I like to think that venture capital is similar to marriage – marrying a good person isn’t enough to get you a happy home, you still have to work it out with your partner, but marrying a bad person is a sure-fire way to overthink everything, increase your blood pressure, and stress yourself, something a good number of venture investors may find relatable.

Tech news of recent has been overtly focused on the two tail ends of the venture spectrum. On one hand are reports of companies that burned through investor funds, shut down, and/or never achieved their intended objectives, and at the other end are companies that have provided successful exits for investors, and are on track to going public. However, in the middle of this spectrum are companies that may never provide meaningful (or VC-type) returns to investors either because of how these businesses are structured, the kind of problem they set out to solve, or just the general macroeconomic environment they have found themselves in.

In this piece, I go through 10 commandments a fintech investor should pay attention to when getting married to a startup from an operator’s perspective that can help venture capitalists evaluate prospective portfolio companies (especially in the fintech space) before they write that check.

These are my ten commandments:

TL;DR

1.     Pride goeth before a fall, so does being overvalued

High valuations do not necessarily lead to high exits. At best, they reduce acquisition incentives by qualified local buyers.

2.     The portion of Paystack and Flutterwave is not like them

The tailwinds that drove Paystack and Flutterwave to succeed may not necessarily be in your portfolio company’s favor, so projecting on the growth of these two companies may largely be inaccurate.

3.     In all thy getting, get revenue

It is important to fund companies with either real revenues or a path to revenue. Paying customers is the difference between a business and an experiment

4.     What shall it profit a firm to garner CAC with no LTV

Understanding the key metrics that govern the growth and performance of your firm is pertinent to help you evaluate what marketing strategies to employ and which to not.

5.     Thou shalt lend unto many SMEs and thou shalt not borrow

Lending is an underserved business segment that doesn’t just need well-positioned players, but a robust infrastructure layer for it to scale and prosper.

6.     Look from where thou art, all the land (offline acquiring opportunities) that thou seest shall be given unto thee

Some of the largest opportunities in Africa are in the informal and offline markets. Digital-only businesses are great, but some of the largest outsized outcomes will come from serving users at the bottom of the pyramid.

7.     All we have is US$500,000, but what is that amongst so many

Capital efficiency is exceptionally important. Quality of life in Nigeria means that with a pre-seed chest of US$500,000 (depending on your industry), you should be able to build an MVP, secure traction, and have some form of revenue. Anything beyond that may be outlandish and create bad incentives.

8.     Follow me as I follow Piggyvest

Piggyvest is the perfect example of what a successful fintech business should look like; capital efficient, aligned founding team, strong marketing fundamentals, and a proper understanding of how to execute.

9.     Many are API providers, few provide real infrastructure

Not everyone who claims to be building infrastructure is building anything meaningful. Some are building APIs with remote (and in some cases impractical use cases) that may not be profitable at scale. BaaS is different but must be properly aligned.

10. If thy eye (strategy) be single, thy whole body shall be full of light

Super app models don’t seem to work in Nigeria, especially in the consumer space. If you’re building a business in Nigeria, focusing on your core fundamentals and building from there is a much better strategy than chasing shiny objects here and there.

Ten Commandments of Fintech Investing in Nigeria

1.     Pride goeth before a fall, so does being overvalued

Venture investors typically explore three primary avenues for exits: secondary sales, acquisitions, and initial public offerings (IPOs). Secondaries are by far the most common exit route for most investors in Nigeria, acquisitions follow closely and (considering the fact that I can count the number of African tech IPOs on one hand), IPOs are a distant third.

If you’re an Angel Investor or early-stage fund (think pre-seed and seed), exiting via secondaries tends to be a very common exit route for you. You invest in a company at pre-seed/seed level, the company goes ahead to raise a Series A round, the company’s value increases, and you cash out via a secondary sale (I know it’s more complex than that, but this is supposed to be an overview). If your fund’s exit strategy is primarily focused on secondaries, chances are, you like overvalued companies. You may be a proponent of investing in African tech, driven by your belief in the potential of the African ecosystem and the attractive returns generated through secondary sales. If this is you, you may prefer “proud companies”. This section is probably not for you.

If you’re a growth fund that invests at Series A or B level, then while you may also consider secondaries, acquisitions, and IPOs are more likely to inform your funds exit strategy. There are only two IPOs so far in the local tech ecosystem so I’m going to discount that and focus on acquisitions.

There are three ways acquisitions occur in the Nigerian market;

Horizontal Integration: A direct competitor acquires you to bolster their market share. Think Dufil Group’s acquisition of Dangote Noodles, MTN’s acquisition of Visafone, or Risevest Acquisition of Chaka.

Vertical Integration: A company acquires you to deepen its play in a certain adjacent industry. Vertical integrations are usually a way for a company to enter a new space without starting afresh or to improve their margins by either integrating backward (buying the infrastructure required for their business to operate) or integrating forward (buying the frontend/product layer and deciding to play there). Think Whogohost acquiring SunChamp, Interswitch acquiring Vanso, etc.

Expansion: This is where a company acquires your firm to enter a new market as against starting to build from scratch. Think Stripe’s acquisition of Paystack, MoniePoints proposed acquisition of Kenyan Startup KopoKopo.

Of the three acquisition routes highlighted above, two involve local companies actually pushing acquisitions, while one (expansions) will usually involve a foreign firm, and therein lies the issue. The more overvalued your company is, the less likely any other local company is to acquire it.

For some context, there are two Nigerian fintechs listed on the Nigerian Stock Exchange – eTranzact and CHAMS. Both of these companies are what I call Fintech 1.0 companies (you can read my article on understanding the Nigerian fintech evolution), both of these companies generate positive cashflow, both these companies process billions in transaction value (eTranzact reportedly processed N50 trn in FY 2022 alone), and both of these companies are licensed Switches (the Tier 1 of payment licenses in Nigeria). However, none of these companies is worth a billion dollars. As of the time of writing this, eTranzact the bigger of the two is worth N86.94bn (US$86.94 million).

The biggest issue with foreign VC funding has been the unadulterated fact that we have been building local companies that can only be acquired by international buyers.

