One of the core issues in the Nigerian tech space is funding.
Startups need funds to scale, investors provide the needed funds for startups with the projections of making a profit from the startups in the future. As a tech startup lawyer, I have been privileged to work with over 300 startups through their journey, including their entire funding process. Hence, I know first-hand the issues and challenges startups face regarding funding, dealing with investors and scaling.
The tech funding landscape in Nigeria is still at its foundational stage, with most funding coming from foreigners and foreign companies.
However, we’re doing little to develop local capacity, and investors, tech media, and tech founders themselves have pivotal and important roles to play in developing the local funding landscape here in Nigeria.
The funding quandary in Nigeria’s startup space
Tech startup founders in Nigeria face very peculiar challenges that inhibit their growth and the general development of technology here in Nigeria. Some of those challenges include:
- The impact of government’s indifference: This is perhaps the most difficult challenge Nigerian founders face currently. The Nigerian government, and even local investors, are far removed from the tech ecosystem, so the needed support in terms of funding and favourable policies is not available. Consequently, they often resort to seeking funding from foreign investors, albeit with its own challenges. This reliance on external funding puts them in a precarious position, akin to begging for sustenance rather than having a place at the decision-making table. Despite innovative products, the lack of local support forces startups to accept external aid, irrespective of the strings attached, hindering their autonomy and growth potential.
- The dilemma of building for foreign approval: As a consequence of the lack of support from local entities, Nigerian tech founders find themselves increasingly reliant on foreign investors. However, this reliance often leads to a shift in priorities, with startups focusing more on attracting investments rather than addressing local challenges. Consequently, the essence of entrepreneurship, which lies in solving local problems and profiting from those solutions, becomes overshadowed by the pursuit of investor interests, resulting in a disconnect between startup initiatives and indigenous needs.
- The misconceptions founders have about investor funds: Another significant challenge revolves around founders misunderstanding investors' funds as personal assets rather than capital for scaling and sustaining their businesses. This misconception leads some founders to prioritise acquiring investments over ensuring their business's longevity, often squandering funds on non-essential expenses. This mismanagement of funds, including diverting them to personal use and operational costs rather than business development, contributes to the difficulty tech startups face in raising and utilising funds effectively.
- The trap of seeking investments too early: Many Nigerian startups prematurely seek investments before fully understanding their market or establishing themselves within it, which can stifle creativity and hinder flexibility. Early-stage investments often come with rigid investor theses, limiting the founder's ability to pivot based on market experience and challenges. Without sufficient market experience, founders may struggle to earn investors' trust in their decision-making abilities, potentially hindering the startup's ability to scale and expand if investment agreements restrict necessary actions for growth.
How we can overcome investment hurdles in Nigeria's startup space
Navigating investment hurdles in Nigeria's startup ecosystem requires a strategic approach that addresses the above challenges.
We need to emphasise accountability in startup culture
Founders should understand that investor funds come with obligations.
When we start holding founders accountable for the funding that they get, the system will be sanitised. You don't gather people's money, then give them a flimsy excuse and shut down. Accountability is key. Integrity is a big issue. The only way to prove that we are different from the norm and that we are the future is by being accountable for investor funds received.
Accountability can be achieved by building a transparent system so that founders know that if they squander investor funds, they will be punished and have to pay back the money. However, if the money is properly deployed but the business still fails, the founder will be free of misconduct.
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Accountability should also be beyond merely considering how the money invested was spent. Founders must also ensure that they spend the money on the right things to help the business grow because sometimes, what founders think is important is not necessarily what the business needs at that particular time.
Build for market sustainability
Rather than preoccupy themselves with closing funding deals with investors, founders should focus on penetrating their desired market and building a business that can be sustained by the market and not necessarily investor funds.
Founders should aim for market sustainability, such that if investor funds are needed, it will only be for a major business expansion and not necessarily to keep the business afloat. In this case, founders can show ready example that they have a market for their product, and investors will easily trust that they will make a profit if they invest in such a startup.
