The Growth and Prospect for Venture Capital Activities in Nigeria

By Debbie Ariyo

It is rather disheartening that the singular issue of Sharia law is diverting world-wide attention from the more exciting and positive developments on the Nigerian economic scene. Recent government activities have demonstrated that the small business sector is now seen as an integral part of Nigerias renewal and regeneration process. The creation a Small Industries Development Agency to provide the necessary help and assistance to small businesses and the set up of a new technological park in the capital, Abuja, to help the growth of the technology sector are indicators of this.

 The increasing shift of emphasis to the small business sector is a crucial step in the right direction.  In these days of globalisation and the digital economy, small firms play a crucial role in experimentation and innovation that lead to technological change and employment growth.  They definitely have a key role to play in catalysing the Nigerian economy into a knowledge driven one thereby bringing wealth and prosperity for all.

 For Nigeria to be able to make such a successful transition it must put in place the right conditions and encourage the right culture that stimulate a knowledge driven economy.  But what does this mean in reality?

 It means Nigeria must provide the opportunities for ideas, for creativity and brilliance to develop, leading to commercial success in the internal and global market places.  It means Nigeria must put more efforts into fostering a strong entrepreneurial culture in which more and more innovative people can set up their own businesses thereby creating more jobs and wealth. It means we have to provide the right environment that would enable business to flourish and to grow. In short, it means we have to ensure that the knowledge economy improves peoples lives, and Nigerias long term economic and employment prospects.

 This is neither an over-ambitious nor unrealistic proposition. The key role that small businesses and entrepreneurs or technopreneurs have to play in a knowledge economy has been well proven in other countries.  In just over 20 years, India has grown from an underdeveloped socialist state into the worlds second largest exporter of software.  Bangalore, the Silicon Valley of India, has become the hub of Indias information industry and is home to more than 100 small computer software and hardware companies and tens of thousands of computer engineers.  In South Korea, the new wave of small high-tech businesses have overtaken the old chaebol  - large firms like LG, Hyundai and Samsung to become the bedrock of the countrys recovery from the Asian economic crisis.  With its Vision 2020 agenda, Malaysia has practically transformed itself into one of the worlds fastest growing economies.  This is largely due to its focus on small businesses in relation to their powerful contribution to economic growth.  Its a similar story in Singapore and closer to home, in South Africa.

 So how can we in Nigeria, like the countries mentioned above, also harness the wealth of our entrepreneurs to enable us develop into an economic superpower?  How can we unleash the entrepreneurial spirit in our people to enable them convert their innovative ideas into successful business ventures?

 Of course there are many conditions necessary to induce such a massive cultural change.  But in any country seeking to modernise, entrepreneurial activity needs well functioning capital markets able to channel finance to the most promising projects. In this arena, the role of venture capital is of significant importance.

 Venture capital, aka equity funding aka risk capital has been behind the growth of Silicon Valley and the high number of high growth high technology firms that abound there.  In Bangalore, venture capital is behind the growth of high tech companies that abound in that erstwhile village to enable it earn the accolade the Silicon Valley of India.  In the UK, venture capital has been responsible for the massive growth in the dot.com e-commerce businesses that now proliferate in the country, creating millions of high paying jobs.

 In some of the worlds foremost universities, venture capital is helping to turn research that would never have gone outside the laboratory into multi-billion dollar businesses.  In the US and the UK, young innovative individuals, who because of their age and lack of track record would never have attracted bank finance, but who have the necessary intangible assets and good business plans, are now behind some of the worlds most successful internet companies like Amazon.com and lastminute.com backed with venture money.

So what is the principle behind venture capital and what prospects does it hold for the development of a buoyant Nigerian economy?  The concept behind venture capital is simple.  Instead of providing debt or bank finance, it provides equity capital for businesses.  Venture capital is a form of long term investment for start-up companies and growing businesses that have the potential to develop into significant economic contributors.

However, the benefits of venture capital go beyond the provision of long-term finance.  Since they have a vested interest in the success of a business, venture capitalists, unlike banks, actively work with the companys management by contributing their experience and business knowledge gained from helping other companies with similar growth challenges.  They are involved in the management, strategic marketing and planning of their investee companies.  Unlike banks, they are not just passive financiers, but are also entrepreneurs.