A fintech with an agency banking suite of 100,000 agents can raise a US$ 20 million round and claim a US$ 100 million post-money valuation. The biggest problem is that paying N100bn (US$100million) for just an agency banking suite is preposterous to almost any company with pockets deep enough to make such an acquisition, yet this is what the majority of companies raising funding today are projecting with; valuations that are true on paper, but not in practice. For context purposes, FirstBank (one of Nigeria’s largest deposit money banks) recorded 129bn (US$ 129 million) in post-tax profits in 2022 alone. What makes you think what you’re building is so disruptive they’d be willing to cough up 70% of that to buy your firm as against building it out themselves?

To be clear, acquisitions do occur in the Nigerian tech space, but they tend to be with companies that haven’t raised enormous amounts of capital and acquired bloated valuations, and they usually tend to go unnoticed or more frequently unannounced i.e Smile Identity’s acquisition of Appruve, Prembly’s acquisition of Tunnel, etc. Companies with huge valuations still exit, but in most cases at significant fair value discounts and/or cash and share deals.

The higher your portfolio company’s valuation, the less likely any local firm will be able to afford it.

2.    The portion of Paystack and Flutterwave is not like them

If you get to the bus stop late, and you miss the bus, there is a high chance another bus going your route will drive by and pick you up. If you get to the airport late, and miss your flight, depending on your destination, you may be able to get another flight moving in your direction (at an extra cost of course). If you miss a rocket’s launch, highly likely you aren’t getting on that rocket again.

Paystack and Flutterwave are the poster boys for African tech ecosystem success. Flutterwave is a US$3bn unicorn, and Paystack got acquired by Stripe in a mammoth deal that not only provided healthy returns for Paystack’s early investors, but opened the floodgates for massive tech funding into Africa (P.s: Flutterwave has raised US$350million in two funding rounds since Paystack got acquired). However, similar to the Power Law, I like to think that Paystack and Flutterwave’s successes are more of anomalies than the norm, Here why:

Both Paystack and Flutterwave were founded circa 2015. They both started out in the online acquiring space, and both decided to solve one singular problem – the complexity of online payment collections. However, what most people fail to realize is that both these companies played a large role in facilitating the payments gateway market evolution from technology innovation to product innovation.

There are basically three market evolution stages; Technology innovation, Product Innovation, and Marketing/Brand Innovation.

• Technology Innovation: This is the first step where the technology for a certain kind of operation actually becomes possible in the first place.
• Product Innovation: This is the second step where the actual technology is leveraged to build a much more user-friendly and attractive product.
• Marketing/Brand innovation: This is the final step where most products meet some minimum level of performance, and the differentiating factor is basically who has a stronger brand and marketing strategy and is able to deepen its marketing play.

The online acquiring market/payment gateway space today is in stage 3; The Marketing/Brand Innovation stage, and that is why I am always concerned when a new startup (without a distinct brand) comes out to launch a new payment gateway set to “revolutionize the Nigerian payment ecosystem” (whatever that means).

Paystack and Flutterwave came into the market and largely drove the evolution from technology to product innovation, prior to Paystack and Flutterwave The technology to receive money online (at least via cards) already existed. Certain Fintech 1.0 players had already developed payment gateways that could be integrated into websites. However, these gateways were ugly, clunky, and even charged integrators to implement.

These two companies entered the market and drove the inflection point from there by creating payment gateways with neat and clean UIs, redesigned the payment gateway business model by scrapping integration fees, and made payment gateway APIs publicly available for every Dick and Harry to experiment with.

Jumia launched its eCommerce business in 2012 and started a massive fundraising campaign that saw it raise more than US$760 million by early 2019 (riding on its Amazon for Africa narrative) before it eventually went public in April 2019.

As of 2015, Jumia had raised more than US$341 million and was burning massive amounts of money on marketing to build top-of-mind awareness (not just for Jumia as a distinct brand, but for the concept of eCommerce itself). I like to think that Jumia created the market for eCommerce, but didn’t really capture it, the rise of third-party logistic companies (especially after the Okada Ban in Lagos), the COVID pandemic, and a couple of other sub-factors all culminated into a growing eCommerce market opportunity for online acquirers like Paystack and Flutterwave to latch on to. The end result: increased influx of online merchants into this ecosystem, and an expansion of the market.

While there are still fintech companies in Nigeria that have other tailwinds working in their favor, most companies don’t, and that your portfolio company that is building “Infrastructure for xxx” in all likelihood doesn’t. So, when they say they want to be the “next Paystack or Flutterwave”, give them a bombastic side eye ?

The portion of Paystack and Flutterwave is not like them.

3.    In all thy getting, get Revenue

2021 was the year of Optimism. 2021 was the year of founders, 2021 was the year you could raise money without a clear revenue plan. 2023 is not that year. Global macroeconomic issues and rising interest rates in the US (where the majority of LPs funding African fintechs are domiciled), mean investors are asking more questions, doing more due diligence, and increasingly interested in revenue. This is the year you not only need a pitch deck to raise, but you also need to “show workings” working in this context refers to revenue.

The 2021 obsession with valuation in the fintech space meant that companies were increasingly garnering market valuations without the commensurate revenues to back it up. Valuations of 100x revenues were not an anomaly during this period. Market valuations are great, but revenue and ultimately profits are what guarantee long-term sustainability, not Techcrunch articles, bill-board adverts, and speaking engagements.

The delusional addiction to valuations is probably what led this young man to tweet that a fintech with US$5 million in GROSS profit can successfully acquire a struggling traditional deposit money bank. First of all, no fintech wants to acquire a deposit money bank, the regulatory and compliance responsibilities are at best a headache to manage, and two I imagined the author had never heard of the N25billion (US$25million) paid-up capital required to own a banking charter, or the fact that 89% of Union Bank was acquired by Titan Trust Bank for N191 billion (US$191 million) in 2022.

While not every great company will have revenue at the get-go, investing in companies that don’t have a very clear, sustainable, and practical plan to grow revenue in the coming years is usually a bad idea, you want to invest in a company with a repeatable business model that works and is revenue positive. This means that even if they go on an all-out growth spending spree and start burning money to grow the business, the fundamentals of the business are still intact, and there’s always that one operational switch the business can tweak (if things aren’t going according to plan) to drive it back to revenue and becoming cash flow positive.

This is a great segway to my next commandment.

4.    What shall it profit a firm to garner CAC with no LTV

This X thread by the CEO of Eversend gives some great insights into how to look at Customer Acquisition Cost (CAC) and Customer Life Time Value (CLTV). Every company wants to grow, but knowing HOW to grow is probably the one thing a lot of firms get wrong.

