Why are Venture Capital Funds Domiciled in Africa Dropping Despite Influx of VC Formations into the Continent?

It’s no longer news that Venture Capital (VC) funding in Africa has ballooned over the last few years. Partech Ventures estimates that total venture capital funding reached $560 million in 2017. That’s a 53% increase over the $366.8 million recorded in the previous year.

But an even promising discovery shows that more venture firms are making diversity changes to how they operate. More and more VC firms are bringing some or expanding their bases of operations into Africa. GreenTec for instance just announced it is opening shop in Lagos soon. It joins a host of other players with several presence in African countries.

Also, many firms are now opting to create funds managed by Africans. Techcrunch reports that 51 Venture Capital firms have investments in at least 7 African startups. 22 of these firms are located in Africa and managed by Africans. One example is Yemi Lalude who oversees TPG Growth’s $2 billion social fund targeted at African startups.

Domiciling a fund in #Nigeria comes with a lot of pains and uncertainty. Not a lot of smart business people will opt for this route. Also not a lot of investors will back such fund. However, this is one sure way of understanding and inspiring sustainable solutions to funding.

— 'Bosun ‘Kgosi’ Tijani (@bosuntijani) October 24, 2018

That’s a stunning accomplishment and a testament to the growing trust in the capabilities of Africans.

However, very few of these firms have their capital domiciled in Africa. Using Nigeria as an example, only one VC firm, CcHubs Growth Capital, has funds domiciled in the country. Thus, even though the total venture funding for Nigerian startups between 2016 and 2017 was $256.37 million, practically none of these funds are domiciled in Nigeria.

What could be the reason behind this?

Tight Banking Systems and Regulatory Issues

In Nigeria, forex regulatory laws have grossly affected how investors invest in the country. Since 2014, Nigeria’s forex market has had a fixed regime with a parallel black market. Meanwhile this era marked the rise of Venture Capital funding into Africa.

Sent money to Burkina Faso on Oct 2nd and it only arrived today. Surely sending it via pigeon carrier would have been faster?

— Chairman AW (@AffiSupaStar) October 17, 2018

Tight monetary laws makes it difficult for foreign capital to leave the country. Thus, keeping vc funds within Nigeria is not a route a lot of smart people would opt for.

Mr Bosun Tijani sums it up thus: “Domiciling a fund in Nigeria comes with a lot of pains and uncertainty. Not a lot of smart business people will opt for this route.”

Unstable Legal Frameworks and Taxation

A key reason why VC firms don’t keep funds locally is due to perceptions around the legal frameworks in Nigeria and Africa at large. Writing on TechCabal, Olubunmi Abayomi-Olukunle shares that many investors feel they don’t understand the local dynamics around law and taxation issues. Thus they choose to keep funds abroad.

Startups Opting to Incorporate Abroad

Many reports about African startups focus heavily on how much funding startups receive. However, many miss the fact that VC funding sometimes require that startups incorporate abroad, preferably in the US.

Interestingly, most of the funding rounds recorded in Nigeria are mostly led by foreign VC firms. According to TechCabal, domestic capital pool constituted less than 5% of startup funding in 2017.

We lost months to our inability to invest in a number of attractive "local" start-ups because they are mostly US entities by incorporation. We knew it wasn't going to come easy. Though still domicile in #Nigeria, our future will include both local & foreign businesses.

— 'Bosun ‘Kgosi’ Tijani (@bosuntijani) October 24, 2018

Companies like PayStack and Andela have offices in San Fransico and Lagos not just to facilitate payments, but to make their growth a lot easier. Meanwhile SureRemit chose to incorporate in Seychelles.

With more and more startups choosing to incorporate abroad, it makes little sense for VC firms to trap their funds in Nigerian banks.

So although VC investment into Africa and trust in African managers is growing, very few are confident about how supportive local environments are to VC funds. For many VC firms, keeping funds abroad is wiser and allows them to make investments to any part of the continent without worrying about regulatory issues or other unpredictable challenges.