Success beyond exits: Alternative paths for African startups

Davidson Oturu's path to venture capital (VC) is a fascinating one. With a strong legal background, he previously worked as a partner at AELEX, a respected law firm with operations in Nigeria and Ghana. His legal career was even recognised with awards before he transitioned to Nubia Capital, a VC Firm focused on funding tech-enabled startups in Africa.

As a Managing Partner at Nubia Capital, he doesn't just source and recommend deals; he puts his legal expertise to work, reviewing and negotiating contracts alongside operational due diligence teams and local counsel.

In this edition of The Investors' Corner, Davidson dives into Nubia Capital's unique investment approach, shares his vision for Africa's booming fintech future, and offers insights on how startups can achieve success beyond traditional exits.

Nubia Capital’s strategic and multifaceted approach to fostering innovation in Africa

Nubia Capital is currently focusing on several key sectors in Africa due to the remarkable opportunities they present. While acknowledging the inclination towards sector-agnosticism in Africa, Nubia Capital has narrowed its focus to five thematic areas: health, fintech, edtech, clean tech, and agritech.

In discussing Nubia Capital's investment focus, Davidson emphasizes a strategic targeting of key sectors in Africa: health, fintech, edtech, clean tech, and agritech.  These sectors, he explains, "hold immense potential for innovation and societal impact."

Within healthcare, Nubia Capital is particularly drawn to African health tech startups that leverage AI to address healthcare gaps, recognizing the vast potential to improve access and outcomes across the continent.  Financial inclusion is another key area of focus, with fintech solutions like mobile banking and digital payments offering a lifeline to the largely unbanked population.

Education is no less critical, and Nubia Capital sees edtech as a powerful tool to "improve education and development" through accessible learning platforms.

Sustainability is also a priority, with cleantech ventures focused on renewable energy and waste management attracting Nubia Capital's investment.  Similarly, agritech's potential to leverage AI and robotics to improve agriculture and food security aligns perfectly with its goals.

Beyond these core sectors, Nubia Capital acknowledges the transformative power of software as a service (SaaS) and invests in tech companies providing enterprise solutions.  These investments, Davidson explains, serve to "further amplify their impact on Africa's challenges" by empowering businesses across various sectors.  Through this strategic and multifaceted approach, Nubia Capital positions itself as a key player in fostering innovation and development across the African continent.

Nubia Capital’s multi-layered selection process for high-impact ventures

Identifying and prioritizing high-impact ventures is a multi-layered process for Nubia Capital, according to Davidson.  Thematic alignment forms the first hurdle, with startups in healthcare, fintech, edtech, clean tech, and agritech prioritized for their potential to drive growth within these key sectors.

Following this initial screening, Nubia Capital conducts in-depth market analyses.  These analyses meticulously evaluate factors like competition, regulatory environments, and scalability within each target sector.  For example, Davidson explains, "the fintech sector might involve assessing the competitive landscape, unique value propositions, and the regulatory environment."

Team evaluation is paramount, with Nubia Capital placing a high value on the expertise, experience, and dedication of the founding team.  A strong team, Davidson emphasizes, "significantly increases the startup's success potential."  Technological innovation is another key factor.  Advanced technology, innovative solutions, and strong intellectual property all contribute to a startup's ability to disrupt its sector.

Financial analysis is the next step. Nubia Capital's team meticulously assesses revenue growth, burn rate, profitability, and overall financial health to ensure the startup's long-term viability and ability to attract further funding.

The final step is a comprehensive due diligence process. Promising startups face rigorous scrutiny to confirm their initial appeal and resilience. Unresolved issues uncovered at this stage can lead Nubia Capital to pull back, ensuring only the most promising ventures receive their backing.  Through this multi-layered approach, Nubia Capital aims to identify and support ventures with the greatest potential for success and societal impact.

Nubia Capital's strategies for overcoming challenges

While the allure of African innovation is undeniable, VCs operating on the continent face a unique set of challenges compared to their global counterparts. Davidson sheds light on these hurdles and Nubia Capital's strategies for navigating them.

"Political and economic instability across Africa can disrupt investment plans and raise concerns with our limited partners (LPs)," he acknowledges.  Nubia Capital mitigates this risk by geographically diversifying its portfolio across the continent, while also closely monitoring economic trends.  However, Davidson concedes, "unforeseen events can still impact investment decisions."

Infrastructure limitations pose another hurdle. "Online disruptions, like the recent MTN incident, can significantly hinder startups reliant on online platforms," Davidson explains. Nubia Capital tackles this challenge by advocating for improved infrastructure and developing contingency plans to ensure business continuity during disruptions.

Regulatory environments across Africa are a complex patchwork.  "Understanding local laws and building strong relationships with regulatory bodies is crucial for both startups and investors alike," Davidson emphasizes.  Nubia Capital leverages its legal expertise to navigate these complexities effectively.

Currency volatility throws another wrench into the investment process. "Fluctuations in exchange rates can significantly impact valuations and returns," Davidson explains. To mitigate these risks, Nubia Capital employs careful financial planning and utilizes hedging strategies where feasible.

Perhaps the most significant challenge for VCs in Africa is achieving successful exits for their investments. "Limited exits raise concerns about the feasibility of our investment strategies," Davidson admits.  This challenge is further compounded by economic instability and longer startup scaling periods on the continent.  Despite these hurdles, Nubia Capital remains optimistic.  "We are confident that the future holds promise for improved exit opportunities," he added.

Outlook on Africa's thriving fintech future

Davidson offers a glimpse into the exciting future of the continent's fintech sector. A defining trend, according to him, is the explosive growth of digital payments and mobile money solutions.  He predicts this space will become "fiercely competitive," driving innovation in integrated payment solutions across various industries.

