Nigerian Venture Capital Asks Harder Funding Questions for Startups


Over the past half-decade, the boom in Africa’s tech ecosystem has produced remarkable valuations, with unicorns like Nigeria’s Flutterwave and Senegal’s Wave raising hundreds of millions of dollars. Even some small, unproven startups have raised millions in a relatively short time. According to an analysis of Africa: The Great DeaI. And yet, few people have wondered how these astronomical figures were reached. It was a great example of “momentum” investing, as a seasoned venture capitalist told me last week: as long as money kept flowing into the market, other investors would follow, more convinced by the trend itself than by the fundamentals or the founder of a company. Talent.

The accepted premise looked like this: Africa is a huge market opportunity with 1.2 billion people and a growing middle class, coupled with underdeveloped physical and digital infrastructure. Informal economies were everywhere, ripe to be brought online by digital businesses. If you made the right bet in such a young ecosystem, you could expect to make an outsized comeback. This idea of ​​“Africa rising” saw investors flooding into the market, many of whom had little knowledge or experience in sub-Saharan Africa.

The reality is a bit more complicated. The addressable market – the actual number of customers that can be reached – is well under 1.2 billion. Looking at the potential of an app-based idea, for example, an investor might see 500 million phone subscribers, but that doesn’t mean all phones are smartphones, and it doesn’t mean all of those subscribers on the phone can afford enough internet. data to power an app designed for a seamless, “always-on” lifestyle. In other words, investors have yet to determine the true size of the opportunity – the “usable addressable market” – and, within that, how much they can capture.

This disparity has become more stark as funding has begun to slow dramatically in the West, and most Africa-based investors and founders – fully aware that much of the funding comes from Silicon Valley – now expect that funding is slowing down here too. That means more pointed questions are already being asked of founders, according to two VCs and one founder I’ve spoken with over the past two weeks.

The root of these misconceptions is a lack of widely available consumer and business data, which allows investors to bet on the best-case scenario in a “bull market,” but less so when investors are tightening their belts. The data void is affecting more than just the tech sector, but the effects are more apparent there due to the size of the bets being made.

Jake Cusack, co-founder of investment consultancy CrossBoundary, ironically calls it “the first-mover disadvantage.” Without a pool of reliable information and few other tech companies investors can compare themselves to, the inability to benchmark can encourage inflated prices. It’s not just about raw market size potential, Cusack said — an investor needs to identify pockets of willingness and ability to pay for new services.

It pushed Yannick Lefang founded his consumer market research company Kasi Insight in 2013. “The main problem we’re trying to solve is the mismatch between the continent’s potential and its reality,” Lefang told me. “It really comes down to the lack of reliable data.”

Kasi Insight has spent the past few years building consumer panels and now interviews between 500 and 1,000 people in 20 African countries each week, to offer some of the key findings a tech founder or VC might need to understand their opportunity to market.

According to Lefang, while companies like traditional fast-moving consumer goods (FMCG) manufacturers or luxury goods makers often sign up for his company’s services, few tech companies or investors ever do. . “Everyone knows there’s a lack of data, but that doesn’t mean they’re going to buy your data,” he said.

This has been a similar case for Fraym, a market research company that uses a mix of household survey data and geospatial satellite data, analyzed by machine learning software, to understand consumer markets. in Africa and other developing regions. Bobby Pittman, chairman of Fraym and founding partner of Kupanda Capital, said foundations, NGOs and government agencies, rather than tech companies, dominated his client base. “As investors, we built Fraym because we wanted to understand the market for ourselves, but few other investors do,” Pittman said.

“Venture capital deals have happened so quickly, with so much foam, that there is not enough time to do due diligence.”

For the most part, any concern over lack of data has barely slowed down African founders or their backers, where venture capital investment reached $4.4 billion last year, more than tripling. pre-pandemic levels of 2019.

Not all investors are indifferent to minimal due diligence. “Investing here involves a lot of art,” said Ike Echeruo, managing partner of startup fund Constant Ventures, which this week announced the launch of a $100 million fund to support African startups. “You can see the lack of data as a downside, but that’s inherent in all informal systems,” he added. “There are other things you can see…by anecdotally sampling people and carefully extrapolating.”

He said his firm’s analysts and associates spend time in the market talking to businesspeople and consumers about their local challenges. But Echeruo also agreed that high valuations have become a problem in recent months, with little evidence to back up expectations. “I’ve seen a lot of decks pass, and in many cases it’s not clear what drives this rating.”

Behind the rush, there was also this simple push of dynamic investment. In a so-called “hot” market, where investors compete to fund the next coveted startup or admired founder, there’s often a rush to beat rival VCs to “get on the cap table,” the companies said. investors. I spoke with. This meant slim due diligence. “Venture capital deals have been happening so quickly, with so much foam, that there’s not enough time to get the job done,” Fraym’s Pittman said. “Large startups contacted us before a funding round, but even before we could figure out what was going on, the deal was already done.”

Lefang echoed the same, saying that many international VCs operating in Africa have no incentive to do extensive market research given that they might not be there long term.

Ngozi Dozie, who co-founded the Nigeria-based consumer lending fintech in 2015, said he had to collect data independently from government agencies, established banks and institutions like the World Bank and McKinsey, to better estimate the true market potential of his startup.

After “triangulating” data from industry bodies, including Nigeria’s Interbank Settlement System, EFInA (a non-profit financial inclusion organization) and data from the mobile phone industry, he finds that the total market opportunity for his company is approximately 30 million users, in a country of 200 million people. But, realistically, he estimates useful opportunity at closer to 10-20% of that. Dozie said he thinks fintech startups, traditional banks and others are targeting a very similar market base. “We’re all fighting for the same 6 million customers, in my opinion,” Dozie said. “If I’m being generous, I’d say 10 million.”

Most of the investments over the past year have been in the fintech sector, where start-ups are racing to catch up with outdated, over-regulated and under-funded infrastructure. The sector has produced the continent’s most recognized unicorns, such as Flutterwave, Chipper Cash and Wave. Last year, fintechs – whose subsectors include payments, remittances, neobanks, consumer lending and financial infrastructure – accounted for 53% of all funding.

In recent months, this rush has been accompanied by heightened concerns and detractors in recent months questioning whether the combined African markets realistically have enough consumers of financial services to justify the number of fintech startups or the high valuations attributed to them. some of these companies. And it’s unlikely to cool completely anytime soon. Echeruo of Constant Ventures said his fund would definitely look into this space. “Fintech in Africa is still underinvested, but the opportunity is to look for real issues to address, like lack of credit – a huge problem.”

If, as expected, funding slows as much as some founders fear, there will be a natural upheaval in the entire ecosystem, and calls for better investor due diligence will grow louder. Those who understand the realistic size of the market opportunity could be well positioned if they already have liquidity and a good cost structure, Dozie said: “It’s ultimately a zero-sum game: if I win , someone loses.”

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