The Growth and Prospect for Venture Capital Activities in Nigeria
By Debbie Ariyo
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
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.
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?
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.
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
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?
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
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
possibilities are endless.
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.
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.
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.
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.
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 firstname.lastname@example.org
Transmitted: 19 April 2000