As more foreign money pour into the continent, with Nigeria often getting the largest slice, startups from the country are compelled to look outside for expansion.
While tech startups in Africa had a record funding year in 2021, a majority of the cheques were written by foreign investors, either investing for the first time or those who have already been on the continent working with startups.
According to a report by Briter Bridges, 62.5 percent of investors involved in the top 20 deals raised by African tech companies in 2021 came from the United States, 7.5 percent were from the United Kingdom, 6 percent from South Africa, and 4 percent from Canada. Nigerian investors are categorized among ‘Others’ that include investors from the UAE, Germany, Netherlands, China, France, Singapore, Bahamas, and Switzerland.
Maxime Bayen, Venture Builder for Catalyst Fund by BFA and one of the authors of the Big Deal, a report on Africa, noted that around 30 percent of the active investors into startups in Africa are headquartered in Africa.
The trend of foreign investors dominating funding activities has continued in 2022. So far, startups on the continent have raised over $1 billion with Nigeria leading the pack, thanks to Flutterwave’s $250 million Series D in February. Foreign investors are behind over 80 percent of the funding announcements made so far in 2022.
OPay with its $400 million record-setting funding in 2021 has also stepped up its expansion into the Middle East after it launched in Egypt. Autochek, another startup that had a very busy fundraising year in 2021, has gone on a rapid expansion drive creating offices in Nigeria, Ghana, Ivory Coast, Kenya, and Uganda and soon in Egypt and South Africa.
TradeDepot, which raised $1100 million via debt and equity on Wednesday announced the acquisition of Green Lion, the biggest and fastest-growing business-to-business ecommerce platform in Ghana, to accelerate the delivery of its services across the country. The company’s biggest ambition is to become the supply partner for Africa’s retail outlets. TradeDepot’s services are currently used in 12 cities across Nigeria, Ghana, and South Africa.
Investors in Nigerian startups are a bit more stringent with expansion. An ambition to expand beyond the primary market is usually a prerequisite to secure funding from many investors.
“The Nigerian story is often not enough to maintain the attention of foreign investors, perhaps because the market alone is not deep enough,” said Olaoluwa Samuel-Biyi, co-founder. “So startups have to make a case for the entire continent by default. This means that foreign capital forces the strategic direction of startups to be towards expansion very early on.”
Ordinarily, ensuring your service reaches about 200 million people in Nigeria should be an exciting strategy for many startups and investors, but this is not always the case. In fact, for many of the companies, Lagos is as far as they go putting up an office and presence before heading outside the country.
There are many challenges that startups face operating in Nigeria including an opaque regulatory environment, high inflation, multiple taxations, a slow judicial system, and an unwieldy exchange rate. There is also the reluctance of local investors in the past to invest in the ecosystem.
Collins Onuegbu, executive vice chairman of Signal Alliance makes the point that the local investors were initially hesitant because this model of investing was new in Nigeria and exits were rare so it was difficult to model success.
Adedeji Olowe, CEO of Trium, a venture capital firm with investments in different startups, says raising huge funds is both a blessing and a curse. As a blessing, startups are able to compete and attract world-class talents. They can also expand faster as well as take on some upfront costs to make their services cheaper to sign up for. It is however a curse because startups must deploy that cash and produce valuation or returns in multiples that may be significantly harder to do than someone else with a smaller raise.
The business model of venture capital which is to realize value at subsequent up-rounds towards an exit also adds more pressure on startups. For some startups, the pressure could lead them to raise more and more capital as they seek to grow at all costs.
This has its own obvious advantages in the near term, but if these exits are not realised at scale for many of these ventures, the ecosystem becomes very unattractive very quickly, and that will not bode well for the future entrepreneurs,” Samuel-Biyi said. “It is important that the current spate of capital injection we are seeing in the market translate to exits for the investors in due time.”