The most important thing a fintech needs to find early on is what marketing models work for it. The untold truth is that every fintech has an Ideal Customer Profile (ICP) and there are a handful of ways to reach them. While Paystack serves merchants, developers are a key stakeholder in their go-to market hence their relentless focus on developer tours and engagements. Excluding the one at Ikeja, they do not have billboards littered about the place. They are not a B2C business, they are fundamentally a B2B business. Even B2C businesses like Piggyvest (whom I will talk about later in this article) understand their ICP and are clear that billboard ads littered around the place are not necessarily the best way to reach them. I am not berating bill-boards by the way, OPay is one of the most successful B2C fintech businesses in Nigeria, their investment in bill-board advertising, and this LinkedIn article by their former CEO detailing how maniacal they are about measuring metrics may indicate they are clear on the Return on Investment (ROI) of their offline marketing channels.

At the beginning of a startup’s lifecycle, it is basically trying to find out what marketing model(s) works for it, and this is where trial and error is allowable, as these companies begin to mature, a level of certainty needs to be achieved regarding ideal marketing channels and all a company should be focused on should be optimizing single points of execution. A fintech’s investment in understanding its marketing engine can go in one of three ways:

1. The Nomadic Approach: Never know what works, keep trying a plethora of disjointed and fragmented marketing strategies and approaches that do not provide any consolidated or sustainable long-term value for the business. A surprisingly large number of fintechs fall into this category.
2. The Lazy Approach: Buy Facebook and Google ads where necessary, and find a way to incentivize people to use your products. If any of these three bring results (which they will likely do – results in this case will be customer acquisition not necessarily customer retention) keep pumping money there and watch your number of users skyrocket.
3. The Explicit Approach: Identify your ICP and iterate with channels until you find the right one(s), and when you do, double down on them.

For companies who embrace the explicit approach, new products may or may not require a retweaking of their existing models (but this will usually be determined on a case-by-case basis).

There is no Santa Claus in Africa, Do not take up that responsibility

It is generally a bad idea to incentivize people to use your product by “running giveaways”. Freebies and the like do not work in Africa. If you want to acquire customers you can’t retain (to create a façade of a growing business), then by all means run giveaways, give freebies and generous discounts, and all those other things that VC money is best spent on. If you want to retain customers, target the right people. More often than not, your ideal customers do not need freebies to use your product.

Case in point; how many freebies does your bank give you to incentivize mobile app use? Zilch, Nada, Zero. As long as it is a good product, you’re okay paying the transfer fee for transactions. How many of you have switched your salary accounts to OPay because of free transfers? As long as a customer needs your product and it is appropriately priced, they will pay for it.

ChowDeck (the food delivery startup) announced a partnership with Chicken Republic in August of this year and started a 15% discount campaign to draw users to its app. I use the ChowDeck app somewhat regularly and I imagine I fall into their ICP range (even though I don’t think I am in their core ICP).

The Chicken Republic campaign didn’t mean anything to me, I was happy I saved 15% for a Chicken Republic order, but I would have gladly paid full price and had no issue with it.

There are many users who will download the Chowdeck app because of that campaign, get the 15% off, and probably never come back. I remember some years back, OPay was giving University of Lagos (Unilag) students free N2,000 food vouchers to be spent on the now defunct OFood to students who downloaded the OPay app. My younger brother and some of his roommates downloaded the app (obviously for the free food) onboarded on it, got their free food, and even went as far as getting other people’s numbers to onboard on the platform to get free food via them. Safe to say, my brother doesn’t use OPay today, and there’s a high chance that even if some of his roommates do, it’s probably not because they came to do giveaways. OPay came to share palliatives for Unilag students. What a generous company.

Jumia is another good example of this; prior to the ascension of their new CEO Francis Dufay, between Jan 2020 to September 2022, Jumia spent roughly US$170million on marketing (roughly US$5million a month) – I want to think that excluding bill-boards and digital ads, that also included product discounts especially during big events like Black Friday. This marketing largesse resulted in steady GMV (Gross Merchandise Volume) growth, but where these real customers? Let’s check – New CEO decides to cut sales and marketing costs from US$22million in Q2 2022 to US$5.8million in Q2 2023. GMV falls to US$202.3million a 25.4% YoY drop from the US$271million recorded in the previous year, while the company loses 1 million customers (roughly 30% of its existing customer base).

When companies engage in growth marketing initiatives, there is usually a spike in user adoption for a specific period; you will see this when you start a digital campaign, or sponsor an event like Big Brother, etc. However, the real question is what’s the difference between the spike in product adoption and steady state (steady state being the more balanced performance of your product which should normally increase to some extent as a by-product of your campaign). If the delta is small, you’re doing a good job, if it’s huge, that says a lot about either your campaign targeting or the real value of your product.

Understanding your ideal marketing model, and making sure your customer acquisition cost makes sense when juxtaposed with your customer lifetime value is of utmost importance.

5.    Thou shalt lend unto many SMEs and thou shalt not borrow

The wealthiest man in America (according to Forbes) makes electric vehicles with autonomous driving capabilities, he’s also designing and building reusable rockets and a constellation of satellites to beam high-quality internet directly from space. The second wealthiest man in America built the largest eCommerce platform in the world and runs the underlying cloud infrastructure company powering roughly 30% of the global internet.

The wealthiest man in Nigeria sells salt, sugar, cement and is now planning to start an oil refinery. The second wealthiest man in Nigeria sells spaghetti, flour, and sugar.

The Nigerian market is an essential market, and products that prosper in this market tend to be those that impact a large percentage of the population as highlighted in a 2020 article I wrote on Market Sizes and Classes. A good understanding of this brings two things to the fore – one, the primary way to own a big business in Nigeria is to sell a product that a large percentage of the population needs, can afford, and are willing to consume, and two is a lot of technology businesses are operating in markets that are generally niche when compared to the larger ecosystem they operate in. A good way to look at this;

There’s a beggar that stays around Eko Hotel Roundabout in Lagos Nigeria, she seems to have a faulty leg. This lady stays there begging passersby in the morning as people scuttle to their various places of work. Some days back I was passing this same roundabout, and I noticed this lady making a phone call with what seemed to be a feature phone.

