Fund constraint stalls technology role in economic diversification

Nigeria’s plan to diversify its economy away from oil through the deployment of a plethora of digitally enabled businesses is being slowed by the funding constraints amplified by local investor apathy, industry observers say.

 

The industry observers further say that securing local start-up funding is a daunting task in Nigeria, considering the high failure rates of internet businesses,along with the limited understanding of technology investment.

There are also compelling concerns amongst investors about the industry’s viability from a Return on Investment (RoI) perspective.

The ministry of communications technology had earlier set the target of creating 30 successful software internet businesses by the end of 2015 as it looks play a critical role in aiding the diversification of the Nigerian economy, cramped for decades by its dependence  on oil.

These tech start-up businesses are expected to develop innovative software solutions for critical sectors of the economy. Industry observers are however of the view that the said target is a big mirage and remains highly unattainable because local investors expected to stimulate the emerging ecosystem are skeptical about putting in funds because investment in digital start-ups is high risk and requires significant due diligence.

  “Local investors do not have sufficient understanding of the technology landscape to identity good or bad deals”, said Mark Essien, chief executive officer at Hotel.ng, Nigeria’s largest hotel booking website. 

Speaking with BusinessDay in an interview, Essien explained, “It is not their fault that they do not want to invest in tech start-ups. Nigerian investors are not conversant with technology.

“Many of them come from another generation and do not understand the tech landscape”. Femi Taiwo, co-founder and chief executive officer of Nigeria’s property website, www.private property.com.ng, agrees with Essien. According to Taiwo, it is a daunting task securing investment from Nigerian investors. “We secured seed funding from friends and family who believed in the idea. I would say Nigerian investors do not understand internet business and the economics of it.

“This makes it difficult to secure investments from them”, Taiwo added. He observed that it would take a massive wave of investment from foreign investors to open the eyes of local counterparts to the immense opportunities that abound in Nigeria’s technology space.

Nigeria’s technology start-up market is indeed gathering serious momentum this year, with a growing number of foreign Venture Capitalists (VCs) showing willingness to invest in these innovative digitally-enabled businesses, industry observers have said.

Buoyed by the country’s budding, technology-savvy middle-class and massive online population (83 million internet users), Nigeria’s tech start-up scene is witnessing a flurry of activity in the frame of new investment drive, acquisitions, strategic partnerships, as well as plans to establish more accelerators and incubation centres.

Hotels.ng, has secured $1.2 million, about N240 million investments from international investors. The investment came from international investors including seed-stage technology fund, EchoVC Pan-African Fund and Omidyar Network, the investment vehicle of eBay founder, Pierre Omidyar.

A few months ago, it was reported that Konga.com, Nigeria’s largest online marketplace, had raised $40 million new venture fund. This is the online platform’s largest yet. In January 2014, the electronic retailer reportedly raised $25 million from Naspers and Kinnevik. Market observers are convinced that the technology start-up scene will be unable to make the required impact in terms of expanding the economy because of the difficulty involved in building the critical mass of businesses. According to them, Venture Capitals, private equity firms and other angel investors in the country at the moment are not willing to invest in new ideas but are ready to fund few start-ups, that have tested the viability of their concepts, scaled up and are already making profit.

Femi Longe, co-founder of Co-Creation Hub (CcHub) and director of its Open Living Labs, said investors are only willing to invest in already established startups whose growth are expected to be steady and rapid.

Essien however enjoined tech start-ups to focus on building traction in their business to attract the much required funding to take the business to the next level.

Industry observers told BusinessDay  yesterday, that the reality about fund availability for tech start-ups is that there is more funding for established start-ups than there are established start-ups. “Where the funding gap exists is the early stage investment to get start-ups to be established enough to attract large capital investment”, explained Longe.

This further implies that there are lots of funds chasing few established technology start-ups, while many yet to establish start-ups starve of investment. “The challenge is not from the start-ups,” he observed. “The challenge is from the investors. To put this in context, we need to have a fund stream that can support businesses from the foundation, say with as little as $5,000 as proof of concept fund.

“For instance, I have an idea but not sure if the idea will be a viable business, I need some money to put it to test. “In other parts of the world, people could get money from family and friends but in Nigeria, so many people have no family members to give them a million dollar to test-run a business idea that may end up not being successful”, he explained.