By: Olubunmi Abayomi-Olukunle
By many standards, the venture capital
industry in Nigeria is still emergent especially if one considers the size of
the deals, number of funds and sophistication of investors in the market.
Accordingly, the Federal Government must promote venture capital activity in
Nigeria as a strategic policy initiative and in order to promote innovation and
enterprise amongst the most productive segment of its population. As part of
that process, the Federal Government should strategically engage all the
stakeholders in the industry’s value chain. This is particularly important at
this time given the increasing flow and value of foreign investments into the
venture capital space in Nigeria, a trend, which in our view, holds the promise
that Nigerian start-ups can unleash a revolution of wealth creation and rapid
economic growth in a sustainable manner. Our proposition is that local
Development Finance Institutions (DFIs) are critical stakeholders in the value
chain and have a significant role to play in Nigeria’s venture capital

It is in this context that the decision by
the board of Nigeria’s Bank of Industry (BOI) to be investors in the first-ever
social innovation fund out of Nigeria, is commendable. In a financing mix of
both local and foreign investors, BOI (alongside Venture Garden Group and
Omidyar Network) is committing up to USD230, 000 to a USD 1 Million social
innovation fund promoted by Nigeria’s foremost startup incubator, CCHub.- a
first of its kind for BOI
( I am glad to have advised on this deal!)
It is interesting to note that the fund
will be managed onshore. Also noteworthy, is the fact that the fund aims to
invest in early-stage tech companies that demonstrate an ability to solve a
social problem – Think of a company that converts heaps of refuse to clothing,
shelter or other usable material.
The decision of the Board of the BOI
accords with trends we see in the international venture capital space, tending
towards an overall increase in the portfolio allocation by international DFIs
to early-stage fund managers and ventures. This July, the board of directors of
the International Finance Corporation (IFC) will be meeting to consider making
a USD 10 million commitment to Algebra Ventures Fund which will target
technology and technology based start-ups in Egypt, the broader middle-east and
the North African Region. Similarly, the European Investment Bank is
considering making a USD 10 million commitment to TLcom’s TIDE Fund, a planned
100 million venture capital fund, which will invest in entrepreneurs and
enterprises that are leveraging technology. Recently, it was announced that IFC
has decided to double its venture capital portfolio to USD 1 Billion to further
spur innovation in emerging markets. One of the companies in IFC’s venture
capital portfolio is Andela, a company co-founded by a Nigerian. The Company
recently received USD 24 Million in a series B funding in a round led by the
Chan Zuckerberg Initiative.
of Risk Finance
Growing trends in this space should bring
to focus debates around how DFIs in Nigeria can be used to strategically grow
Nigeria’s venture capital industry especially with regard to the risk finance
to the industry. There is, in our view, a shortage of risk finance to high
growth tech/e-commerce start-ups especially when one considers the rapid
increase in the number of Nigerian tech start-ups with scalable business
models. The majority, if not all, of the financing currently available from
local DFIs is debt-linked and sewed with requirements that venture companies
will find hand to fulfil.  More of the risk financing available have been
from foreign venture capital, incubators and angel investors who focus on
Africa. On the local scene, the Lagos Angel Network and the African Business
Angels Network, are gathering a more enduring appetite for early-stage risk.
Also, a growing network of solo angels, incubators and corporate venture funds
in Lagos and Abuja hold the promise of soaking up some of the demand that is
available in the market. Nonetheless, we think that a sizeable portion of the
market is underserved in terms of the availability of risk finance.
 Nigeria’s venture capital industry will require a sustained injection of
risk capital and local DFIs are in our view better positioned to close this gap
as, by their nature, DFIs have higher risk tolerance and longer investment
horizons and are able to take up investments in sectors where the private
sector finds it difficult to invest.
Which Roles?
The active involvement of local DFIs in the
venture capital space can help grow the industry in a number of ways. First,
there is empirical evidence that lends credence to the theory that increased
portfolio allocations by local DFIs to early-stage ventures or venture capital
fund managers can catalyze and help attract and mobilize other sources of
capital. In addition to helping mobilize other sources of capital, the
involvement of DFIs can also help provide the much needed management support
and hands on experience that can help commercialize entrepreneurial vision.
Secondly, DFIs can help in promoting and entrenching ESG compliance across
board, thereby promoting the adoption of sound business practice, an
imperative, which will further give comfort to potential limited partners.
We think that the current state of play
presents a good opportunity for local DFIs to expand the range of financial
products available to Nigerian start-ups, by increasing allocations to
Nigeria’s venture capital sector either through dedicated venture capital funds
or through participations in privately-managed venture capital funds.
Yes and it is important however to situate
the foregoing within the extant legal framework for DFIs in Nigeria, especially
because, there are a number of provisions contained in the CBN Regulatory and
Supervisory Guidelines for Development Finance Institutions in Nigeria ( the
Guidelines) that have a bearing on a DFI’s level of exposure to the venture
capital patch in Nigeria.
For instance, local DFI’s may only invest
in a start-up business up to a limit of 10% of shareholders fund
unimpaired by losses. DFI’s are also subject to a maximum of 25% holding in any
enterprise. Whilst we take the view that the current thresholds are fairly
acceptable given the state of development of the industry, we note that the
Guidelines do not define the term “start-up business”. In our view, it is
important to define that phrase as the meaning of the phrase is not immediately
obvious and also capable of multiple interpretations. Businesses at different
stages can qualify as a “start-up business” depending on the indices
More importantly, the wording of the
Guidelines suggests strongly that DFIs can only take up equity directly in start-up
as opposed to taking up participating interests in third-party
managed venture capital funds, a prospect which we think may hinder the growth
of the venture capital industry in Nigeria.
Nigeria’s DFIs would also have to do more
in terms of building capacity to complement a possible increased allocation to
early-stage ventures and as part of own value creation strategy.
In addition to building capacity in terms
of evaluating, structuring and negotiating new equity, venture-type
transactions, it will be important to develop venture capital investment
strategies that are not only reflective of commercial realities but can also
help to mitigate possible risks in a downside event.
Although there are usually contractual
remedies available to a portfolio company or to a fund in the event of a time
default,  DFIs can make a lot more progress in terms of improving internal
disbursements processes for commitments made.
Overall, allocations to the venture space
will have to be in the form of patient capital, an investment strategy which
has now overtaken the traditional venture capital as a source of investment for
tech start-ups in mature markets
Olubunmi specialises in venture
capital and private equity financing.
Source: Linkedin