The Quest for a Black Unicorn: Investing in Lagos Start-ups

The Nigerian tech scene is on a roll, Lagos the financial and commercial centre of the country has become the epicentre of a nascent tech industry now boasting of hundreds of new ventures all competing to meet the demands of a young and fast growing population.

Lagos is already one of the world’s mega cities hosting a population of 21 million, this is expected to double in the next twenty years as more Nigerians move there to seek their fortunes. Lagos exhibits huge paradoxes, stories of incredible ingenuity and success are apparent amid severe hardships and the pressure of living in such densely populated urban area with scant resources.

When I covered investing in Nigeria a couple of years ago there was a great deal of optimism about the country, but since then the sustained low oil price has led to a collapse in the value of the Naira and a drop in the previously high economic growth rate. But there is optimism in the air, could some combination of a rise in oil prices, the prospect of new President (the incumbent Buhari is recovering in a London hospital), and an end to the Boko Haram insurgency in the north bring about a revival in Nigeria’s fortunes.

Despite Nigeria’s current economic woes increasing smart phone usage, extensive internet coverage and rising incomes (at least for some) has unleashed a wave of tech usage. Nigerians are bypassing fixed line phones, walk in banks and other physical infrastructure instead leapfrogging straight to modern solutions such as mobile banking often outpacing Western countries in the process. The presence of this new technology has also opened up opportunities for those entrepreneurs previously held back by a lack of capital and wider connections, now the door is open for tech start-ups to thrive.

The Lagos start-up scene

Technology start-ups the world over typically try and address a real world problem using modern technology and Nigeria is no different, attempts to reduce the pain of commuting in traffic crazy Lagos with a fleet of comfortable modern buses which allow passengers to prebook seats with free wifi and the opportunity to work, sleep and perhaps even enjoy an otherwise hellish journey to work. Another start-up DIY Law started by three female lawyers helps businesses through the complex thicket of regulations that is required to register a company in Nigeria. Big Cabal Media which produces a new generation of online magazines for young African audiences, all ventures made possible through the internet and mobile technology.

Nigerian and African tech companies have already proven themselves to be winners; IrokoTV was one of the first African success stories, the so called Netflix of Africa which has taken Nollywood online across Africa bypassing traditional television stations. Jumia is the latest tech company to hit the headlines receiving funding from Goldman Sachs, Rocket Internet and CDC, the firm has grand ambitions to create a one-stop shop for internet shopping, selling, travel, food delivery and anything else that can be sold online.

Now major US tech incubators such as Y Combinator are investing in Nigeria by funding companies from an early stage in an attempt to find winners. Tech start-ups are characterised by a high “burn” rate – in other words nearly all fail to make money or survive for very long, a few will create successful business or get brought up by a bigger competitor and a tiny minority will become major success stories, the so called “unicorns” because they are so rare.

How do you invest?

If you like many established tech players get the feeling that Nigerian tech firms have a bright future and you have the funds or skills to invest in this sector then there are few things to consider:

Compared to Silicon Valley or Europe it is a lot cheaper to invest in Africa, your investment could be as low as US$ 1000  per investment. However as nearly all start-ups eventually fail you will probably want to make multiple investments to spread your risk effectively which is possible via an Angel Fund. Investors put their funds into a large pot which is placed into various enterprises in the hope that a few will make money and cover the losses of the ones that don’t make it.

One established way of doing this is through the Lagos Angel List platform which will place your money in 100-200 companies at different stages of growth, but mainly seed capital and across a wide variety of sectors, all vetted by experienced professionals. The returns from the 2013 investment round have been impressive with unrealised IRR of 46% reported as of end of 2015. Unrealized IRR is of course an estimate as the investment cycle is not yet complete and this figure could fall over time.

It almost goes without saying that investing in a high risk sector like tech in a volatile frontier market like Nigeria is not to be done lightly, there is a lot that could go wrong. But this has to be balanced with the upside; Nigeria has huge potential as an economy as does the tech sector in the country and more generally Africa as many people on the continent have yet to even access the internet let alone explore its full potential.

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