In 2010, Idris Ayodeji Bello gave up his lucrative job at a major oil company in Texas to return home to Nigeria. Bello believed that Nigeria’s tech sector was poised to explode, so he and three partners established Wennovation Hub, a tech hub to support entrepreneurs and test innovative ideas.
“Our goal was figuring out how we could turn all these ideas into corporations,” he told Rest of World.
In 2012, Bello and his partners, then in their early 30s, took a bigger risk. They raided their pension funds to create the LoftyInc Afropreneurs Fund 1, an angel investment fund that invested between $25,000 to $50,000 in promising founders. Nigeria’s tech ecosystem was still at a very early stage, and several of LoftyInc’s investments failed. But two — Andela, the developer training platform, and fintech company Flutterwave — would go on to attract hundreds of millions in follow-on funding.
The ticket sizes in Nigerian venture capital have grown substantially since Bello started writing checks. In March, Tiger Global led a $170 million round into Flutterwave, pushing the company’s valuation over $1 billion, and making it Nigeria’s third unicorn. In August, the Japanese mega-investor, SoftBank, joined Sequoia Capital China in a $400 million investment into OPay, a Lagos-based mobile money company.
The entry of these firms — major investors in the tech sector in emerging markets — has been interpreted as a sign of validation for founders pointing to the growing maturity of the Nigerian ecosystem. Where these funds go, other investors tend to follow.
“There isn’t a major global VC firm I’ve spoken to in the last 12 months that isn’t seriously exploring opportunities to immediately deploy funds in Africa right now,” Aaron Fu, head of growth at the global tech accelerator Catalyst Fund told Rest of World.
Investors have been predicting that Nigerian startups would break out for more than a decade, but the ecosystem has gone through several false starts. Rising internet adoption and smartphone penetration have created opportunities to disrupt traditional industries like retail and financial services, but startups have been hindered by weak infrastructure, uncertain policies, and a lack of investment.
Scaling in Nigeria has often proved difficult. Even though the country has a large population — more than 210 million — average income remains low, and companies have struggled to find large, accessible markets. They also face a funding gap — the companies need sums that are too big for local angel investors, but too small for international VCs.
“The startup may have proven some viability and product-market fit, but they couldn’t scale because either the bigger boys thought they were too early, or the smaller angel investors had already reached their funding limits,” Olumide Soyombo, co-founder of Voltron Capital, an angel investment fund, told Rest of World.
To offset this problem in the past, local investors pooled funding from a network of backers to invest in startups. “We were like the first set of damsels on the dance floor while the music plays,” joked Soyombo, who was an early investor in Paystack, which the U.S. fintech behemoth, Stripe, acquired for $200 million last year.
There are signs that that is changing. In Nigeria, the number of funding rounds above $1 million has almost doubled from 25 to 47 between 2019 and the first nine months of 2021, according to data from Africa: The Big Deal.
“Investors have been eyeing Africa for a while, but have been making safe bets,” said Rebecca Enonchong, chairperson of Afrilabs, a Pan-African network of innovation hubs. “Lately, the size of the investments demonstrate a real commitment to Africa; this is new,” she added.
Tiger Global had already dipped its toe in the Nigerian startup scene in the early 2010s, with investments in Jobberman, a job listing platform, Wakanow, a travel booking service, and Cheki, a car marketplace. In 2012, it made a high-profile $8 million investment in IrokoTV, the video-streaming service.
When Tiger Global made a $1 million investment in Jobberman, they did their due diligence, but their focus was less on the startup and more on the opportunity in that market, said Opeyemi Awoyemi, co-founder of Jobberman. “When they met us ,” he said, “it was a 30-minute meeting and right there they made an offer.” It was a moment that captured Tiger Global’s trademark process of swift decision-making, which some rival investors found contentious.
But the company didn’t follow up this flurry of activity until 2021. One person with knowledge of the early conversations said the firm is in advanced talks with one other Nigerian company, and is exploring investments into other fintech companies. Tiger Global declined to comment.
Fintech is seen as a likely entry point for global investors due to the scale of the opportunity and their familiarity with the sector around the world. More than half of Nigeria’s adult population has no bank account, and only 2% have access to credit. Fintechs could — if regulation permits — step into that void and build enormous markets. Tiger, Softbank, and Sequoia have been major investors in fintech in China, India, and Southeast Asia.
“Everyone understands the need to build digital infrastructure in Africa, and their partners understand fintech,” Catalyst Fund’s Fu said of leading global VCs looking to Nigeria.
The arrival of big, global VCs into the Nigerian tech sector is creating excitement among startups and local investors — although those who spoke to Rest of World also cautioned that it was very important for international players to find local co-investment partners, to help them better evaluate local opportunities and get on-the-ground perspectives.
For both local VCs and startups, larger investors also create exit opportunities — something lacking in the market — through secondary equity sales, which is when an investor sells on a startup’s stake to another investor. Sensing the opportunity, Soyombo and Bello, both of whom have enjoyed outsized returns from backing Paystack and Flutterwave, have each announced new venture funds.
This could be crucial. Despite the size and investment spree, companies like SoftBank and Tiger Global rarely invest in early-stage companies, especially in a less-developed market like Nigeria. Local investors still bear the greater responsibility of backing companies in the early stages and supporting them in developing their ideas. In 2020, early-stage companies represented 64% of Africa’s 359 startup funding rounds above $200,000, according to Partech. However, collectively, they accounted for $220 million of the continent’s $1.4 billion startup investments.
On the back of their successes, local investors can also go on to create more significant funds to invest bigger sums in companies. Soyombo warned that it's still early days. “You raise the fund based on your track record, and that’s what will give us the platform to raise proper large funds.”