Venture capital is actually a very common phenomenon in Africa, and most of todays successful businesses have had some form of outside individual investment at some point during their growth.  Reading the late Dele Giwas biography, I was not surprised to find out that Newswatch, one of Nigerias most popular news magazines which he helped to create, would not have started off without an injection of equity funding. DMA Consulting would not have existed today without the contributions and support of our various partners. There are other notable examples.  Surely some of us must have been approached by a close friend or relative in the past to put some money in their new venture, and a number of us would have ended up doing so.  As individual investors, or business angels we are the archetypal venture investors in Nigeria, creating the opportunity for new enterprises and new business ventures to develop.

But organised venture capital is much more highly significant and highly sophisticated than business angels funding. The main difference is that venture capital firms, being large pools of capital, can contribute very large amount of finance for business development.  Depending on their investment strategy, they may invest in various industry sector, or various geographical locations, or various stages of a companys life.  They may invest in new businesses, may provide capital to aid business expansion, or may help with later stage financing to help a company attain the critical mass to attract public financing through a stock offering.  Again, a venture capitalist may help the business attract a merger or acquisition with another company by providing liquidity and exit for the company's founders.

For a country like Nigeria looking to achieve real time economic growth, alleviate poverty and create jobs and prosperity for its people, the potential for venture capital in helping to develop a culture of investment is phenomenal.

To gain a picture of how venture capital can really impact on Nigeria and Nigerians, it is necessary to examine the extent to which it has contributed to the growth and development of other economies.  Over the four years to 1998, the number of people employed in the UK by venture backed companies increased by 24 percent, against a national growth rate of 1.3 percent per annum. Over two million people in the UK are estimated to be employed by companies backed by investment from British venture capital.  A report by the European Venture Capital Association showed that employment in venture backed companies grew more than 7 times faster than in the top European companies.  General investments, especially in R&D, plant and property also increased significantly and on average their exports rose by 30 percent per year.

Cynics of course would say this is only possible in Europe or the US, but not in Africa. On the contrary, however, it is difficult to see a better climate where the availability of venture capital to fund business growth and competitiveness is more crucial than in Africa.

I remember in 1989, a prototype of a totally made in Nigeria car was exhibited at the Science and Technology Fair at Tafawa Balewa Square in Lagos. Later on, a mixture of tribal politics and a lack of capital to continue research and attain production ensured the project died an early death.  Of course an injection of venture capital would not have solve the tribal wrangles, but it would have provided the necessary funding to make Nigeria a producer of its own indigenous motor car.  The same goes for a recent claim by a medical doctor of a discovery for a cure for AIDS.  A team of committed venture capitalists could have helped provided funding for a more long-term research and development of this discovery, turning it into a marketable, profit-making medical product.

As a Nigerian living in the UK, I find it quite shocking that the high number of talented Nigerians abroad seeking to set up high technology, high growth businesses in Nigeria are unable to do so due to a lack of access to the necessary capital.  Venture capitalists would have had a field day selecting the most pr omising of these businesses to invest in. 

The possibilities are endless.

In any country seeking to grow, entrepreneurs need good access to the necessary finance to enable good projects get off the ground.  The time is therefore ripe for Nigeria to take action by putting in place the conditions necessary for the take off of an efficient venture capital industry.  This means putting in place the necessary financial infrastructure, removing the regulations that restrict competition in financial services and encouraging institutional investors like pension funds and insurance funds to take more interest in venture capital investment, via the provision of incentives like tax benefits.  Most importantly, enabling the change of culture that would help Nigerian entrepreneurs understand the importance of equity funding and the benefits to the business and the economy in general.

 Nigeria should borrow a leaf from South Africa that has newly created a venture capital fund for high technology businesses to help stimulate the growth of the industry.  This is a first for an African country and the consequences can only be positive for South African businesses.

 Some innovative Nigerians, in realisation of the potentials of venture capital to Nigerias economic growth have recently set up a Nigerian Venture Capital Exchange to serve as a forum to help investors and entrepreneurs make the necessary contacts.  This is a laudable pioneering effort worthy of serious help and support by the Government to make it a success.

 Clamouring for technology transfer from the West will not put Nigeria on the path to economic success.  Instead, efforts should be made to put the necessary infrastructure in place to help indigenous skills, entrepreneurship and innovation to flourish. With the establishment of a strong venture capital industry, the scope for Nigerias economic growth and success is unlimited.

Debbie Ariyo is Director of DMA Consulting, an organisation providing strategic advice and support to developing countries on enterprise and small business development issues.  Contact by e-mail dmaconsulting@hotmail.com

Transmitted: 19 April 2000

Date Uploaded 1/23/2008
Copyright Africa Economic Analysis 2005