On Monday, January 9, 2023, agritech startup, Releaf, announced its $3.3 million pre-Series A round while disclosing two new additions to its tools: Kraken II, a more portable version of its palm kernel desheller and SITE, a geospatial mapping application developed to aid businesses make better decisions.
Africa’s current population is an estimated 1.4 billion people. Experts expect this number to double by 2050, with Nigeria, the continent’s most populous country, tipped to dethrone the United States as the third most populous country globally.
In the right hands, a large population is a blessing, often providing a ready workforce and a large middle class that could harness or take advantage of economic opportunities. Many, however, worry that this may not be the case for Africa. Economic instability and an absence of adequate policies in most countries suggest that the population boom could become a millstone around the continent’s neck.
But some of its citizens see it as an opportunity to build solutions for some of the most challenging problems on the continent, from financial services to logistics and agriculture. Ikenna Nzewi is one of these entrepreneurs. He moved to Nigeria after graduating from university to start Releaf, a company that uses its supply chain technology to ensure manufacturers in Nigeria have access to quality raw materials.
Over a video call last week, I caught up with Nzewi to discuss his reason for starting a business in the agricultural industry straight out of school. We also discussed how the startup weathered the storm of the Nigerian market to build a thriving business.
Back to the farm
In January 2022, when asked about the performance of his government on the economic front, Nigeria’s president, Muhammadu Buhari, said more Nigerians should return to the farm.
“All I know is that we have to allow people to have access to the farm. We just have to go back to the land,” he said.
A few months later, Ahmed Bola Tinubu, the APC presidential candidate, advised the federal government to recruit 50 million youths into the army to fight insecurity in the country. As for how they would be catered for, he pointed out that they could also grow their food.
If you think you see a pattern, you’re not wrong. Many Nigerians believe the solution to the country’s economic woes is good old agriculture. So why are Nigerians not getting into agriculture en masse?
To understand this, we must understand how the agricultural value chain works. For this example, imagine I’m a tomato farmer in Jos, Plateau State. At the beginning of the planting season, I need seeds for my farm, pesticides to protect my crops, insurance (which many Nigerian farmers do not have) for potential losses, and employees.
If all goes according to plan, I would need to transport my produce to the market during the harvest season. Depending on my location, I might have to drive on bad roads without the assurance that all my harvest will be bought at the market. In many cases, some products will be destroyed on the way to the market or lost because of poor storage conditions.
In August 2022, a representative of the Minister of State for Agriculture and Rural Development revealed that as much as 50% of agricultural produce in Nigeria is lost post-harvest. The economic value of these losses, he said, was equivalent to ₦3.5 trillion ($7.6 billion). Bad road networks, poor distribution networks, poor storage conditions, and lack of agricultural finance are some of the problems that players in Nigeria’s mostly subsistence agricultural sector.
A tech solution for agricultural produce in Nigeria
While studying at Yale, Nzewi started studying Africa’s economic development. With the continent’s population growing rapidly, he soon realised it was important to provide food at affordable prices.
“Over the course of our lifetime, Africa will be the most populous continent on the planet, and it’s very important that we build a food system that can support our people but also a food system that is not too expensive so that people can make money and invest it in their education.”
Speaking of inexpensive food systems, many African households spend between 40% and 85% of their income on food. In the United Kingdom and the United States, that number is 10.8% and 10.3%, respectively.
With this realisation, he set about building Releaf with his Co-founders, Uzoma Ayogu and Isaiah Udotong. The idea was a marketplace for agricultural produce, and it was enough to get them into Y Combinator.
But moving to Nigeria soon brought them face to face with the reality of agrobusiness on the continent — providing an online marketplace was not enough. They needed to be a part of the value chain, so the change to a startup building supply chain technology began.
Lessons in fundraising and valuation
Although the startup had Y Combinator as one of its investors, Nzewi pointed out that they still had investors who were sceptical about investing in an agritech startup with a profit model.
“I think there’s a perception that agriculture in Africa equals non-profit or poverty alleviation. I think that’s strange. You would think that businesses operating in the largest sector on the continent could return free cash flows, and so I think that’s been an education process for our investors.”
That reluctance from investors, Nzewi said, has influenced the startup’s approach to storytelling. Since most investors are aware of the social impact of its business, they are now more deliberate about pointing out the economic returns as well.
Although Releaf was accepted into Y Combinator, the startup opted against participating in its Demo Day as the founders felt they did not have a product that VCs could support. Instead, they conserved the investment they received from Y Combinator and returned to Nigeria to build the business and understand the market they intended to play in.
That decision appears to have paid off, as the startup has found its niche in the market with its supply chain technology.
But why would Y Combinator accept founders with minimal industry experience into the accelerator? Nzewi pointed to the passion and commitment shown by the team as one of the major reasons. When they started Releaf, the three co-founders lived in different parts of the United States because of their academics and, even when speaking to the Y Combinator team, had to call in from separate locations.
Regardless, their major takeaway from Y Combinator was a decision-making framework that gave them a guide for making decisions quickly. He stated that the lessons from Y Combinator mean they can quickly test their assumptions instead of waiting for months.
If you want the big valuation, deliver the big revenue
Valuation is tricky for investors and founders because each party often has different reasons for arriving at their valuations. What many agree on, though, is that valuation is more of an art than a science, a view Nzewi agrees with. However, he made it clear that the founders’ backgrounds and having Y Combinator as an early investor were helpful when meeting investors.
"I think startup valuations are more of an art than a science, especially as it relates to early-stage companies. I think especially during the pre-seed stage, the range of valuations that companies will get is often based on the background of the founders. Often I think that if you have been educated at a world-class institution or have a world-class investor like Y Combinator or you've worked at blue chip companies like Facebook or Bain, the starting valuation that your startup gets is often higher than someone who would have had the same traction but doesn't have those badges if you will."
As startups advance to later stages, the background of their founder(s) begins to matter less during valuations as investors begin to seek evidence of traction. For some startups, this could be revenue growth; for others, it could be growth in the number of users.
"As a company reaches the seed stage, valuations are driven by multiples of some metric, and generally, that metric is revenue in our space. If you want the big valuation, deliver the big revenue. It feels like a fair way to go about it."
Having spent resources building solutions based on unvalidated assumptions, Nzewi advises that startup founders ensure their thoughts on their business are grounded in reality before committing resources. When dealing with investors, he also cautions that they speak to other founders to understand how potential investors act.