Furthermore, the rise of challenger banks and mergers and acquisitions (M&A) activity will reshape traditional banking models, creating exciting avenues for investment and disruption. Financial inclusion initiatives are another area ripe for acceleration.

Davidson highlights the role of fintech advancements and agency banking expansion in unlocking underserved customer segments and disrupting traditional banking structures.  Insurtech is another area primed for innovation, with players reimagining product offerings and distribution channels, forcing incumbents to adapt to a changing landscape.

He sees immense potential in blockchain technology and cryptocurrencies to transform remittances, cross-border transactions, and financial intermediation.  While acknowledging regulatory hurdles in some regions, he emphasizes the undeniable trend of global cryptocurrency adoption, leading to increased mainstream integration.  This shift, Davidson argues, will ultimately reduce reliance on intermediaries and promote broader financial inclusion.

The way individuals and businesses access credit is also set to be transformed by innovative credit scoring models and digital lending solutions.  Peer-to-peer lending platforms and digital lenders, leveraging data analytics and mobile technology, will offer accessible and affordable credit options.  The adoption of sophisticated credit scoring models will enable more efficient risk assessment and lending decisions, further fostering financial inclusion and economic growth.

Regulatory frameworks are actively evolving to support fintech innovation, a trend Davidson welcomes. "We are witnessing supportive startup acts and regulations emerge across Africa," he observes, "fostering a conducive environment for fintech companies to thrive."  Clear and supportive frameworks, Davidson emphasizes, will be critical for continued fintech growth and development.

Embedded finance, a model where fintech companies partner with non-financial entities to offer financial services within existing platforms, presents another disruptive force.  Davidson envisions partnerships between fintechs and e-commerce platforms, telecom operators, and others seamlessly integrating financial services into everyday transactions, fundamentally transforming how people access and utilise financial services.

Finally, the "buy now, pay later" model's growing traction is another trend Davidson sees shaping the future.  This model, offering consumers greater flexibility by allowing deferred payments on purchases, will become even more widespread as credit scoring systems mature.

Three pillars for a robust VC ecosystem

Davidson spoke about the key factors that would accelerate the development of a mature and thriving VC ecosystem in Africa. He identified three main pillars for building a robust VC ecosystem.

The first pillar, according to Davidson, is fostering a supportive regulatory environment. Governments, he said,  must enact clear and investor-friendly frameworks that protect rights and encourage entrepreneurship. "This clarity attracts capital and fosters VC growth," he remarked.

The second pillar Davidson highlighted is infrastructure development. Reliable power and robust internet connectivity, he explained, are essential for efficient startup operations and innovation.

Finally, Davidson emphasized the importance of a thriving angel investor network. "Early-stage funding and mentorship nurtured by these networks propel promising startups, creating a fertile ground for VC investment and further growth," he explained.

He concluded by stating that by addressing these key factors, Africa can cultivate a vibrant VC ecosystem that fuels innovation and unlocks the continent's entrepreneurial potential.

Looking beyond the pitch: Assessing commitment to sustainable business

Davidson shed light on Nubia Capital's approach to assessing a startup's commitment to building a sustainable business in Africa, looking beyond just fundraising goals.

"Our evaluation prioritizes several key factors," he explained.  First, Nubia Capital dives into a startup's mission, looking for alignment with impactful and lasting objectives.  "A dedication to social good is an indicator of a long-term perspective," he remarked, "a genuine desire to contribute to Africa's sustainable development."

Historical performance also plays a critical role.  A track record riddled with failures raises concerns about building a sustainable business.  "While past missteps aren't necessarily dealbreakers," Davidson clarified, "they offer valuable insights into the team's ability to bounce back and adapt."

Nubia Capital also places a strong emphasis on the founders and their team.  "A proven track record isn't a guarantee of success," Davidson admitted, "but it provides valuable clues about the team's capabilities, expertise, and commitment to the venture."

Beyond the team itself, the focus shifts to the product or service's potential for sustainability and scalability. "A strong business model with the ability to scale significantly suggests long-term success and a dedication to sustainable growth," Davidson pointed out.

Finally, Nubia Capital assesses a startup's financial prudence and governance practices. Sound financial management and strong governance structures, Davidson explained, are essential indicators of a startup's ability to navigate challenges and achieve long-term financial sustainability. By applying this multifaceted approach, Nubia Capital goes beyond identifying ventures simply chasing capital, instead seeking out those truly committed to building a sustainable future for Africa.

Success beyond traditional exits

Davidson acknowledged the challenge of limited exit options for African startups and offered a range of alternative paths to success beyond traditional acquisitions.

"There are multiple strategies we advise our portfolio companies on to achieve liquidity," Davidson explained.

Secondary sales, he suggested, can be attractive.  These transactions, he said,  allow early investors to exit while bringing in valuable local capital and strengthening the startup ecosystem. Davidson also mentioned Initial Public Offerings (IPOs) on local exchanges as a viable option. "These platforms create liquidity for existing investors and allow participation from local communities in the company's growth," he remarked.

Recapitalisation was another strategy Davidson highlighted. "Restructuring capital and bringing in new equity or debt can fuel growth without giving up control," he explained. Mergers and acquisitions (M&A) were also presented as an option. "Combining forces with complementary businesses can create synergies, strengthen market position, and ultimately drive long-term value," he pointed out, even if a traditional exit isn't immediate.

Davidson then discussed internal strategies. "Employee stock ownership plans incentivize employees and align their interests with the company's success," he explained, fostering loyalty and commitment while providing a controlled form of liquidity.

Finally, Davidson emphasized the importance of flexibility. "Maintaining the ability to diversify products allows leveraging existing strengths and market opportunities, creating new avenues for growth and potential future exits," he said. For instance, a fintech startup offering payment services could consider expanding into lending within the same financial services sector.