One key reason MTN Nigeria is a N5trn (US$5billion) business is its ability to add value across a large proportion of the Nigerian market classes. MTN extracts value from everyone; from the dollar millionaire in his two-bedroom Sujimoto apartment making international calls to his business partners in Qatar, to the beggar on the sidewalks of Victoria Island. The clearest sign of a potentially big business is how impressive its stretch along that spectrum is, the longer the stretch, the larger the potential. (P.s: there is no guarantee the lady in question was making a call with an MTN line, she might as well have been receiving one, but considering MTN controls 40% of the telco market in Nigeria today, there is a 1 in 2 chance that was a revenue opportunity for MTN.

MPesa in Kenya also mirrors this same approach. Revenue from MPesa for FY 2022 was US$885million. There are about 53million people in Kenya and over 30 millions of them have an Mpesa account. The distribution and adoption of MPesa is so massive it outshines the banks in a lot of key areas. Across the Kenyan socio-economic spectrum, everyone from those at the top to adults in rural Kenya use MPesa. MPesa is so distributed it is a huge challenger to the banks. I once read that Kenyans receive their salaries in bank accounts and withdraw them to MPesa wallets. The Kenyan financial services ecosystem is mobilemoney-led as against bank-led like Nigeria and South Africa. If anyone tells you they are building the Mpesa of inserts random African country please look at them with a bombastic side-eye.

Why am I saying all of this? Simple. You don’t need overtly complex and technical solutions to create value in Africa. While there’s one company in your portfolio that is building one sophisticated API stack that is supposed to be the underlying infrastructure for some remote use case that will power the next phase of economic growth in Africa (and I’ll get to this in just a minute), there is someone somewhere with three engineers, one support personnel, one (or two) risk persons, one operations person and a digital marketer with access to a few hundreds of millions of Naira in capital and a lending license connected to Remita’s Direct Debit for repayment and Paystack for disbursement making roughly N200million or more in net revenue from lending. They don’t have a sophisticated website, no buzzwords, no fancy VI office, no branded shirt, just a pure and simple solution; if you need a loan we will give you on the condition we set a mandate on your bank account. With only 5% credit penetration in Nigeria, this is definitely a huge market you shouldn’t sleep on.

Understanding Lending

Lending is by no means a walk in the park, certain businesses can steal your shirt right off your back if you don’t know what you’re doing, lending is one of them. I’ve written extensively on lending in the past, especially in my article on why Nigerian Fintechs are Morphing into Lenders.

Nevertheless, it is important to recognize that despite the challenges inherent in lending, it continues to present a significant market opportunity with substantial demand for the product.

There are two broad forms of lending:

Consumer Lending: Consumer Lending is basically the issuance of credit to individual customers. The most lucrative market segment for consumer lending is salary earners. Salaried customers earn a steady and predictable source of income and therefore are easy customers for consumer lending solutions.

This is a market the banks are competing for due to the amount of excess capital at their disposal and their favorable interest rates compared to the alternatives on the market. According to the NBS, there are roughly 35.8million full-time salary earners in Nigeria. This leaves roughly 45 million people without access to responsible credit solutions.

These 45 million people are left to rely on so-called loan sharks who issue credit at exorbitant interest rates and leverage crude and ungodly debt repayment solutions including texting your contacts that you are a thief, HIV positive, and on the run if you default on your loan obligations (weird combination of accusations, but who am I to judge).

SME Lending: Unlike consumer credit where you are lending money to Amaka who wants to buy an iPhone 15 Pro so she can pepper her followers on Instagram, SME credit is targeted at small business owners who need credit to scale their businesses. There are over 39million MSMEs in Nigeria according to SMEDAN. The majority of these SMEs dwell in informal markets and do not leverage digital payment solutions meaning they do not have proper records to show banks who require proof of transaction volumes as a pre-requisite for credit issuance. This hampers SME growth and reduces overall productivity in the informal economy which represents roughly 60% of National GDP.

A founder friend of mine in the informal market space shared with me how there are women who sell food in wheelbarrows to bricklayers and other manual labor workers. Some of these women can make up to N20,000 (US$20) a day from sales, and roughly N400,000 (US$400) a month. At that price point, a salary earner can receive a N5,000,000 (US$5,000) credit facility, this woman cannot. With no digital footprint, she isn’t worthy of any bank facility. SMEs like this are forced to rely on other informal channels like Ajoo (community thrift savings), friends and family, and in some cases, cooperatives to raise funds to expand their business. This shouldn’t be the case.

There are three core ways companies run SME lending solutions.

Human Infrastructure: The human infrastructure approach is a high-touch lending approach that requires human intervention to secure credit repayments. In this system, human agents engage with borrowers to collect payments at due dates and/or help structure alternative repayment plans when customers fail to meet their targets. Microfinance banks targeting small businesses in rural or local market vicinities tend to adopt this approach; human loan collection officers engaging with borrowers to collect repayments.

This method is great because excluding the fact that companies can build personal relationships with their customers via physical engagement, it is difficult for borrowers to abscond, in most cases, we know exactly where to find him. One of the biggest disadvantages with this approach is poor scalability at 50 to a 100 borrowers this is plausible, but when you have loan requests from say 5,000 SMEs, this approach becomes clearly impractical and untenable.

Digital/Automated Infrastructure: The digital infrastructure approach employs technology to help make the repayment process seamless. There are many ways this can work out; on one end, there’s the provision of virtual account numbers for borrowers to transfer monies to when facilities are due, on the other hand, there are fintech solutions that allow for automated collections; these could include card tokenization technologies employed by fintechs like Paystack and Flutterwave, or Direct Debit solutions from fintechs like Remita that allow you place repayment mandates directly on bank accounts.

Integrated Infrastructure: Integrated infrastructure is for companies that have built a product suite and integrated automated collections into this suite. A simple example of this is a firm that provides offline acquiring solutions for in-person merchants. If a merchant takes a loan from them, instead of tasking them with paying at certain intervals or placing mandates on their bank accounts, the payment provider can simply choose to collect a small percentage of the loan amount from every transaction the merchant makes until the full amount is repaid.

This helps reduce the burden of repayment and makes the loan collection process seem invisible and convenient. For SME-focused lenders, this is likely the best way to collect monies from borrowers. The challenge however is in properly integrating it and actually making sure your merchants aren’t by-passing you by collecting money through other means.

