In Africa, regulations are a double-edged sword, accelerating startups' growth or putting them out of business in one fell swoop. Two examples that highlight this are the okada ban in Lagos and the currency redesign in 2020 and 2023, respectively.
Where the okada ban resulted in the end of certain business models, the currency redesign was a boon for fintechs such as OPay, PalmPay, and Moniepoint.
With traditional banks struggling to handle the increased demand for online transactions, these fintechs seized the moment with lightning-fast transfers, winning the hearts of customers and turning sceptics into believers.
Navigating regulations as a startup
Olufemi Oyinsan, General Partner at The Continent Venture Partners, has witnessed first-hand the impact of regulations on startups with his firm investing in both Gokada and Moniepoint.
With startups and regulators often appearing to be on opposing sides, he argues that it is important both parties understand that neither is actively trying to undermine the other as they have different objectives.
“Innovators want to work as fast as they can to bring new things to the markets, but the regulators are tasked with the role of oversight, making sure things don't go out of hand, and essentially protecting the general populace and consumers,” he says, advocating for a middle ground approach.
But he notes that many startups operate in regulatory grey areas, while regulators frequently wield the hammer rather than take a conciliatory approach.
In April, the Central Bank of Nigeria (CBN) ordered certain neobanks in the country to cease account openings in a move aimed at curbing fraudulent transactions. It later insisted on certain KYC requirements before easing the restrictions in June.
Such an approach undoubtedly threw a spanner in the works for all parties involved and potentially slowed down their growth projections.
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While acknowledging the importance of regulatory bodies, Oyinsan cautions that startups shouldn't expect to be completely compliant right away and suggests that they start working on it as soon as they start seeing traction.
Regulations affect everyone, except a startup has been fingered for specific infractions, and Oyinsan argues that collaboration to engage regulators is crucial to achieving favourable results.
However, he adds that the body tasked with engaging with regulators may see more success if it is recognised by the government as official representatives of the startup community. On the part of regulators, he notes that hiring people with startup experience to assist in formulating regulations and engaging with startups could bear positive fruit.
Building the digital infrastructure for Africa
A critical factor in the growth of African tech startups is robust digital infrastructure. In Nigeria, for example, fintech startups like Interswitch and Paystack laid the foundation for other startups to build on, facilitating the movement of money online.
The absence of critical digital infrastructure has also hindered the creation and adoption of certain services, and Oyinsan notes that the government and private sector need to work together to bridge the divide, with the government playing the role of an enabler rather than a competitor.
He argues that while governments are stretched thin across various essential sectors like healthcare, education, and security, they should focus on creating enabling environments for digital infrastructure development.
“There's a reason why some of the most successful startups here are now beginning to focus on B2B rather than B2C. It's not that the C is not there, but I often ask people, 'How do I give credit to somebody if I don't know their accurate identity or address?' So I think the government’s biggest role is to be the referee and give the right incentives.”
Tax breaks, reduced fees for rights of way, and other incentives could significantly boost internet penetration and subsequently foster economic growth.
“We’ve built what we’ve built without the greatest quality of Internet, without sustainable power, so you can imagine when all these things exist, things will literally fly.”
The Nigerian Startup Act
The Nigerian Startup Act, which became law last year, promises to foster innovation and seamless interaction between the government and startups. Some of its provisions include tax relief for startups, investors, and employees; training and capacity building for startups; and a fund to provide seed funding.
However, its slow implementation has been a concern. Since being signed into law in October 2023, the most progress has come in the form of a startup registration portal that does little to enhance faith in the government’s speed of implementation.
Also, much of its usefulness is now tied to the willingness and speed of state governments to domesticate the Act. So far, Rivers and Kaduna States have made moves in that regard, while Lagos is working on an innovation bill.
Although he points out that there’s no silver bullet to accelerate implementation, he argues that a lobby group recognised by the government could be effective.
Towards increased regional collaboration
Currently, intra-African trade is minimal, with most businesses trading more with countries outside Africa. And Oyinsan argues that regional collaboration is crucial for African startups to thrive.
“On a continent level and on a global level, we're not going to really make progress as Africans if we don't trade with ourselves first and trade in a more commanding way with the rest of the world.”
Oyinsan points out the need for regulatory harmonisation across African countries to facilitate easier expansion and operation of businesses across borders. This would involve more collaboration among regulators to recognise and streamline procedures for startups operating in multiple countries.
“We backed this startup, one of the earliest cheques in the startup, and they started in Nigeria; they registered with the SEC in Nigeria. They're having to start the exact same process in Ghana, Kenya, and South Africa. Why can't there be a level of transfer?”
Currently, expanding a business across Africa requires the acquisition of several licences, an expensive and lengthy process for any business. While the African Continental Free Trade Area (AfCFTA) is a step in the right direction, its potential is yet to be fully realised, and Oyinsan notes that governments need to collaborate to unlock more prosperity for businesses on the continent.
Adapting to a changing funding landscape
The investment climate for startups has evolved significantly, with a noticeable dip in funding activities compared to three years ago. Oyinsan believes that this cyclical nature of funding requires startups to demonstrate sustainability, profitability, and clear business viability. Investors now prioritise these factors over mere innovative appeal.
For venture capitalists like TCVP, it's equally important to be able to attract funds from limited partners (LPs) which can be challenging, given the perceived risk and higher returns available on fixed instruments in the West. Oyinsan calls for increased local funding, emphasising that local institutions should ramp up their participation to mitigate currency mismatches and foster a more stable investment environment.
