For the last year or so, the team at tiphub has done a lot of interesting research and testing to identify key needs to accelerate entrepreneurship in emerging markets like Nigeria. One of the most common challenges, as most would assume, is access to capital. However, speak to VCs and they say they don’t see enough invest-able companies and are constantly fighting for the best opportunities with other VCs.
There seems to be a deeper disconnect that we haven’t been able to capture. In the next couple of paragraphs, I’ll discuss the actual amount of money in the VC space in Nigeria. (Nigeria will be our case study) Identify where I believe they key gaps are, and present a viable solution that will be the catalyst for start-up funding at scale.
Based on a triangulated estimate, there’s about 300 million USD under vc management in Nigeria. This does not include foreign based funds that operate in Nigeria. To better put this in perspective, we took GDP/ VC asset ratio to give some context. Its relatively easy to see that Nigeria is lagging in vc capital as an available asset class. This isn’t the only issue. If we look at how 300 million USD is deployed year after year, we’ll see that most vc firms look to invest in later stages in lifecycles of most start-ups. This translates into entrepreneurs who need to prove viability and scalability before investment. However, its the chicken or the egg argument. How do companies prove the validity of an idea without funding?
There’s an abundance of growth capital in Nigeria. The key issue is the lack of early stage “market validation” capital needed to get companies off the ground. In more developed markets, entrepreneurs find early capital from the three f’s (Friends, Family and Fools). There are also more opportunities for funding through banks and government grants. Family members are willing to bet on the next big idea. Ultimately, entrepreneurs in developed markets have access to a diversified stream of capital that 1. is at a smaller amount 2. Friendlier terms and capital structures for young companies.
The key gap, as I see it, is access to friends and family capital in emerging markets. At its core, it stems from lack of access to credit and disposable income in rising and emerging markets. This is the real gap. Early stage companies don’t have the capital to fund their first MVP or to validate their market. As a result, many ideas never get tested in the market.
Continue reading here...