As funding ICT business gets hotter…. Where are the VENTURE CAPITALISTS? Segun Oruame
Know Bangalore? That is the small Indian village in the 80s and now home to hundreds of high-tech companies that include Infosys and i-Flex. Infosys posted over two billion US dollar as profit in its recent financial year statement to underscore Bangalore as India’s Silicon Valley. As in the first Silicon Valley inside California, US, the emergence of India’s high-tech companies on the global scene has been propelled by venture capital aka equity funding; or if you like, risk capital. As far back as 2000 in UK, venture capital was responsible for the massive growth in the dot.com e-commerce business that proliferated in the country, creating millions of high paying jobs observed Debbie Ariyo, director of Lagos based financial consulting firm DMA Consulting.
Risk capital is ‘angel fund’ and without it, Silicon Valley would have remained in the limbo. So too, Asia’s expanding communities of high-tech companies churning products for markets in Nigeria and other African countries. A rough estimate of the financial value of technology imports from Asia in 2005 into Nigeria is in excess of US6.7 BILLION. They include software solutions, telecom equipment, computer hardware and accessories. India banking solutions including Flexcube and Finacle rule the country’s financial sector.
“In some of the world’s foremost universities, venture capital is helping to turn research that would never have gone outside the laboratory into multi-billion dollars 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 world’s most successful internet companies like Amazon.com and lastminute.com backed with venture money “noted Ariyo. There would never have been a Google or a Yahoo without angel funds.
America’s venture capitalists put $20.4 billion into technology deals in 2004, writes the Economist in a report last year. It would mark the first cautions stake by venture capitalists after the crash in technology shares in the late 90s. it would also mark the return of confidence of venture fund managers in the technology sector. The software sub-sector got the largest investment growth from $4.1 billion in 2003 to $4.9 billion. It was far higher last year.
In Nigeria, as in the rest of Africa, the story is different though there is increasing focus on understanding how venture capital can be useful to transform innovative ideas to wealth creation for African countries. But the challenges are still nerve-wracking even though the phenomenal successes of mobile companies across the continent tend to paint a picture of a market awakening to its full potentials. This is far from the truth. The financial and infrastructural support that would allow small businesses and entrepreneurs or “technopreneurs” emerge and remain successfully on the scene are still not there. As a result, only a handful ever gets to succeed leaving a frighteningly huge number in the dustbin.
With strong financial support and well-developed infrastructures, Asia offers a good recipe on how to make small technology businesses triumph to build a big economy. In 20 years, observed by Ariyo, India grew from an underdeveloped socialist state into the world’s second largest exporter of software. Bangalore became the hub of India’s information industry where more than 100 small computer software and hardware companies and tens of thousands of computer engineers are building the new India. “In South Korea, the new wave of small high-tech businesses has overtaken the old “chaebol” – large firms like LG, Hyundai and Samsung are to become the bedrock of the country’s recovery from the Asian economic crisis. With its Vision 2020 agenda. Malaysia has practically transformed itself into one of the world’s fastest growing economies”.
Nigeria’s major ICT drivers are the mobile operators. Over $5.8billion has been spent on network rollout in the last five years by operators. The total number of mobile subscribers in the country stood at 18.6 million at the end of 2005, with a penetration rate of around 16% to underscore the massive investment by cellcos. About three years ago, MTN invested $120m with a further $60m to build its own transmission backbone (the MTN Y’elloBahn) in what would begin an era of immense funding of its operations largely sourced from banks. At the same period, Vmobile, then Econet, invested more than $110m to begin its investment climb. Both cellcos have put in more than $3.2 billion. Since Globacom, Nigeria’s second national operator (NSA) joined the fray as a latecomer, three years behind the three other operators, it has spent more than $2.5 billion to build its SNO network and rev up its mobile service. It is an exciting story in Africa’s most populous country as it is elsewhere including Ghana where mobile operators are also the best reference for ICT investment.
The sweet story all ends there. Now, the vinegar! More than 60% Nigerian private telecom operators delivering fixed and landline services are starve of funds. Software makers hardly have funding to run their software houses. Here’s the picture of an average indigenous software house: the chief software architect is the marketer and promoter of the product. There is hardly enough earning to sustain the business or keep food in the tummies of the manager and his team. If the business survives the first three years, you can be sure it would have faded out in five years’ time. Most likely, the brain behind the business would have sought for livelihood elsewhere, maybe in the banking or oil industry where he becomes the IT manager. Or in an extreme case, this is very usual; he sells off his tools, shuts down the office, buys himself a flight ticket and leaves for abroad. But if the business stubbornly remains after five years, you can be sure it would neither be alive nor dead. The exceptions are the likes of Systemspecs, Progenics, and the SOFTTribe in Ghana.
“My company has not been assisted by any bank though I have been formally asked. Reason is that I do not expect positive answer. Most of them say that they do not understand what we are doing. I do not know anybody that they have assisted. If you regard the IFC as venture capitalist, well, they did approach us. But they later told us that we were too small”. Said Dr. Chris Nwannenna, president of Nigeria Computer Society (NCS) touted as the biggest computer professional body on the continent. Nwannenna, who has been using the NCS to ask for government direct intervention to get banks fund software houses runs a software company in Lagos faced with the cash ache. His company Condata offers solutions that include mapping software. There are armies of software writers, ISPs and human industries with bright ideas, the such that made yahoo happen, that have gone under. Unlike the likes of Google and eBay, Nigeria’s ICT start-ups have no venture angel investors to reduce the burden of building viable enterprises that could build a robust national economy.
