Editor’s note: This is the concluding part on lessons from early fintech companies in Nigeria by Chukwuemeka Monye. He continues to shine light on strategic partnerships and moves other industry founders can adopt.
If you missed the first part of this series, please read it here.
4. Partnerships and Corporate governance are key
It’s a great thing to build a fintech solution, but the financial services sector is one where connections can determine whether a player lives or dies. Great products are not enough to build partnerships – you need a vast network. Each of the Fintech 1.0 players had built or been part of prominent tech companies, before starting their own companies, so they had existing networks to test their products and get feedback.
Credibility is key to building partnerships and interfacing with regulators. One way of building credibility lies in setting up a sound board – consisting of members beyond you, your family and friends. Kenneth Olisa, OBE, an accomplished businessman and philanthropist, chairs the board of Interswitch (he took over from the distinguished Adedotun Sulaiman). Mr Sulaiman was the former country Managing Partner of Arthur Anderson and Country Manager of Accenture and is a founding member of the Nigerian Economic Summit Group (NESG). The renowned diplomat and academic, Dr Christopher Kolade became Chairman of Systemspecs a few years after the company launched Remita in 2005. Felix Ohiwerei chaired the board of Etranzact for several years before retiring in 2016. The reasons for these choices in board membership and leadership are not far from the reasons behind the recent appointments of three ex-regulators as non-executive board members of MTN Nigeria. It builds the credibility of the company.
Innovators gain trust when their boards are chaired and consists of well-respected business and social leaders. Board members may also open founders to their networks at a national or international level (an advantage Angel and VC funded start-ups enjoy).
For founders in health, education, and agriculture, it is crucial to seek out individuals who are respected in the sector or as entrepreneurs and not wait until investors make such appointments. Your board’s clout and their network may also come in handy in the face of adverse regulators.
In today’s ‘VC age’, board membership is often influenced by investors and their funding terms. However, not all start-ups will receive VC funding, and founders may perpetually be at liberty to appoint non-executive directors. Please do not look only within your circle.
Awards also help build credibility. According to this Forbes article, in 2004, Interswitch won a gold medal for innovation at the Computerworld Honors, ‘an international award program which recognises individuals and organisations whose achievements in ICT have impacted society.’ Before receiving the award, the company had seven local banks on its network. After that, the number increased to 13, and the company added its first set of non-bank customers, including an ATM consortium and Globacom, a mobile telecommunications company.
5. Honour the Regulator and Regulations
Mr Obi recounts that he had visited the CBN office in Lagos with his idea for mobile payments and after sharing his ideas, he was ‘politely walked out’ by a CBN Director. Years later, the Central Bank eventually played an integral role in the development of automation in banking and the growth of the Nigerian fintech ecosystem. From its role in the setting up of the Nigeria Inter-Bank Settlement Scheme (NIBSS) in 1993 to the setup of a fintech regulatory sandbox, the CBN has done quite well. Its most controversial move thus far was the delay in creating a license for telco-led Mobile Money Operators.
Many Fintech 1.0 players set the tone for the sector, and fintech 2.0 members came into a market that was regulated by the CBN, NCC, and NITDA.
Innovators in agriculture, health, and education cannot afford to depend on regulators to lead the way. Regulation always trails innovation. However, to prevent regulators from hampering the spate of entrepreneurial activity flowing from innovation, pressure groups are essential. Thanks to in-house needs and the galvanising activities and funding of international donors, pressure groups and associations have been formed to drive fintech-related agenda, such as, Fintech Association of Nigeria (FAN) and Enhancing Financial Innovation & Access (EFInA). The African Fintech Network formed as a result of a partnership between FAN and UNECA. There are also several fintech-related programmes to help drive interaction and engagement among stakeholders.
Other sectors can replicate this strategy.
6. As you think fundraising, think exits and seek expansion
Of the Fintech 1.0 companies I referenced in this article, Etranzact is the only public company currently listed on the Nigeria Stock Exchange. Other companies that are also public companies are Chams Plc, CWG Plc and Omatek Plc.
Although not a public company yet, there is some information about Interswitch’s funding over the years and the company is expected to list on the London and Nigerian stock exchanges soon. It is interesting to note that although Interswitch and Etranzact launched at about the same time, Etranzact went public six years after its launch while Interswitch has not gone public in 17 years. Although Interswitch will be listing with several times the value of Etranzact, investors will be on the lookout for its earnings and ability to grow its profits. Systemspecs, on the other hand, remains a private entity and hasn’t disclosed much about its funding sources and revenue growth.
Etranzact had a fundraising advantage because the organisation started as a product of an already existing software development company – Sybase Nigeria. I imagine that issues like office space, hiring and payroll, and other overhead costs were already solved. However, for other infrastructural needs like servers, Mr Obi recounted that the company could not pay the merchant immediately, so the company agreed to pay him in shares. That merchant remains one of the shareholders of Etranzact. Founders who do not have the cash to pay for their company’s needs will have to figure out other ways to exchange value.
Etranzact also leveraged on its close connection with Sybase. Sybase gave it licenses for its platform for later payments. According to Mr Obi, this was good for Etranzact and Sybase because the banks eventually bought the licenses.
Between 2008 and 2009, the Central Bank of Nigeria issued a directive, asking banks to retain and reinvest 10% of their profits in companies. This directive led two banks to invest and own stake in Etranzact.
