LEGAL IDEAS FORUM

Why do nigerian start up companies struggle?


Something quite remarkable happened in the year 2000. Former President of the United States of America, Bill Clinton, addressed a forum of business leaders in Abuja where he spoke about Nigeria’s past and made projections about the future.
He stated that “…Information Technology has virtually collapsed the meaning of distance, and it has made the human mind and ideas even more important than riches in the ground.”


It was almost as if President Clinton saw the future that is now set upon Nigeria. And that future, I tell you, is one of digital disruption.


Technology, Startups, and Digital Growth in Nigeria.
Young entrepreneurs, the world over, are emerging to seize the technology space. So far, without building factories, they simply deploy Information Technology (IT) and engineering tools to create stupendous wealth. While at it, they are impacting many lives on a universal spectrum. It is an unprecedented revolution.Remarkably, Nigeria is not left out of this global revolution. In fact, in Africa, Nigeria’s youth are taking the lead in what we can call a brave new world. With very little institutional support, smart Nigerian entrepreneurs have keyed into this knowledge-based economy, which places emphasis on the power of human imagination to create business opportunities through new entrepreneurship models anchored on know-how. 
That these young Nigerians are deploying technology to provide solutions to everyday problems, and in the process creating wealth, has shown quite clearly that they are ready to be active players in, and contributors to, this age of knowledge. Indeed, the future of Nigeria can be glimpsed from the skills, knowledge, and capabilities that are now being seen in the tech ecosystem.


Generally, investment in tech start-ups appears to be a function of two key factors. First is the potential of entrepreneurs to revolutionize service provision in new and existing sectors. This potential excites investors. Second, the business models of start-ups show the possibility of harnessing profitability from a large segment of a country’s growing population. Thus, the Venture Capital (VC) scene in Africa has appreciated, with an influx of funding from local and international investors reaching unprecedented heights in recent years. Let us put some numerical context here. In 2015, $400 million was raised by African startups. Fast forward to 2019, no less than $2 billion was raised by startups!


Fortunately, Nigeria leads this race of VC investment. It has consistently remained the top destination for digital start-up funding followed by Kenya, Egypt, and South Africa. The country’s tech sector has gained a lot of traction in terms of external funding. For instance, foreign investors contributed $85.8 million out of the approximately $120.6 million that Nigerian startups raised in 2020.


The melding of ingenious start-up entrepreneurism with VC funding opens the in-road for digital services into Nigeria’s macroeconomy. This is why digital services pervade many sectors of the country. Think about how E-Tranzact, Paystack, and Flutterwave among others have disrupted Nigeria’s payment system for a second.


While you are thinking, the good news is that the fund is also pouring into the digital ecosystem! In October last year, Stripe, an American financial services & software company acquired Paystack in a deal estimated to be about $200 million. With $15 million seed capital, Flutterwave recently raised $170 million and currently has a $1 billion valuation.


Turning to the financial service sector, Kuda Bank, Nigeria’s first full-service digital-only bank, licensed by the Central Bank, reshapes the traditional way of banking, thereby making banking products more accessible and affordable. The company recently raised $25 million funding in its drive to become the ‘neobank’ for all Africans around the world.


Remarkably, the health sector in Nigeria which is characterized by poor funding has also witnessed the influx of ingenious innovations. Take for instance, LifeBank. LifeBank is a logistics company that collects blood from registered blood banks and delivers it to patients in hospitals. The goal of the organization is to synthesize the business model to solve distribution problems for patients who require a blood transfusion. Another start-up company, Medsaf, is a tech-enabled medication supply chain management solution for hospitals and pharmacies. Its goal is to reduce preventable deaths and streamline the pharmaceutical industry.


At the forefront of human biotechnology development in Nigeria is 54gene. The Nigerian biotech startup has attracted $20 million in funding from Silicon Valley venture capitalists who are betting big on the yet unexplored African genome. 54 gene’s rise, coinciding with the covid-19 pandemic, has increased the potential for the founding of more biotech startups and an influx of more venture capital. Unlike other VC-backed startup companies, biotech is a highly specialized field that requires significant training, qualifications, and expertise, thus, success here is predicated on the difficult ability to develop and commercialize research findings from the laboratory bench.


Some other start-ups prioritize inventing solutions to protect the environment. One such organization is eTrash2Cash. The company is a social enterprise that helps low-income people in Nigeria exchange all their wastes for cash incentives. Through that, it raises grassroots awareness on environmental sustainability and climate change. With this solution, all wastes collected are reprocessed and recycled into reusable materials that are environmentally friendly and sustainable.