The Infrastructure Play

In my honest opinion, the biggest winner in the AI arms race playing out in the US is not OpenAI, Google, Anthropic, or even Meta, the biggest winner in the AI arms race is NVIDIA. NVIDIA stock is up 214% Year to date. The reason is simple; while everyone is busy running around looking for which Language Learning Models will disrupt the market, NVIDIA is busy providing the underlying GPU processing capabilities powering this AI gold rush. Regardless of who wins and who loses, NVIDIA will enjoy steady revenue growth due to its unique position in the market.

The best way to capture value in the lending space is not necessarily to offer a new lending solution, but to provide the underlying infrastructure required for lending to operate in a large, fast and scalable way. This is where the money is, and this in itself is not easy.

One of the biggest problems in the lending space today is that due to the lack of a single comprehensive infrastructure layer for lending, lenders are building customer lending data in silos. So for instance, a fintech like Branch may choose to give a customer a loan at a specific amount and as he/she begins to pay back builds a credit profile of this customer that is siloed with Branch. This means that this customer cannot take a credit facility from another lender even though they have been building a robust credit history that shows how reliable a borrower they are. This is a competitive advantage in itself for the individual lenders, but bad for the general industry because data silos do not help anyone. This is a problem I imagined Mono or Okra were going to solve at scale. Doesn’t seem like they’ve been able to crack that yet, so moving on.

I am personally of the opinion that one of the largest opportunities in the fintech space today is the provision of this one single infrastructure layer accessible via APIs. This creates a comprehensive one-stop suite for Identity verification, credit checks and scoring, disbursement, repayment, and recovery. While there are many solutions that address either subset of these or all of these at some level, a comprehensive solution that can cover everyone with a bank account is a big need in this market.

As a VC if you see anyone building this and they seem to know what they’re doing, do your LPs a favor and write them a check. You’ll thank me later.

6.    Look from where thou art, all the land (offline acquiring opportunities) that thou seest shall be given unto thee

I will always question the logic of certain business decisions. For instance, why “Purch” opened another location opposite my church when there is a Slot location 150 meters away from it, a 3C Hub location 1 kilometer away, and a whole computer village 350 meters away, considering both them and their competitors sell basically the same thing – smartphones.

For starters, I do not believe in the gospel of competition. If a market has become somewhat mature, market winners have already been defined, and any product modification you may want to introduce will at best be incremental and easily replicable. When the market opportunity in itself is not gigantic, I sincerely struggle to understand why new players still want to throw themselves into the ring.

When people say things like the market opportunity for fintech in Africa is gigantic, I personally think those statements should be taken with a pinch of salt. The truth is while there are still opportunities for building new rails and solutions, most of the more conspicuous opportunities (where everyone is focusing an undue amount of attention) have already been captured; Mobile payments is a cornered market, unless you have a strong brand you want to use to bulldoze the market with, it is very unlikely you can build a business that can provide venture sized returns from this market alone. This is why I’m particularly bearish when I see companies building payment gateway solutions – there is almost nothing new your product will bring that will match what is already available on the market (you can read my article on understanding the Nigerian payment gateway space), switching costs are particularly low, and there are really a handful of high-value merchants that can move the needle for this business in a meaningful way. This in particular why I’m particularly bullish on offline acquiring.

The offline acquiring market is huge for two main reasons – one is it is largely tied to the informal economy which is basically 60% of Nigeria’s GDP and represents some of the largest opportunity thresholds for fintech in Africa. Secondly, it is not a Lagos market alone. When most fintechs say they are building for Africa, what they are doing in essence is building for Lagos. The relative digital penetration rate of Lagos makes it so alluring for people to start in Lagos, build for Lagos, and end in Lagos. Because of this, most digital solutions struggle to scale beyond Lagos. Offline acquiring is not so.

Due to the size of the market, the pockets of opportunities in remote states like Bauchi, Kano, Kebbi, etc. are huge and difficult for one player to completely capture. So, while it is easy to assume that fintechs like Moniepoint and OPay have captured this market, you may just be speaking to Lagos alone, other states are also being dominated by other players, and pockets of opportunities continue to dwell across the country.

My thesis for offline acquiring is very simple: IT MUST BE A PATH TO CREDIT. The margins from offline acquiring (0.5% gross revenue) are so small that unless you have a clear distribution pipeline (Global Accelerex), a dominant agency network, or a path to build one (Moniepoint, OPay, PalmPay) a strong brand or a path to credit, building an offline acquiring play may be tantamount to suicide.

The opportunities that building this present are also humongous, disintermediating banks (or better still, serving those they do not have the risk appetite to serve via credit), is a big opportunity that should not be overlooked.

Creating visibility into the transaction flow of SMEs and using that as a basis for underwriting credit can create new revenue opportunities for fintechs to latch on to. Moniepoint is already exploring this and recently announced they had issued US$3.3million in credit to SMEs they are working with on this.

To be very clear, this is not necessarily easy. Some of these markets may not have sufficient digital payment use cases to create the data points that enrich the underwriting process for decision-making, and some of these markets may be difficult to reach since social media ads may not be the best way to reach them (i.e customer acquisition costs may be higher), however, this is a hard problem that if solved can create massive upsides. Traction raised US$6 million in 2023 to solve this problem and has already disbursed N2billion (US$2million) in credit so far. Whether they will get this right or not, only time will tell, but this is an area I do not think investors should sleep on.

7.    All we have is US$500,000, but what is that amongst so many

A lot of Nigerians believe that the best opportunity for them lies in “The Abroad”, I personally think that the sweet spot for most Nigerians is not actually moving abroad but earning like a foreigner in Nigeria.

US$60,000 in annual income in the United States is basically average, especially when you factor in the cost of living and taxes. In Nigeria, if you earn US$60,000 a year, you’re basically a low-budget Dangote.

US$60,000 a year in Nigeria means you can comfortably stay somewhere nice, drive something nice, and marry someone nice.

The cost of living in Nigeria is so low compared to other Western countries that the annual income of an entry-level staff at Mcdonald’s in the US (US$17,894) is enough for a young man in Nigeria without serious responsibilities to live very comfortably.

The lower cost of living presents a unique opportunity for Nigerian employers – labor is practically cheaper. Employee expenses are a significant portion of a company’s cost structure, on average about 30% (depending on the industry) of a company’s gross revenues are spent on staff compensation.