But it is the country perception factor that is the greatest hurdle. Africa is still considered an investment high-risk area haunted by despair, war and diseases. “They (are) amplified sometimes, due to the prevalence of conflicts and diseases such as AIDS and due to the very low-income levels and lack of infrastructure, but they are certainly not unique to the continent. The key lies in dealing with these risks from evaluation, close monitoring to mitigation. Interestingly, Africa is recognized as a high return investment by many of the investors in Africa, exceeding other emerging markets”, argued Paul Inbona, an Associate Director at Modern Africa Growth & Investment Company (Modern Africa), a leading investor in Africa’s expanding economies. The fund is managed out of Johannesburg, Abidjan and Washington and has closed in nine investments in various sectors as at 2003.
Africa’s liquidity problem is real though there are encouraging signs, as the success of mobile operators would indicate and the consolidation exercise in Nigeria’s financial sector, which capped banking reserve at about US$170 million. This is expected to make more funding instruments available for investment. While the private equity industry is still very small, it has been growing steadily in the past few years. But it is far sustaining a wave of small high-tech businesses that could ultimately impact on the national economy, “Even the well-researched South African market is dwarfed by the American or European private equity industry. At the end of 2000, the South Africa private equity industry had approximately US$3.3 billion under management. The number of professionals in the industry topped 300 in that year with no more than 20 firms. There is no data to measure the size of the African private equity market, but it is likely that the SA market would represent at least 50 per cent of the total market estimated at $6bn, ‘said Inbona, adding that “the minuscule capitalization and turnaround of African Stock Exchanges makes any pre-IPO transaction a fantasy for African venture capitalists”.
African venture capital funds are more often than not supported by government agencies and multilateral agencies such as DEG, Proparco, FMO, OPIC, CDC, IFC. Some independent players exsits, but are generally very small (smaller than $10m). In the recent years, private independent players such as Ethos Private Equity or Brait Capital have managed to raise funds in excess of $400m each, exclusively for the South African market and focusing essentially on the later stage transaction. VCs supported by multilateral agencies hardly find businesses at the stretched on the carpets fit for finding, as the experience of the Condata would show. IFC turned down request for funding from the Lagos software company on the premise that it was too small.
But there is a bright opening for “young Nigerian entrepreneurs who believe they’ve got what it takes to transform high-tech ideas to high-yielding products or services within a reasonable time span, and are able to deal with the high risks involved.” The Venture Capital Association of Nigeria was formed more than two years ago to get some vim into bright waiting tech-ideas. But VCAN would have to become more proactive and get more involved at the bottom-end of funding technology ideas. Among the large number budding ICT entrepreneurs, only few know of the existence of the VCAN and its members and a paltry number are convinced it is not a body of money managers whose pre-occupation is to fund commodity imports. But Nigeria and other African countries could take a cue from South Africa, which created a venture capital fund for high technology businesses to help stimulate the growth of the industry more than five years ago.
Fact is not all companies can access bank’s loans even if they have very excellent business plans. Banks are reluctant to grant their instrument for many reasons. Most ICT businesses require long term funding and patience before profits can come. Bank cannot reconcile this reality with their own immediate situation that makes long term financing impossible. The new financial baseline for Nigerian banks should strengthen their capacity for long-term financing, but they are unlikely to look beyond the established or thriving cellcos. Small sized companies may still have to look elsewhere. Only big will do as banks may consider funding small operators or ICT start-ups too much of a risk.
“Banks don’t give loan because unlike commodity that you can see, import and sell off within 60 days, software is invisible. You cannot see it. It is in your brain and banks are amused that you are asking them to invest in your brain, and even telling them that your brain is enough collateral” said Austen Onwughai, managing consultant at Lagos based Orsin O’ Perri Consulting developers of the Mr. Don Academy software application.
Local computer Hardware maker, Omatek, offers a rare story of how banks’ SME (Small Medium Enterprises) fund could impact on indigenous enterprise. Omatek started as a dealer of foreign brands such as HP and Dell but it later ventured into producing its own systems locally with the brand name ‘Omatek’. SME funding from Zenith Bank and Guaranty Bank has helped to put a computer factory in place in Lagos and sustain the Omatek brand. But Omatek is a drop of water in the indigenous computer hardware sector where brands struggle for funds to live another day.
The new president of the Association of Telecommunications Companies of Nigeria (ATCON) Dr. Emmanuel Ekuwem said the association would explore ways of building a synergy with financial institutions to get the much-needed funding for ICT enterprises. ATCON is the umbrella body for ICT operators in Nigeria. It is a body that is composed of players that are active, moribund and practically extinct; Ekuwem said he would be working on proactive initiatives to salvage the industry from the ‘cash –in-morgue’ disease. For Ekuwem, VCAN, NCS and other stakeholders in the fledgling ICT industry, it may just be the beginning of laying the block to build Bangalore in Nigeria.