Oh, and there is also the COVID-induced innovation!
The COVID-19 pandemic, with its twin forces of disruption and acceleration, pushed both foreign and domestic players to develop opportunities in the Financial Technology (FinTech) space, thereby making FinTech investors emerge as one of the top gainers. FinTech revenues, driven by the increasing smartphone penetration of the unbanked population, are predicted to reach an estimated $543 million by 2022. Mckinsey estimated that Nigeria is now home to over 200 FinTech stand-alone companies. Added to this evolution, a number of FinTech solutions are now offered by banks and mobile network operators as part of their product portfolio.


From the foregoing, we can make the assumption that Nigerian tech entrepreneurs are not short of ideas. That much has been sufficiently established. But there is a catch. These ideas must not be wasted or shipped to another country as a result of the Nigerian operating environment which is hostile to innovation and creativity.


It is at this unfortunate point that we may need to consider the overreaching effects of the country’s infrastructure gap on digital growth, which as we fear, is in fact antagonistic to innovation and creativity.


Infrastructure Gap: Clog to the Wheels of Digital Growth
The digital economy is essential for every modern society. The accelerated speed of tech penetration has produced a profound effect and marked indices of macroeconomic progress. More so, the popularity of digital tools with the Nigerian youth has led to ingenious means of job creation within the formal and semi-formal markets. However, the gains of digital growth in Nigeria should be met with cautious optimism. Investment in the digital space and start-ups alone may not really accelerate far-reaching, holistic economic development.


Long-term drivers of development within any country are multifaceted. Therefore, in as much as Nigeria’s digital ecosystem is receiving the much-desired investment push, without corresponding physical and social infrastructures, long terms economic development will be difficult to achieve. More significant is that the start-ups themselves will continue to struggle because of underlying structural challenges—which this article refers to as infrastructure deficit.
The WHAT and WHY of infrastructure deficit in Nigeria.


Infrastructure deficit is the situation whereby existing social facilities do not satisfactorily meet the demands of a country. The effect is a negative downturn in the socio-economic development of that country. Infrastructure stands as an important source of competitive advantage. Hence, facilities such as ports, pipelines, hospitals, highways, water, sewage, and phone systems, etc. provide the bedrock for national prosperity.


Infrastructure deficit is essentially the result of a steady decline of government’s investment in public and social utilities. Corruption, combined with the rising cost of building additional infrastructure, also produces a variety of bottlenecks across transportation, water, freight, and communication networks in Nigeria. According to the International Monetary Fund (IMF), Nigeria’s infrastructure stock remains far below the 70% international benchmark. Despite the apparent benefits of a robust infrastructure to economic growth, Nigeria over the years has failed in optimally developing its infrastructure system.


Now, let us go back to thinking once again. Let us think about power.
Everyone needs power. The local businesses, artisans and start-ups need power. They suffer operational consequences when they spend a fortune on alternative power sources. As of 2019, power generation in Nigeria stood at about 4,000 Mega Watts. This is far below the 15,000 Mega Watts required for a population of over 170 million people. This will invariably lead to low power supply. Power failure in Nigeria has often been attributable to the endemic corruption, inefficiency, poor technical expertise, and poor planning that characterize the public procurement process in Nigeria.


Within the context of start-ups, infrastructure deficit is equally scathing. Even more scathing is a subtle type of deficit which takes a more socio-economic dimension rather than purely infrastructural or physical. This deficit is what I term the poverty and purchasing power deficit. We can represent the deficit in the following statement: “if there is no demand or need for the products or services a start-up is providing, then that startup won’t be around for very long. Also, if people cannot afford the services sold, this defeats the goal of the start-up offering those products.” Supporting this is an estimation that about 42% of startups fail due to lack of market demand and low purchasing power of willing consumers. The economic conditions in Nigeria render many people impecunious. So, it will be difficult convincing a ‘hungry man’ to pay for tech products/services don’t you think?
It is prudent for a start-up’s business model to be centered on satisfying a particular need in order to ensure it has a market. But what can a start-up do when the market cannot simply afford its services? This, among other internal factors, undergird the reason startups struggle in the country.


Implications of deficits on Start-up Growth and Innovative Services
There is a lack of ‘basics’ to provide the needed conducive business environment for innovative services in Nigeria. These obstacles impede competitive survival for start-up companies. Today, most firms suffer unreliable electricity supply. For example, MTN, one of the largest mobile network operators in Africa, though not a startup, spends about 70 percent of its operating expenditures on generator fuel, with average monthly consumption in excess of 10 million liters. Imagine the effect of this operational cost on fledgling companies trying to find their feet in the market.


More than any other sector, poor infrastructure has been the bane of ICT service provision. This alternates from broadband penetration to reliability of mobile network services. For example, remote jobs are more resilient but require internet and energy infrastructure that is currently lacking in Nigeria.