In Nigeria, excluding fees spent on license acquisition and other industry-specific expenses, US$500,000 is enough to hire a small team of builders to create an MVP, test your solution, and generate some amount of revenue or traction before seeking follow on funding to help scale (a business with existing traction and revenue) to the next level.

If a technology company needs significantly more than this when they do not have traction or revenue, asking more questions becomes pertinent. Raising too much money creates a bad precedence; driving founders to spend money on things they don’t need, over-hire, get fancy perks, and basically distract themselves from the core mission and purpose of their startups which is a somewhat common occurrence in our ecosystem today.

Wrong Incentives

Today, we praise fundraising like it’s a liquidity event. Startups are so focused on raising funds and appearing on Techcrunch that key issues like profitability, product market fit, and user retention are shifted to the background in favor of vanity metrics like total venture capital raised, user growth (whether customers are retained or not) and irrelevant partnerships that may or may not have any significant impact on the trajectory of the business.

At pre-seed you should be laser-focused on getting to PMF, showing traction and some form of revenue potential so you can begin to raise a seed round. A seed round should be your final round before you register positive cashflow (depending on your sub-vertical) and you could either choose to stop raising at seed (and still have a proper business) or raise a Series A round to drive massive product growth knowing what your key levers and unit economics look like. This is why when I see headlines like X raised US$Xmillion, the largest pre-seed round in Africa – I sincerely wonder what kind of incentives that is supposed to drive.

Why US$500,000?

When Jesus multiplied the 5 loaves and two fishes as recorded in the bible to feed 5,000 people, he made sure everyone got at least a piece of bread and fish. Everyone at that gathering ate till they were filled and the disciples recorded leftovers. I’m saying all this to say; you are not Jesus, and you do not have the ability to multiply bread and fish – US$500,000 (excluding specific industries where there may be licensing requirements) managed properly should be enough to hire a founding team, build a version 1, iterate till it makes sense, gain relevant traction and show signs of revenue. You do not have the ability to multiply money, so any extravagant spending at this point may be dangerous for the long-term viability of your startup.

Note: US$500,000 only applies in the Nigerian market and other African market with a similar PPP (Purchasing Power Parity) due to the relative cost of living.

Note: At the Pre-seed and seed level, the founder is basically in the trenches. Any founder attempting to live large at that point needs to be monitored closely and may institute an existential threat to the viability of the business.

8.    Follow me as I follow Piggyvest

My younger brother has a tweet that went semi-viral some months back – paraphrased, he was suggesting that everyone should spend at least 30 minutes daily to just sit down and fear women. As hysterical as that sounds, Piggyvest is the app that corroborated that view for me. The day you check the PiggyVest accounts of most of the girls asking you for money is the day you’ll realize that because she asked you for 2k doesn’t mean you have more money than her – na safelock hold her down.

To be fair, research shows that women are considerably better at saving than men, however, women on Piggyvest take it to a whole new level – which is good for women and the Piggyvest business in general, and puts an onus on us guys to sharpen our eyes.

When people think of successful fintechs in Nigeria, a couple of names come to mind; in my honest opinion, Piggyvest is the example of what a successful fintech business should look like, and the example any aspiring fintech founder should look up to.

The Business of Trust

Behind the allure of well-crafted marketing copies, email campaigns, and the eponymous Piggycomics is a fintech business that sells trust. On a macrolevel, it’s easy to conclude that Piggyvest is just a savings app, however behind the IOS and Google Play hosted mobile application is a business that has defied the odds for what trust looks like in the African ecosystem.

The fact that real people put their life savings in a company that is digitally hosted over the internet, where they aren’t even sure where their physical offices are is a mystery to me. Even Nigerian banks that have more than 4,437 branches scattered across the length and breadth of Nigeria for people to walk into and perform madness when their banking platform wants to act funny still have users who do not completely trust them, yet a 7-year-old fintech founded by Covenant University students with little or no banking experience whatsoever being able to pull this off is a miracle in my opinion.

To be very clear, I would have bet against Piggyvest in its early days, not because the product wasn’t good, but because I’d be hesitant to believe that Nigerians would trust a fintech app with one of the most valuable assets they have – their money. Piggyvest has, however, pulled this off and this represents not just a miracle in marketing but what should be a case study in consumer trust management.

A Real Business

One other unique thing I like about Piggyvest is the fact that Piggyvest is a “real business”. Not a venture-funded entity or an experiment, but a real business with sustainable cash flow and profits. Piggyvest reportedly raised a seed round (US$1.1million) in 2018 which was largely used to finance its Microfinance banking license application, and hasn’t needed to raise follow on funding since then.

Piggyvest reportedly hires roughly 120 people per LinkedIn data with most of its team members based in Nigeria. While Piggyvest doesn’t have a lofty unicorn valuation (it is our obsession with raising money that makes this a big issue), this is a business that with or without external input from investors will likely continue to be in business for the foreseeable future. For context purposes, this is probable where Interswitch was in 2019 when VISA acquired a 20% stake in the business for US$200million cementing its place as Africa’s first Unicorn.

Expansion Strategy

Most startups raise with the premise they are “building for Africa”. This is generally a way to sell a large vision and excite investors about the potential of their ventures. The problem with this is at some point you will need to show some clear path to African market penetration. This invariably forces startups to expand too early into new African markets all in a bid to keep up with the “building for Africa” narrative.

As a rule of thumb, there’s a level of market depth you should have achieved in your home market before considering expanding into other regions. In your home market, you have the advantage of being native and indigenous, in these other markets, you are a foreign company. If you can’t milk the opportunity your startup thesis is built on in your home market, what are the guarantees you’ll do that in another market?

An expansion strategy should be well planned but should feed from success in the home market, not presumption, optics, positioning, or investor influence. Interswitch had built Nigeria’s dominant card rail and a fledgling card scheme (at the time) before it began expanding across Africa, Paystack’s Pan-African expansion strategy has been well thought out with the head of Paystack South Africa writing a detailed piece on what informed their decision to go into South Africa, only recently did Moniepoint choose to expand into Kenya and Piggyvest (the subject of this section) is still only active in Nigeria (to the best of my knowledge).

The opportunity in Nigeria is so large that the team is still razor-focused on executing here as against running around Africa to own offices and operations that will provide 0.01% of annual revenues and require significant capital expenditure. Not to say, Piggyvest won’t expand across Africa at some point, but they are taking their time to milk their native market before doing so.

