Investment surges as start-ups seek to tap 40% of country still unbanked amid rising internet use.
The Covid-19 pandemic, oil price slump and civil unrest have hammered Nigeria’s economy this year, but the tech start-up scene in Africa’s most populous country has continued to thrive.
Yabacon Valley, an area of Lagos which took its nickname from the US tech hub, hosts hundreds of banks, IT companies and start-ups.
The number of internet users in the country is surging, hitting 140 million people in June. Nigerian start-ups are capitalising on this shift, raising $747m last year, according to Partech African.
Leading the way are fintech firms, as entrepreneurs look to serve the 40% of Nigerians that are remain unbanked and meet gaps in the market that have not been met by incumbent providers.
Tunde Kehinde, chief executive and co-founder of Lidya, a Nigerian start-up providing loans to SMEs, said at a recent TechCrunch event that “fintech is really top of mind right now”.
It’s a really exciting time for tech start-ups, Mr Kehinde added, as they can “operate with a blank slate”, developing products and services for African consumers without being held back by “legacy infrastructure” or technology.
Lagos-based Interswitch received $200m from Visa to value it at more than $1bn and become Nigeria’s first home-grown unicorn
Since being founded in 2016, Lidya has expanded to offer its services in four countries outside Nigeria.
Other Nigerian fintechs that have drawn investors’ attention, include mobile money service Opay, payment app Palmpay and challenger bank Kuda, which have all raised large sums of money since November 2019.
Most notably, Lagos-based Interswitch received $200m of funding from US payments group Visa to value it at more than $1bn and become Nigeria’s first home-grown unicorn, while another start-up, Paystack, was acquired for a reported $200m by Silicon Valley-based payments giant Stripe.
Aaron Fu, the head of growth at Catalyst Fund, a fintech-focused venture capital (VC) firm and incubator, says that companies can become “incredibly large and successful by only being in Nigeria”, making it the go-to market to expand operations for start-ups founded in other African countries and internationally.
“Nigeria is increasingly becoming the gateway into the African start-up world for most landing into the continent for the first time,” he adds.
The opportunity afforded in the financial services sector is also reflected in foreign direct investment (FDI) figures. Investment monitor fDi Markets tracked 44 greenfield FDI projects in Nigeria’s financial services sector between 2014 and 2019, making it the most active sector alongside business services during the period.
Interswitch, Nigeria’s ‘poster boy’ fintech unicorn, founded in 2002, decided to revive its VC arm in October 2020 to invest in Nigeria and other African tech hubs as they have matured.
Despite a thriving start-up ecosystem with investment pouring in, Nigeria’s regulatory and macroeconomic climate has room for improvement.
“The frequency and duration of recessions in Nigeria is contributing to concern for most general partners,” said Gozie Chigbue, the director of funds and capital partnerships at CDC Group, the UK’s development finance institution, at a recent AVCA (African Private Equity And Venture Capital Association) event.
On top of Nigeria entering its second recession in five years, the business climate still lags its West African peers. In the World Bank’s 2020 Ease of Doing Business ranking, Nigeria ranked 131 out of 190 countries, held back by poorly developed transport and energy infrastructure, and inefficiencies in both the judicial and dispute settlement systems.
This is an edited version of an article that first appeared in FDI Intelligence.