Despite having the largest number of online users in Africa, internet quality in the country remains poor. The increase in internet penetration in Nigeria is due to the growth in mobile data users rather than broadband services. Although mobile data works well for individual users, it cannot effectively serve large organizations, like schools, businesses, and government agencies which require a large number of people to be online at the same time. Hence, many Nigerians, especially those living in rural areas, are prevented from gaining affordable and reliable access to high-speed internet (and ICT) services.


We go full circle again. Digital innovations must be complemented with requisite utilities in order to fully unlock the Nigerian startup potentials. Although the Nigerian government has stated it has made the tech sector a priority, it needs to do more to improve the basics of the business environment. This is because public investment in robust infrastructure is the chief catalyst for sustainable economic development—a development that tech entrepreneurs are in need of.


Maybe, this is why we should be a bit optimistic about InfraCorp.
Infrastructure Finance with InfraCorp
In March 2021, President Muhammadu Buhari approved the establishment of a company, Infrastructure Corporation of Nigeria Limited (InfraCorp), with initial funding of N1 trillion. The funding is projected to grow to N15 trillion.


Set up for the construction of critical infrastructure projects to help accelerate growth in the country, InfraCorp, according to the government’s official press release, is a dedicated privately managed infrastructure and industrial vehicle that will harness opportunities for Nigeria’s infrastructure development by originating, structuring, executing and managing end-to-end bankable projects in that space.


The company will be one of the premier infrastructure finance entities in Africa and will be wholly dedicated to Nigeria’s infrastructure development. Infracorp will finance public asset development, rehabilitation, and reconstruction as well as invest in cutting-edge infrastructure projects for roads, rail, power, and other key sectors.


Given the theme of this article, the establishment of InfraCorp is a step in the right direction. Hopefully, the company will prioritize building and rehabilitating key utilities (power, ICT/broadband connection, road, etc) which will enable a conducive and competitive business atmosphere for tech growth, and start-up survival.


We have looked at the infrastructure and its effect on the digital economy. But, it remains to be seen how the government’s policies fit into this narrative.


Nigeria’s Policy Direction and the Digital Economy.

Promoting a healthy digital economy takes effort. And with the potentials being demonstrated by startup companies, governments at all levels must support these players through a more robust regulatory environment.


Nigerian regulations lag behind in addressing digital challenges and framing the ICT and tech entrepreneurship domain in the country. The main reason for this is that tech startups are quite recent and authorities with executive powers are not all informed enough to steer the right discussions.


The lack of clarity and established implementation guidelines are other challenges. Tech ecosystem stakeholders feel regulators develop a quick judgment on the policies and regulations without much engagement. For instance, unilateral, and somewhat impulsive regulations by the Lagos State Government in the past two years have adversely affected tech companies such as Gokada and Uber to mention a few. Therefore, collaboration, engagement, and consultation with the tech community become imperative going forward.


In developed countries, the shift to knowledge-based industries has taken place both via favourable policies that support the development of each component of the tech ecosystem and greater government funding for high-growth firms. Governments have played a leading role in successfully facilitating tech entrepreneurship ecosystems. Nigeria must therefore take the bear by its ears and do the needful. One area the government can show its commitment to tech growth is making policies to incentivize Angel Investors (and other structures of investments) to promote increased funding of digital entrepreneurship. An Angel investor(s) is a high net worth investor who provides financial backing for small startups in exchange for ownership equity (or stake) in the company. There is presently no legal framework addressing angel investment in the country. 


Similarly, Capital Gain Tax exemptions for early-stage investments in startups for investors and Venture Capitalists are good incentives. Furthermore, the Pioneer Tax incentive should be reviewed to ensure more entrepreneurs take advantage of the pioneer status.


Nigeria’s reputation of policy volatility has created a risk-averse attitude from potential investors in the tech space, both local and foreign.Nigeria’s reputation of policy volatility has created a risk-averse attitude from potential investors in the tech space, both local and foreign. This is a big problem that is just as deleterious to startup growth as lack of infrastructure. So, the government must, and should, solve the twin problems of inadequate infrastructure and policies incompatible with digital acceleration.


Creating a future for economic prosperity hinges on Nigeria’s ability to promote technology in view of the modern trend of economic diversification.


The Future Imagined.
“We cannot compete with the technology capitals of the world, but we can be unique in our own way.”
The rationale for supporting the digital ecosystem is based on its contribution to the economy. Startups bring dynamism to the economy through innovation and competition. A case scenario is, once again, given in the financial service sector. For a long time, financial institutions in Nigeria were content to focus on a niche high-income customer base, excluding a large share of the population from financial products. Then Fintechs came in and changed the dynamics. Fintechs’ significant efforts in the last ten years have jolted traditional financial institutions into action, putting Nigeria on a path towards greater financial depth and inclusion.