Concerning going public, Mr Obi said his support for the idea was his desire to have Etranzact as a ‘Nigerian product; something people will say Nigerians are doing it, Nigeria owns it, and Nigerians are part of it’. He also alluded to the corporate structuring and standardisation that public listing brings. Moreover, the company did not list to make money and did not make money from the stock market. It listed by way of introduction. However, in 2018, the company announced plans to increase its share capital and raise additional capital.
In the case of Interswitch, a consortium of banks gathered by Accenture made a significant investment in the company. Interestingly, Mr Elegbe had no stake in the company at its inception. He recounts in an interview with Forbes Africa that his decision to forgo ownership of the company was not only the right decision but had a significant impact on the company’s stable growth. “Eight years after it was set up, two-thirds of the company was sold to a consortium, in a private equity deal, with the company valued at ‘over $170 million”.
Several Fintech 2.0 founders and companies may not have had the pedigree that Fintech 1.0 members had. Still, they do have critical opportunities that Fintech 1.0 players did not have, such as incubators/accelerators (for example, several Nigerian fintechs got into YC). Fintech 2.0 start-ups also see increased funding made available by investors in the Nigerian tech ecosystem. Nigerian fintech companies reportedly raised over $95 million in 2018.
This funding has come from local and international Angel investors, VCs and lenders.
Piggyvest raised $1.1 million in a seed round from Leadpath Nigeria and a group of Nigerian angel investors.
TeamApt got $5.5 million in a Series A funding from Nigerian-based Quantum Capital Partners.
Global payment behemoths Stripe and Visa were part of Paystack’s Series A round of $8 million with follow-on investment from Tencent and YCombinator. Flutterwave is also not left out – it has the backing of MasterCard and CRE Venture Capital.
Paga, Lidya, Mines have also raised millions of dollars, and Cellulant recently received the mother of all African fintech funding, raising $47.5 million.
To cap off the ‘funding and valuation’ clout Nigerian Fintechs have established for themselves, Flutterwave was the only African company listed by YCombinator in its list of YC companies valued at no less than $150 million.
With funding has come exposure to investors and a global fintech ecosystem, which has birthed partnerships. Paga partnered with UK-based cross-border transfer company, World Remit, for the expansion of the latter’s presence in Nigeria. Chippier Cash, a San-Francisco based fintech, partnered with Paystack to expand its operations to Nigeria. Flutterwave partnered Alipay for Africa-China payments.
Although no Fintech 2.0 member has gone public, there have been some exits and acquisitions within this group. Interswitch acquired Kenyan fintech company Paynet in 2014 and went on to acquire Vanso in 2016. In 2017, Opera acquired controlling stake in Telnet’s Paycom, for the launch of OPay. Credit company, One Finance (the company behind Carbon), also acquired Amplify earlier this year.
While Fintech 1.0 founders appear to have started out with a focus on Nigeria as a primary market, some Fintech 2.0 members are shooting for continental dominance early. This is expected in the financial services sector, where a lot of payments today are cross-border payments. In this interview, Mr Elegbe shared that he regrets that Interswitch had not expanded across Africa earlier. Fintech 2.0 companies will not have such regrets. Flutterwave has expanded to South Africa while Paystack has expanded to Ghana. Both companies are still developing their footprint across Africa. SME Lender, Lidya, recently expanded its operations to Europe.
Beyond raising funds and expanding, start-up founders must also note that financing rounds, media dominance and international recognitions may help brand image but do not translate into profitability or scale. Companies are created to make a profit and investors fund them to get returns.
The real founders who will play their roles in shaping their ecosystems may be the outliers who have little media exposure and who may not even have raised funds from investors.
For example, one of Nigeria’s foremost agriculture start-up companies is Babban Gona, headed by Mr Kola Masha.TED does justice to Babban Gona and Masha’s profile so I will reproduce it here:
“Babban Gona is the first for-profit social enterprise in history to be awarded the prestigious Skoll Award, due to its financial sustainability and highly scalable impact. At Babban Gona, Kola Masha oversees Nigeria’s largest corn-producing enterprise through a program that franchises thousands of mini corn farmer cooperatives across northern Nigeria, increasing the profitability of the smallholder farmers by three times above the national average. This dramatic increase in net income is accomplished by delivering an integrated, holistic package of training, farm inputs and marketing services, on credit. Babban Gona has been able to deliver this credit while maintaining one of the highest repayment rates in the world, currently above 99.9 per cent.”
Babban Gona is a media-shy company, but it’s getting much work done. You probably should be like Babban Gona too.
An African proverb says, ‘It takes a village to raise a child’. I envision the Nigerian tech space as a village consisting of families – the software engineering family that birthed pioneer companies like GICEN, Tara System and Telnet, the families of fintech, edtech, agritech and the likes. A startup is a child and it is only fair to that Nigerian ‘child’ that the parents(founders) draw strength from lessons of the tech ecosystem. The fintech industry has done great things and I am hopeful other sectors now seeing much-needed investment can apply these lessons to build great companies and a great ecosystem.
Editor’s note: Chukwuemeka Monye’s series is a great contribution to the discussions on fintech adoption in Nigeria and scaling African startups. If you’ll like to submit an article, please read our submission guide.
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