The business, investment and tech communities in Africa are all understandably excited at the news that Paystack just sold to Stripe for USD200 million, part of a wider trend which is seeing African startups defy the odds during the Covid-19 pandemic to achieve multimillion-dollar exits this year. Apart from the fact that this has created a few millionaires, the bigger win here is for the African tech ecosystem. The company has been able to further demonstrate that the venture capital system can work in Africa and that the idea that the continent is opaque and devoid of “the right kind of opportunities” is fast becoming myth. Like I’ve written about previously, you just have to have the right understanding of the environment to identify the best ways to invest.
But the biggest win, in my opinion, is for Nigeria and specifically the “Nigerian Dream”.
Shola Akinlade and Ezra Olubi were students at Nigeria’s Babcock University. Coming up in a time when much of our education system has eroded dramatically, with few pathways to opportunities for young people, these two were able to take the steps towards building this success story today. Paystack is the second ever Nigerian start-up admitted to Y Combinator, the Silicon Valley incubator that has backed some major global startups such as Air BnB, DropBox, Reddit, and Stripe itself. Nigeria is replete with abundant talent and resources yet we are somehow unable to translate into the global economic power we should be, such that 40 years later we are still only talking about Nigeria’s potential, instead of actualising it.
And so the obvious question arises - how do we create more Paystacks?
Here’s a “radical” idea. Let’s use our pension savings.
This is because we need to take a more active role in creating our domestic success stories. While Paystack did receive some early backing from a few Nigerian investors, the bulk of the funding came from foreign investors such as Stripe, Visa, Tencent Holdings, Singularity, Comcast Ventures, and Y Combinator. Are we happy for this to continue being the case?
As at June 2020, Nigeria’s pension assets under management (AUMs) stood at NGN11.1 trillion (USD28.3 billion). This is a balance that’s been contributed by a little over 9 million retirement saving accounts (RSA) holders. Yes, by less than 5% of the population. Important to note that of this amount, 67% was invested in government securities and whilst this might be sensible for the bulk of allocations, we might be missing out on a vital potential driver of Nigeria’s economic growth: Venture Capital (VC). Public pension funds contribute 65 per cent of the capital in the US VC market, 18 per cent in Europe, and 12 per cent in the UK. Nordic pension funds account for 16% of total VC funds raised in the region since 2013. Now to be fair, PENCOM has recently introduced a multi-fund structure in an attempt to diversify its investments, but one can argue that more needs to be done.
So let’s take 0.1% of that AUM balance as a test-run and dedicate it to taking smart, early-stage risk in our high potential companies. I’m talking about deploying NGN11 billion to invest in our future. Given the low yield, high inflation environment we currently find ourselves in, one could make the argument that there is no better time to give this a shot. The very nature of venture capital is that success is not assured with every investment, but if you’re good at what you’re doing, the returns from a handful of successful investments could far outweigh the potential losses from the more numerous failures. And anyone who understands anything about venture capital will understand that USD30 million will easily fund a LOT of companies.
And, it’s not just investors who would benefit from a pension industry more open to venture capital; Nigerian businesses across the country would gain from this fresh source of capital. The real victory is that you get to create more successful companies that provide solutions to the critical problems that we face daily. We also get to create wealth in new ways that are not solely resource dependent and can chart a new course for the future. The multiplier effect this would have for young people and small businesses in the start-up ecosystem, their supply chains, and the communities in which they operate, cannot be underestimated.
I personally would happily put 10% of my RSA towards VC to back these upcoming companies. Whether in payments, microfinance, logistics, insurance, agriculture, renewable energy, education, healthcare, or real estate, there is so much we can do. We have people in the country who understand how to incubate and accelerate companies successfully. We have a growing number of entrepreneurs and investors who can get to successful exits. Let's throw in the missing piece by creating the conditions for these companies to grow and thrive!