Friday, 12 March 2010

Emerging Market Venture Capital: Nigerian Case Study

Emerging Market (EM) investments by definition entail greater risk and reward. Venture Capital (VC) within this space follows this trend with a couple of exceptions we discuss below.

Last week in a bid to add colour to our view, we spent several days in Nigeria meeting with local entrepreneurs, technologists, startups, government officials, and legal professionals and can surmise the following: New technology adoption in the region is exponential, for example internet penetration in Nigeria (population 150 million) is 20 million as of January 2010 from 1.77 million in December 2004. Furthermore, there is a higher proportion of mobile Facebook users as a percentage of local Facebookers in Nigeria than there are in the UK.

The passion that entrepreneurs maintain for their businesses to succeed locally must be noted in spite of the added burden of a less clearly defined evolutionary pathway, challenging energy and communications infrastructure and limited access to finance. Government initiatives like the Abuja Technology Village (article by Peter Emeagwali on this initiative) have tried to redress some of these shortcomings through public-private partnerships.

The arid seed funding landscape creates opportunities for VCs willing to gain EM exposure. Commercial and Micro-finance banks have stepped in to provide some liquidity without commensurate levels of support and flexible exit options that VCs can provide. A positive consequence of this challenging seed funding scenario is that whilst companies are bootstrapping their startup, they are forced to focus on revenues very early on. For example Connect Nigeria, an innovative local Yahoo!-esque classifieds, stated they have already secured paying clients.

A second exception is, many of the startups are rehashings of tried-and-tested international technology businesses. The added value lies in localization of the business models. For example, an entrepreneur talked to us about an e-payment billing system that focuses on building trust and reaching clients used to dealing with cash. Another entrepreneur who runs an IT Services company informed us of his plans to launch an ISP in the country to rival foreign Isreali internet service providers, the incumbent suppliers of most of the country's bandwidth. You will find a more comprehensive list of Nigeria's startups to watch in 2010 according to Loy Okezie, an industry commentator and member of the Connect Nigeria management team.

Our opinion is that Nigeria should remain on investors radar as a medium- to long- term growth story. This remark by a very senior government official at the Abuja Chamber of Commerce at a meeting with us succinctly describes our findings, "We are well aware of the local challenges and are very eager to work with stakeholders nationally and internationally to overcome these."

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