promise and outlook. In March US firm TA Associates also took a minority share in Nigeria’s Interswitch, a digital commerce company that has itself acquired a number of other African firms, such as Kenya’s Paynet Group.

Global appeal

Even outside the fintech sector, international interest in Nigeria’s start-ups has risen rapidly.

In August 2016 Mark Zuckerberg, the founder of Facebook, also helped draw international interest in Nigeria with a surprise visit to Co-Creation Hub, a domestic incubator in Lagos. Two months earlier he had also made a $24m investment in Andela, Nigeria’s tech training start-up, through the Chan Zuckerberg Foundation.

That is not to say there are not still hurdles that start-ups and their investors face when scaling up their activities. Mafiana notes, “While Nigeria presents growing opportunities for the ICT sector, we have to deal with a large skills gap in the country.”

Although this gap exists in the general workforce, according to Startup Genome’s report, the majority of individuals that establish start-ups are highly qualified. Lagos is home to some of the best-educated start-up founders: 59% have an undergraduate degree, the 9th-highest rate globally; while 93% have a technical background, the third-highest percentage in the world. Furthermore, 77% of founders are experienced software engineers, above the global average of 72%.

This labour also comes at comparatively low cost: the average salary for software engineers is $14,100 in Nigeria, well below an international average of $49,000.

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