What is currently obtainable in the Nigerian tech space is that founders are building without first recognising whether or not there's a market for their product. They do not conduct sampling tests to know their potential customers and how well their products will fare in the market. After building, they advertise and sponsor tech events where no one knows who they are.
A good example of a startup that built a market-sustainable business before seeking for investor funds to expand is smallChopsNG. The founders established a business selling over a hundred million naira worth of small chops to customers in Nigeria, solely by optimising the logistics supply chain for small chops businesses.
The only thing that keeps a business is the market.
Without a market, tech startups are merely conduit pipes to spending investors’ money. The right question founders should ask is “Is there a market for my product?” Not do “Is there an investor for it?”
Your market should be sustained. Investor funds should be a buffer that helps you serve your market better. Not help you stay afloat.
We need to ramp up local investments
The major reason tech products do not resonate with most Nigerians is that the founders are not building products considering Nigeria's peculiarities.
The founders are not considering Nigeria's peculiarities while building their products because the necessary funding is not available locally. There are not enough indigenous investors to ensure that Nigeria-specific problems are solved using technology. Most tech startups receive funding from foreign investors, so founders must necessarily pander to building for foreigners.
Another downside is that many capable tech hands are harvested from Nigeria and taken to work in foreign countries to help develop their countries.
The basic solution is to have more indigenous investments in technology. When funding is available locally, founders can build products that better serve indigenous markets because they'd provide tailor-made solutions to our peculiar problems.
Beyond funding: Redefining the investor-startup relationship
You can't blame investors, especially indigenous ones, when they refuse to invest in indigenous tech startups.
You put your money where your mouth is. However, I believe that when information like this starts going out, they begin to rewire their mindset and thinking. The most potent solution to the problem of tech startup funding in Nigeria is having indigenous investments in technology and more indigenous investments in technology.
More than that, I would like to see investors helping the startups penetrate their markets using the established business relationships that the investors have been able to build over time. Investors should be able to help indigenous tech startups widen and deepen their market penetration and get a wider market share and not focus on asking for seats on the startup board. Their investments should be more towards product sustainability. In this way, pitch decks become clearer and more detailed.
Investors should be able to provide the right support system for startups so they can channel their energy properly and build products with a market.
The tech media needs to do better
The tech media poses a big problem in the Nigerian tech space.
The constant publication of news of startups raising funds pushes the dangerous narrative that the hallmark of a successful startup is that it has secured funding from an investor. Rather than address market issues, the tech media is fixated on which startups have raised how much. And the problem is that a lot of times, the money raised is paper money. They may not have gotten the money they claimed to have raised from the investor when making that announcement.
The media must move beyond announcing funding rounds to asking startups the right questions. Can you give us more details on the funds you have closed? What's the plan for it? Do you have a ready market to which you are looking to expand? These are the right questions the tech media should be asking.
Lawyers and compliance officers are not left out
Beyond ensuring that startups tick all the boxes for compliance requirements, lawyers, compliance officers and due diligence companies should also ensure that investors consider whether there's a market for the tech product.
Beyond the fantastic pitch deck, they should also direct investors to consider the market penetration plan and growth trajectory of the business the investors are about to put their money into.
What I expect in Nigeria’s funding landscape in 2024
In 2024, I want to see more startups spending less of investors' funds on recurring expenditures and rather channel the funds to market penetration and expansion.
I want to see a reduced burn rate. The only way to reduce the burn rate is by building a market-sustainable business because if nothing else brings money, the investor funds will run out even faster.
Again, I want to see founders delay gratification. Entrepreneurship is a very draining project, and it's even worse in Nigeria, where founders work twice as hard and make a lot of sacrifices to get the funding they receive. However, when the investments come, it's not time to squander the money on frivolities. The journey lies ahead, and the money raised will be of the utmost importance.