Team Composition

Every time I look at PiggyVest’s founding team, I am tempted to ask my father why he didn’t send me to Covenant University. The most important thing about this team is the fact that the 3 cofounders have all learned to work together. They initially started off by building a couple of products, then PushCV before eventually taking on the PiggyVest challenge.

Important to note however is that none of the founders had worked at any big-name firms, what they had was grit, patience, and incredible team chemistry. No domain expertise, just a deep willingness to learn, and try again if things didn’t go according to plan.

Product Evolution

Piggyvest has largely kept to its core of being a savings platform, only recently have they begun to explore building new use cases on the distribution layers they have built via savings. These new use cases are what birthed products like Pocket, and a proposed venture into lending.

Piggyvest is doing what every smart company should do; drill down on building a product that creates a strong distribution platform and develop new use cases for adjacent markets on top of that distribution. In the end, this strategy pays off for patient founders who are able to really drill down and deepen whatever capabilities are required to build a quality first-layer product and the ensuing trust that comes from that, and eventually use that quality first layer to distribute new services and solutions, therefore, deepening their revenue pool.

Marketing Strategy

I don’t know how much Piggyvest spends on marketing, but their growth proves one of two things; they understand with clear precision who their ICP (Ideal Customer Profile) is and the channels that resonate with them, or they have unlocked some kind of flywheel effect that just keeps going and going.

Word of mouth has also played a tremendous role in PiggyVest’s growth, the quality of the product and its target audience means that people are more likely to refer their friends to PiggyVest when they ask. I am not a Piggyvest user myself, but if someone were to ask me to recommend a savings platform, I’d definitely recommend Piggyvest. Piggyvest doesn’t seem to have inherent network effects embedded into its strategy, but its growth engine continues to run at full throttle and this has contributed massively to its success.

Another key thing I think works for Piggyvest is the fact that unlike most fintechs, Piggyvest is actually a mission-driven company. Many firms claim to be mission-driven, but a lot of times their mission isn’t relatable. Piggyvest has a relatable and important mission that is easy for it to rally its entire team around and give their work a sense of value – “To give everyone the power to better manage and grow their finances”

There are people reading this section of this article who believe my purpose for writing this is to elaborate on PiggyVest’s strategy; that is not true. I am writing this so that next time she says she’s broke and sends you screenshots of her OPay, Zenith, and Kuda account balance (which you didn’t necessarily ask for), ask her to share her Piggyvest too.

9.    Many are API providers, few provide real infrastructure

Infrastructure in itself Is a very nice and catchy word, it gives a perception of sophistication and importance, in reality, most people who claim to provide infrastructure are really building APIs for novel or in some cases already existing use cases.

It is important to be able to distill between those who are building real infrastructure that has real potential outcomes and those who are building APIs for use cases that may not eventually scale.

Zero Sum Game

There is a popular saying that the sky is large enough for everyone. This is true in real life, this is not true in fintech. Most market opportunities in the Nigerian fintech space are usually captured by a select group of companies who either have a first-mover advantage (and keep that advantage) or disrupt an existing market with a well-thought-out product that unseats the incumbents and gives them a clear run for their money. Firms with hegemonies of this sort tend to take huge market share in their markets and leave the rest for smaller companies to scamper around for. In other words, while the market may in itself look big, what is really available for upstarts to compete for are usually crumbs falling off the table.

A good example of this is the airtime and data market. On paper, this is a N106 billion (US$106million) a year revenue opportunity. A novice explorer may pitch that capturing just 2% of that market may culminate into N2.12billion (US$2.12million) in annual revenues and may therefore justify entering that market.

In reality, however, excluding the swathes of airtime and data sales that still occur in paper form within offline markets (that you may not be able to compete for because of systemic issues you aren’t poised to solve), a large percentage of that market has already been cornered by the banks who already own the distribution channels for their customers. It is much easier for a Nigerian to buy data directly from his bank app or USSD channel than any other third-party source. So, while this market is big, distribution via banks has cornered a significant portion of it.

Most of the infrastructure required for fintech to blossom already largely exists today. Those that don’t are really difficult to build and are not as obvious as people think. I.e building an end-to-end lending infrastructure stack is very hard (the upsides are enormous, but building it is very hard). What a lot of people are calling infrastructure today is basically APIs that power certain use cases. While these use cases may be useful, most are easily replicable and do not power massive outcomes on the scale of NIBSS Instant Payment (NIP) or Interswitch’s card-switching rails.

Some of the most consequential infrastructure rails in Nigeria are exceptionally difficult to replicate. Anyone can get a switching license (16 fintechs already have this), but not everyone can build the kind of infrastructure companies like NIBSS, Interswitch, Remita, CoralPay, UPSL and a host of other Fintech 1.0 companies have been able to build. This lack of replicability in itself is a moat and is why I am sincerely concerned when people think just building an API that extends certain technical capabilities to other fintechs should be called infrastructure.

Thoughts on BaaS (Banking as a Service)

I personally believe Banking as a Service holds unique opportunities, however, we must look at BaaS from the right lens. Most people believe that the growth of BaaS is predicated on the growth of the digital payments ecosystem in Africa. In other words, as more people adopt digital payments more people will use BaaS services. This is not entirely true. BaaS is not predicated on the growth of digital payments, it is predicated on the growth of Fintechs.

As more startups begin to offer financial services to their customers, BaaS companies will continue to enjoy more growth. This also feeds into the fintechnolization of everything theory where every company will eventually become a fintech. In a world where this happens, companies will rather leverage BaaS providers to extend those possibilities to their customers as against taking the time to build those capabilities in-house, especially when those services are not their main product. However, the risk for BaaS in my opinion is that the larger the fintech capability business of companies grows, the more likely they are to want to build in-house capabilities, especially when the cost of depending on a third party outweighs owning the stack themselves.

A closer look, and you’ll realize that the largest fintechs in Nigeria tend to own their value stacks end-to-end. From technology to licensing. Whatever they consider to be a key part of their business proposition that they cannot afford to outsource they own them, this is why almost all leading fintechs in Nigeria are licensed switches – from Paystack, Remita, Interswitch, Flutterwave, Moniepoint, etc), all of them have switching licenses which is the Tier 1 CBN banking license.