Recently, something interesting happened—an unusual alliance between a telecom service provider and a Fintech company. Reports had it that MTN, Nigeria’s largest telecom service provider decided to cut back on commissions it pays to banks using the Unstructured Supplementary Service Data (USSD) features. Reacting to this, Nigerian Banks decided to cut off MTN from non-core banking services on USSD transaction platforms. MTN thereafter engaged the services of Flutterwave as alternative channels for its customers to buy airtime for mobile devices. The moral of this story is that tech startups are poised to offer services on a large commercial scale which hitherto were provided by traditional institutions.


Diesel costs have long since been a significant burden for corporate entities given Nigeria’s unreliable national grid. Now, startups like Daystar Power are embedding solar solutions to drive down energy costs and make businesses more sustainable.


Some of the benefits of the innovation ecosystem can only be seen through the transformations it brings, whether in subtle ways like the ease with which a Bolt taxi can be requested or in salient ways like how digital products like Zoom have allowed Nigerians to maintain face-to-face interactions during the pandemic.


Digital disruption in Nigeria may not be as seismic as in western countries, but it is nevertheless our reality. And it is making great impacts. The brave tech entrepreneurs are the change agents driving the revolution we experience in the digital ecosystem. They must be incentivized to profit from their ingenuity. To incentivize them is to rehabilitate the dilapidated infrastructure value chain, and maintain beneficial policies for tech growth.


The failure of the government to do these is exactly why startup companies in Nigeria have, and may continue, to struggle. 

SOURCES:
1 This Day Live: Tech, Nigeria’s New Oil. Available at https://www.thisdaylive.com/index.php/2021/03/28/tech-nigerias-new-oil/
2 Janet John “Top Venture Capitalist firms investing in tech in Nigeria”. Available at https://nairametrics.com/2021/03/28/top-venture-capitalist-firms-investing-in-tech-in-nigeria/
3 Techcabal: “54Gene, COVID-19 and the prospects of Human Biotechnology in Nigeria.” available at: https://techcabal.com/2021/03/31/nigeria-54gene-covid-19-biotechnology/
4 Adeyemi Adepetun “Nigeria pushes fintech revolution in Africa, revenues to hit $543m by 2022” available at https://guardian.ng/technology/nigeria-pushes-fintech-revolution-in-africa-revenues-to-hit-543m-by-2022/
5 Proshare: Tackling the infrastructural deficit in Nigeria. Available at: https://www.proshareng.com/news/NIGERIA%20ECONOMY/Tackling-the-Infrastructural-Deficit-in-Nigeria/53291
6 Vijaya Ramachandran, Jennifer Obado-Joel, Razaq Fatai, Junaid Sadiq Masood, and Blessing Omakwu “The New Economy of Africa: Opportunities for Nigeria’s emerging Technology Sector.” Available at: https://www.cgdev.org/sites/default/files/new-economy-africa-opportunities-nigerias-emerging-technology-sector.pdf
7 Nigerian Communications Commission: “Challenges of technology penetration in an infrastructure deficit economy.” Available at https://www.ncc.gov.ng/accessible/documents/976-challenges-of-technology-penetration-in-an-infrastructure-deficit-economy-nigeria-perspective/file

8 Ayodeji Adeboyega “FG seeks asset manager for 1trn infrastructure company.” Availbale at: https://www.premiumtimesng.com/business/445497-fg-seeks-asset-manager-for-n1-trn-infrastructure-company.html
9 OC&C: Tech entrepreneurship ecosystem in Nigeria. Available at: https://www.occstrategy.com/media/1307/tech-eship-in-nigeria.pdf
10 Ugo Aliogo “Nigeria: Kitan-David—Nigeria has comparative advantage in Technology Talent.” Available at https://allafrica.com/stories/202103310267.html

11 Endeavour Nigeria “Protecting Nigeria’s Entrepreneurial Future.” Available at https://endeavornigeria.org/wp-content/uploads/2020/09/Protecting-Nigerias-Entrepreneurial-Future-Endeavor-Whitepaper-September-2020.pdf
12 Why Nigerian Banks Switched off USSD services from MTN customers. Available at: https://businessday.ng/news/article/why-nigerian-banks-switched-off-ussd-services-from-mtn-customers/

13 Techcabal “MTN Nigeria’s USSD codes now powered by FLutterwave, others, as Banks boycott operator”. Available at https://techcabal.com/2021/04/04/mtn-nigeria-ussd-fintech-banks/

About the Author.

Markanthony Ezeoha is a Law graduate of Nnamdi Azikiwe University, Awka. He is a seasoned legal researcher and author with special interest in Energy Law, FinTech, maritime Law and corporate Law generally. He has numerous publications to his name and writes from Lagos. He can be reached via: 08180886379; [email protected]

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