The two models
In their State of Tech in Africa 2021 report, AFRICARENA talk about two models of raising capital for startups on the continent. The “Nigerian Model” where founders incorporate their company in the US/Europe and then go raise money from American/European VC’s.
Then you have the “Kenyan Model” which is quite simply where startups raise funding from investors in their country of origin.
The latter is really just the traditional model, and the Nigerian Model is what we at African Tech Story would call bona fide hustle. Without incorporating offshore (mainly the US), there wouldn’t be nearly as many Nigerian startup success stories as there are today.
So why is this? Well firstly, Nigeria is not the most friendly country to do business in. It’s plagued by perpetual electricity supply issues which mean that generators are a standard accoutrement to any business in the country.
Moreover, it takes a very long time to register a company, placing it in the doldrums on the World Bank’s Ease of Doing Business Rankings (131 out of 190 to be exact). By contrast Kenya ranks 56, and third in Africa. These negative attributes turn a lot of outside investors away which in turn discourages ambitious founders from launching companies.
But these aren’t the only reasons. The Nigerian diaspora is incredibly large and wide reaching and since the 1980’s the US has proven to be a popular destination for Nigerian immigrants.
Today, 61 percent of Nigerian-Americans over the age of 25 hold a graduate degree, compared to 32 percent for the U.S.-born population positioning them as the most successful ethnic group in the US. It’s not surprising that many go on to launch successful startups in the land of the free.
Having access to the worlds greatest entrepreneurial ecosystem, a high-achieving diaspora network, and a low tax jurisdiction in the form of Delaware, makes it is a no-brainer for Nigerian entrepreneurs when it comes to deciding on where to domicile their business.
There is also the positive perception that comes with being an American-registered business where Nigerian businesses can often carry a certain stigma. Many Nigerian entrepreneurs also voice concerns over political interference in the private sector back home.
It’s easy look upon such an approach with a certain level of concern or even disdain. That once again, Africa’s best resources are leaving its shores to add value to other economies. However, such a view is myopic. Nigerian startups domiciled abroad are almost always solving Nigerian problems, and therefore adding tremendous value back home.
Currently, the most popular problem being addressed is Nigeria’s unbanked which currently stands at over 50% of its adult population. That’s an incredibly large addressable market, and it’s no wonder that fintech has reached the heights it has in the country. The 4 Nigerian fintech success stories of 2020 all have foreign domiciles.
Paystack who was acquired by Stripe is incorporated in the US, and part of the reason Stripe bought them was that both companies were Y Combinator Alumni. Africa’s newest unicorn, Flutterwave, have also incorporated in the US. Both Chipper Cash and and Kuda Bank who raised large rounds in the last 12 months are registered UK companies.
Although the notion of having wholly African companies lead the charge on African entrepreneurship is a nice one, the reality is that entrepreneurs follow capital. If this capital is easier to attain from further afield, then we are going to see less wholly grown African startups.
We should nonetheless applaud these companies for their successes, and if anything it should serve as a wake up call to African governments to create enabling environments for entrepreneurs. A basic provision of services, a robust legal system, a free press and a free market economy with no risk of government interference.
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