Why are more Nigerian businesses being registered abroad?
By Opeyemi Solaru
It is no secret that the startup ecosystem in Nigeria has grown rapidly in recent years. Nigeria is at the forefront of the African startup ecosystem, with a population of 200 million — the highest in the continent. According to VC4A, Nigeria can attribute its ranking in the African ecosystem to its high internet penetration rates, high foreign investments and increasing number of innovation hubs that support such work. But one of these reasons stands out amongst the others: “foreign investments.” With many Nigerian startups being incorporated in foreign countries, one could argue that it is likely linked to the vast amounts of money being pumped into these companies from abroad.
There are certainly other factors at play, such as the legislative landscape and ease of doing business, but foreign investments are quite influential in determining how and where Nigerian businesses are set up. According to research done by VC4A, Nigerian ventures secured an average of $93,000, which was 22% higher than it was last year. In 2019, Nigeria attracted over $178 million in investment deals. Fast forward a couple of years to 2020, Techpoint Africa reported that Nigerian startups took 71.2% of Nigeria’s foreign investment. Out of the $120.6 million raised by Nigerian startups, almost $86 million came from foreign investors. This is a 47.8% drop from the previous year, likely due to the caution many investors took during the pandemic.
While the large investments are encouraging, one cannot ignore the fact that most of them did not come from within Nigeria. When hypothesizing why investment from within Nigeria is so low, reasons such as lack of funds and riskiness in comparison to other markets come to mind.
To make matters worse, even those investors that have put so much money into Nigerian startups are increasingly reluctant, with “surprise regulations” and other obstacles at play. In such a state of fragility, Nigerian legislators ought to create policies that not only encourage foreign investment, but most importantly, make it easier for Nigerian investors to invest in Nigerian startups.
Last week, The Guardian reported that foreign investors have pulled over 1.64 trillion naira out of the stock market due to concerns about insecurity in Nigeria. Economic experts are concerned that if the government does not address the weak Naira, kidnappings, inflation and unemployment soon, it could be even more detrimental to Nigeria’s economy.
The Nigerian government has certainly caused some disruption within the innovation space — examples include the okada ban and the cryptocurrency ban, to name a few. Last week, Kola Aina, a founding partner of Ventures Platform, revealed plans to create an executive bill in collaboration with the government. He met with Oswald Guobadia, senior special assistant to the president, as well as other key stakeholders within the tech ecosystem.
As a Nigerian startup founder, it is hard to justify incorporating your business in Nigeria, when funding and regulations are practically pushing you to make the decision that you see fit for your business long term. Given the volatility of building a startup in Nigeria, some investors will even go so far as to assist Nigerian startups in reincorporating their businesses abroad to continue to attract more foreign investment. The bill hopes to address issues such as poor infrastructure, difficulty accessing capital and lack of synergy between the legislation and the innovation ecosystem.
Even as it seems that the government is taking a step in the right direction, “Rome was not built in a day.” Previous articles have discussed how the government works to create legislation that supports the innovation ecosystem and rebuilds the economy; however, it may take a while before startup founders and investors are convinced that the risk associated with doing business in Nigeria is worth taking. Furthermore, many startups do not have the resources or opportunity to be incorporated abroad. Therefore, it is not a sustainable solution if the Nigerian startup space hopes to grow at the rate it has grown recently, and even exceed that rate. As done in Tunisia (2018) and Senegal (2019), startup laws that recognize startups as a tool for policy innovation in Nigeria are essential for the long term success of the industry.