Yesterday, we posted more information about the iSec 10 million dollar investment from Synergy Capital. The sum by itself is cause for curiosity. But even more befuddling is the valuation of $100 million.

There hasn’t been a first round of this size before, and certainly not from local investors. Can this mean that local tech VC climate is warming up and risk appetite is increasing? Or is this an errant blip?

While we’ve been trying to get Synergy Capital to come on the record, I’ve been asking around the ecosystem about what this development might mean.

Local experts react

The general response to the raise itself has been surprisingly tepid. Compared to how the first major funding events of startups like Jobberman, Paga, iROKO and Konga were received, iSec’s raise might probably not even have happened at all.

“If this was a B2P gig, it might have made the 10PM news”, says Akin Oyebode, Head of SME at Stanbic IBTC. “Since its a B2B service, they can’t really milk marketing or the buzz around the deal”

On the question of if local investment in technology startups is finally turning a corner, Oyebode was of the opinion that iSec’s deal is a sign that local money will chase successful startups, and credits TechLaunchpad’s early stage acceleration as the springboard for Synergy Capital’s extraordinary follow-on round in iSec.

“Synergy has a strong board — easier to attract local capital with the clout on their board. The guys on the managing company are also proven (largely ex ACA guys), and so have PE experience IN NIGERIA. All these are important for one thing: investor trust.”

Among those where the news has had an impact however, the feeling of surprise and incredulity is palpable. So far we have been unable to reach the investors directly for comment. But we know that the deal is real. The main question however is how the phrase “up to $10 million dollars” should be interpreted.

“The best reading of this is that they put no more $100k in the business with a commitment to putting more if certain targets are hit”, said a very skeptical Feyi Fawehinmi, a UK-based finance professional.

$100 million?

In a game of Monopoly, you are not supposed to collect £200 until you pass GO. But somehow, a very young iSec has managed to cop a $100 million valuation right out of the gate. Is this valuation justified in the circumstances?

“It’s big news for the tech investment space”, says Chinaza Onuzo, a private equity expert. “I don’t know if you can read too much into this one transaction though. It is in the financial services tech space, and that sub-sector has attracted money over the years. Interswitch, Paga, eTranzact et al. So it is possible that in that space there are more potential deals. If (Synergy Capital) did this deal then they are very sure about the pipeline of work for the business, because this will be the first deal in their fund”.

In 2011, Helios acquired a majority stake in Interswitch for $110 million. Most of its earliest investors were banks, who are reported to have made a 1,400 percent return on their investment. One opinion that has popped up consistently is that this deal is very similar to Interswitch’s in that respect — being private equity people steeped in the Nigerian banking and finance sector, Synergy Capital would not have invested in iSec if they hadn’t been somewhat assured of a return.

“The investors are PE guys (I know them in Ghana), which means that there is a definite plan and probably a waiting project that will generate enough returns to cover the investment”, said Victor Asemota, in a comment on TechCabal.

The African VC funding gap might be closing

Synergy Capital is a generalist fund, but it specifically lists oil & gas, power, consumer goods and services, agro-allied processing, technology and telecommunications, and non-bank financials as areas of interest. The website states that Synergy will commit a maximum of thirty percent of its $75 million fund to each of these areas. iSec just got $10 million.

Synergy is however not the only one that has been making million dollar bets on African technology startups recently. Earlier in the year, Adlevo announced that it had invested in SOLO, a Nigerian digital media company which, when explained simply, makes phones.

The terms of the deal were not disclosed, and it didn’t get a lot of media buzz either. But having been in contact with SOLO’s management and gotten a glimpse of how ambitious their overall strategy for content and devices in Africa is, I’m certain they got a lot of money too. I daresay eight digit dollars. One does not simply make phones, licence twenty million tracks from the big three in global music, license oodles of Nollywood content and invest in offline download hotspots across the country. You must have a war-chest that is sure to not run out too quickly.

Jason Njoku has spoken of a funding gap that threatens to cripple the Nigerian internet space. According to him, most of the money looking to invest in Nigerian startups are not interested in “small fry” but startups whose fundamentals and growth projections justify million dollar rounds.

There are very few internet companies in Africa (or any emerging market) who fit that criteria from what I have come across. (I obviously don’t know every company). But what I do know is in 2011 when we were funded, iROKO definitely didn’t fit that criteria. We are now beyond that comfortably but we wouldn’t have met that criteria then. Even at $50-60k monthly revenue with net profits of 15-20%. Today, no Spark company could meet that criteria and even in 2014/15, I doubt they could.

Also, Chinaza Onuzo who was earlier quoted wrote a post on TechCabal in 2013, in which he warned that local investors, most of whom fall into the private equity category were likely to have their lunch eaten by hungrier and more visionary foreign VCs.

Of course it could be said that iSec and other B2B companies in highly lucrative sectors are are not “internet companies” and are thus exempt from Jason’s funding gap theory. But that doesn’t detract from the fact that one startup scoring a $10 million raise right here in Nigeria is a huge deal for the whole technology ecosystem. And the investments iSec and SOLO suggest that local investor appetite is not as dull as we might have imagined.

Another emerging trend is instructive — a rash of accelerators has erupted in Lagos. Three launched in March alone. And though there isn’t a lot of public evidence out there to support, I am personally aware that angel investors in Lagos are becoming more active. Is there enough here to declare that a groundswell of local investor activity is about to erupt? Is the local investment winter over?

Victor Asemota’s last words in that comment seem the most apt answer to that question.

“…techies can’t blackmail local investors for funding by calling names or comparing them to Silicon Valley. Technology investments are a new asset class they have to learn to understand. (They) are waking up and slowly”.

Bankole Oluwafemi Author

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