Connect with us

Chinaza Onuzo: The five types of startups in Nigeria

Scoopinions

Chinaza Onuzo: The five types of startups in Nigeria

by Chinaza Onuzo

About a week ago there was a post by Tomi Walker on digivarsity titled “Where Did All the $100 million Companies go?” It’s a very good post. Go read it and come back. I’m serious go.

Right. Welcome back. So as you now know, the post uses the frame of “why very few companies that get launched in Nigeria are worth $100 million 10 years later” to talk about the state of start-up and growth businesses in Nigeria. Since I’ve been mucking around funding these kind of businesses for the past seven years, I thought I’d contribute to the discussion.

The central premise of the article is wrong. That got your attention didn’t it? You are welcome. It’s wrong because there are actually a pretty decent number of companies that went from start-up to $100 million enterprise in or around a decade. Significantly more than you would expect; start-ups that weathered the storm of doing business in Nigeria and were eventually able to scale.

Most of these start-ups are business to business companies that fly under the radar and a lot of them have founder management teams that fit the prototype of founder management teams in the States: educated young men (unfortunately) in their late twenties – mid thirties.

In my experience almost all of these start-ups in Nigeria that scale to $100 million generally fit into five broad types that I outline below. Of course there will be overlap within each of the categories, but I’m classifying them as to what I consider the most salient feature of the start-up. So off we go.

Startups to meet an existing, established need: This is the most common successful start-up. This is a new enterprise created to solve an already identified problem – basically there is no market risk. This start-up is normally founded by someone who wants the problem solved, or someone who knows that the problem needs to be solved. The poster child for this type of start-up is Interswitch. Interswitch was founded to solve the epileptic financial switching problem that existed at the time. It was founded by Telnet and a number of leading banks circa 2003 with SMEEIS funds. A large part of it was sold to Helios (a private equity fund) in 2010/11 for a massive return that was well over $100 million. Start-ups like this can fail, but generally only due to execution risk – basically the management team messed up.

Start-ups founded by previously successful people: This used to be the most common kind of successful start-up in Nigeria – where an established individual with links in the Nigerian business community, uses those links to raise funds to start a business. The earlier examples of this were the “new generation banks” like GTB, Zenith, etc. These were start-ups that grew to $100 million companies. Newer examples are successful startups like Swift and Konga whose founders had been successful at a previous enterprise.  These start-ups are particularly attractive to financiers because their promoters have a pre-existing track record of “success”. This doesn’t make their start-ups fool-proof but it does reduce the risk.

Externally funded start-ups: These are start-ups whose beginnings are more akin to the beginnings of start-ups in the Europe and the US. These are start-ups where people with no substantial track-record raise funds to pursue their dream. The promoters/entrepreneurs use their overseas contacts to build businesses that leverage off Nigeria. Three prime examples of this are Iroko, Jumia and Paga. If these companies did not have access to foreign sources of funding it would have been very hard for them to get off the ground in Nigeria. These start-ups are rare because there is very little seed stage funding in Nigeria. As more Venture Capital funds set up to focus on seed investing, these should become more popular. The fact that very few start-ups fall into this category is why people say that there is no money to fund start-ups in Nigeria.

Government induced start-ups: These are start-ups created as a result of government regulation. The founders still have to execute, but the viability of the opportunity was created by the actions of the government. The textbook example here is Chivita. It is possible that there would have been successful businesses built in this space in the long run, but the initial opportunity was created by the fruit juice ban. Local content in oil and gas services is another text-book example, but other issues with the oil and gas industry has meant that fewer multimillion companies were created than should have been.

Big Bang Start-ups: I sometimes think of these as “start-ups in name only.” These are large, well funded start-ups that take aim at a market or a sector in Nigeria. Two successful examples of this are MTN Nigeria ($400m) and Main One (~$150m). These are institutional companies with significant backing, however they still have a number of the same issues other start-ups face. If you doubt me, just think about some of the failed big bang start-ups: Nu Metro, HiTV, Mobitel, Virgin Nigeria etc etc. Having tons of money doesn’t eliminate the risk, it just reduces it somewhat. Given the tendency of these kinds of start-ups to throw money at their problems, I’d say that their odds of success are probably lower than they should be.

I didn’t mention the most common start-up in Nigeria – the Self Funded Start-up. You know them: the ones where people use their own existing capital to start businesses. A number of these are successful and scale, but generally, they do not. I believe that due to the nature of the funding, these businesses lack several ingredients that tilt the odds of start-up success from dismal to bad.

Conclusion

The start-ups that tend to scale in Nigeria primarily focus on business to business. This generally makes sense, because targeting B2B is less risky than targeting the mass market. However, technology is changing that somewhat, and so people are doing a lot more mass market stuff.  As a result, start-ups will become more visible and people will stop asking where the $100 million companies are. Anyway enough waffle, off you go now.

– Follow this writer on Twitter: @IamSnazz

If your answer to the question “What will you do with an English degree” is “enter Finance, obviously” then you have a pretty good idea of who Chinaza is. He found other people who thought that made sense, and so that’s what he’s been doing for almost a decade. When he’s not doing that, he’s mostly making a nuisance of himself talking about Nigerian policy, gender issues, and a host of random things that catch his fancy. Twitter: @IamSnazz

3 Comments
To Top