My postulation is that while new startups looking for quick go-to-market will gladly adopt BaaS services these startups may not necessarily be massive revenue drivers for these providers. Businesses looking to embed specialized banking services i.e embedded lending, card issuance, and wallet services may drive huge revenue outcomes, however, if these businesses are technology businesses, at some point when the revenues from those specialized services begin to increase, conversations about owning those stacks internally may also occur and drive them to build their own services in those spaces.

I think the key thing for BaaS is to really solve the more complex problems on the fintech adoption value chain. Think of it like this; Flutterwave and Paystack offer payment acceptance services to their merchants. The technology required for that to occur is not necessarily hard to build, the licensing requirement (getting a PSS license) costs N250 million (US$250,000) which isn’t necessarily prohibitive, the real work however is staying PCI-compliant, managing fraud, managing settlement relationships across multiple banking providers and processors while staying compliant with CBN regulation at the same time. BaaS providers need to solve hard problems like the latter to reduce the possibility of bigger companies building their stacks in-house and disintermediating them.

If you’re a company processing N100million (US$100,000) per year in transaction value, outsourcing that headache to Flutterwave and Paystack makes so much sense, at 1 billion (US$1million) a year it also makes a lot of sense, even at 10 billion (US$10million) a year. However, when the cost profile from outsourcing that function (not ignoring the fact that large volumes -necessitate generous discounts on processing fees) begins to look significant (i.e. 10% of net profits) then owning the stack in-house begins to look attractive.

In my opinion, BaaS providers are infrastructure providers. However, not everyone offering APIs to third parties is in my opinion an Infrastructure provider (or at least providing really impactful infrastructure).

10. If thy eye (strategy) be single, thy whole body shall be full of light

The average Nigerian has trust issues. We don’t trust the government, we don’t trust NNPC (Nigerian National Petroleum Corporation) so we hoard fuel, we don’t trust NEPA, so we have generators, we don’t trust the banks, so we have multiple banks, we don’t trust the telcos so we have multiple phone numbers, so why (in the name of our Lord Jesus Christ) do you think we will trust you.

I used to believe in the anchoring strategy for B2C digital products. The anchoring strategy involves bringing in users for one key product, and then cross-selling a bunch of other adjacent products to them while they’re in. In practice, this is how super apps are built, in reality, that hasn’t worked in Nigeria and the major reason is trust.

Most bank apps distribute a plethora of ancillary services on their digital touchpoints that are largely meaningless to users. As much as this is opposed to common thinking, consumer behavior in Nigeria shows that Nigerians are more likely to use different service providers for different services as against one provider for all services. This essentially puts the super app model in check and also helps manage expectations when companies claim they want to become the all-in-one app.

To be very clear, this doesn’t necessarily apply to B2B businesses, businesses are open to having a single provider offer more than one service especially when there are significant value adds in having a bundled service, however, the idea of having multiple providers just doesn’t seem to cut it for Nigerian consumers. People can download your application and only use it for the key service you offer while completely ignoring all the other ancillary services you have embedded on your platform as value adds.

Understanding this concept also helps you properly evaluate how startups build their products. While pivoting is not an anomaly while companies are building their products, it is generally a bad idea for a startup to want to push multiple products at the same time when It hasn’t achieved Product Market Fit or some reasonable amount of scale in its core offering. The biggest fintechs in Nigeria have one thing in common; they started with a core offering, scaled that offering to some extent, and began to build adjacent use cases on top of that offering (and the distribution/technology advantage it provided). A lot of times, most of these companies have revenue portfolios that are overtly tilted towards their core offerings while these other adjacent or new offerings start to come alive.

As a rule of thumb, doing many things (and having multiple products) is generally a bad idea. Most disruption in the Nigerian fintech space has occurred for the same reason – A big company has multiple products, and one of these products is a market leader in a supposed niche market with massive growth potential but because the company is boggled with multiple products and revenue opportunities here and there, quality time and the focus required to invest into that product is lacking, eventually, an upstart sees a loophole, comes in with a product focused on this one opportunity market, doubles down on it with laser focus, and eventually captures that market, this big company eventually sees the opportunity it lost and starts playing catch up. This is the story of how Paystack and Flutterwave dominated the payments gateway Space, how OPay dominated the mobile banking space, how Piggyvest dominated the mobile savings space, how Moniepoint dominated the offline acquiring space, and how fintechs like Oradian may eventually dominate the MFB and lending core banking space.

Being laser-focused on the opportunity at hand and committing sufficient resources to exploit them is a much better strategy than spreading yourself too thin in an attempt to capture all markets; someone will come into the market where you are spread thin and offer a much better product than what you have because they have a much more focused team.

You’re more likely to go home with something if you chase one Elephant than if you chase five.

Finding Alpha

In the end, the goal of every venture investor is to find alpha. Alpha is that company that returns your fund and more, Alpha is that company that gives you bragging rights. Alpha is that company that makes all the difference. The truth is that while Alpha’s exist, there are not many Alpha’s in Africa (or anywhere else to be precise). Understanding the right framework to adopt when evaluating companies is key to avoiding wrong marriages and identifying the Alpha’s in the mix regardless of how unseemly they may be.

Four sources of outsized VC return (Alpha).

I personally think there are four broad sources of outsized VC returns:

1. Hard problems: Very conspicuous problems that will require either technological ingenuity or the cooperation of multiple stakeholders to solve. Locally Interswitch and Remita are good examples of this (would have added NIBSS, but they feel more like a regulator than a player).
2. Nonobvious problems: Problems that are usually an increment in quality of living or execution for users but are usually non-obvious to begin with. Globally Uber and Airbnb are examples of this.
3. 10x incremental problems: Problems that target already existing markets with a better solution, thereby increasing access, and expanding the market pool. Paystack, Flutterwave, OPay, and PiggyVest are great examples of this.
4. Democratization: Companies that take an existing solution with good demand that exists at the top of the pyramid and make it accessible for more people by making it more affordable and/or understandable, there aren’t many large companies in this space yet, however, considering this is what the large FMCGs have done to distill their products to users at the bottom of the pyramid, I think this is a good market to look into. In the tech space, fractional investing platforms like Bamboo and Rise are good examples of this.

Conclusion

Building resilient and successful fintech businesses in Africa is not necessarily easy, finding the right ones to fund tends to be harder, however adopting a general framework for looking at businesses of this nature and being able to evaluate them objectively can create an opportunity for Venture capital funds to identify Alpha amid the noise and create outsized outcomes for their LPs.

Inspired By The Holy Spirit