A beginner’s guide to investing in Nigerian startups

So you have decided to invest in Nigerian startups? Congratulations! You’re about to embark on an exciting adventure.

Investing in Nigerian startups can be financially rewarding but you already know that. You saw Moniepoint hit the unicorn milestone and calculated how much an early investor might have cashed out. You also saw how Paystack’s 2022 acquisition changed the game for Nigeria’s tech ecosystem by validating the idea that startups can provide huge windfalls and now you’re keen to benefit from those windfalls. 

As a first-time investor looking to back the next big thing, this guide will answer key questions and help you get started.

Why Nigerian startups?

First off, many Nigerian startups are addressing real-world problems with technology. OPay, Moniepoint, and PalmPay became synonymous with successful transactions in 2023 as Nigerian bank apps struggled with increased demand during the cash scarcity. Nowadays, seven times out of ten, whenever I am paying for something in person or withdrawing cash from POS agents, I send the money to an account operated by one of these fintechs. 

Nigerian startups are innovative. Touch and Pay (Cowrycard), a profitable startup that processed over ₦20 billion in 2024, has familiarised contactless payments to many Nigerians.  In Lagos, Africa’s second-most populous city, all passengers on government-run public transport must use Cowry cards for fare payments. CashAfrica even lets Nigerians make contactless payments from their phones. 

Nigerians love their startups and more Nigerians rely on apps built by these startups for almost all aspects of daily life. Chowdeck, a food delivery app, is so popular among young people that Afrobeats’ biggest stars and Nigeria’s biggest banks advertise on it.

While most startup investments are long-term commitments that require exit opportunities like acquisitions and IPOs, there’s still an opportunity to make a quick buck from investing in startups through secondary share sales (selling to other investors). In January 2024, TechCabal exclusively reported that one VC firm made such a significant profit from secondary share sales that it returned its entire $5 million fund from that deal, showing how much investor interest is in Nigerian startups.

How to start investing in Nigerian startups?

There are several ways to invest in Nigerian startups. As an angel investor, you can invest between $5,000 and $10,000 in early-stage startups in exchange for equity through syndicates like Lagos Angel Network and HoaQ, which help derisk your investment by pooling resources, expertise, and networks of other angel investors.

Or you could meet founders at tech events like Moonshot by TechCabal and ask them about their startup, conduct due diligence yourself or outsource your investigation to companies like Diligence Africa, and negotiate how much equity you get for your investment. 

You can also invest through small-ticket investment platforms like GetEquity, where you can invest from as little as $100 in exchange for equity in startups like Gokada. 

What should you look out for in a startup?

It is critical to conduct due diligence before investing in startups all over the world and Nigeria is no exception. Before investing, you should understand the team behind the startup. After learning about the founders, you should be convinced they have the skills, experience, and drive to succeed.

You should also be convinced about the problem the startup is addressing and its proposed solution. Ideally, the startup should operate in a large, expanding market. It should also have impressive customer growth, revenue milestones, or partnerships.

To maximize your chances of a successful investment, the business should be able to scale quickly without a substantial rise in costs.

Additionally, you should review their financial statements to assess the startup’s burn rate and runway, ensuring they have a clear path to sustainability or profitability.

What risks should you be aware of?

Investing in Nigerian startups comes with significant risks, including regulatory uncertainty. In April 2024, regulators banned five fintechs from onboarding new customers and imposed fines as high as ₦1 billion. Nigeria’s regulatory landscape is also notoriously volatile. In 2020, the Lagos State government abruptly banned two-wheelers overnight, effectively dismantling the ride-hailing market for startups like Gokada, ORide, and Max.

The startup also operates in an inflationary environment with currency fluctuations, which can significantly impact business operations and profitability. You will also likely wait for acquisitions or IPOs before realising returns, as startup investments are often long-term, with limited opportunities for quick exits. 

How to reduce risks?

Start small. You should begin with an amount you can comfortably afford to lose while gaining experience in startup investing. Consider building a portfolio by spreading your investments across different startups to reduce your exposure. 

Also, don’t forget to monitor the startup’s progress. Stay engaged with your portfolio companies by requesting regular investor reports to track their growth and address potential challenges.

Investing in Nigerian startups is an exciting way to support innovation and potentially earn significant returns. With thorough research, a clear strategy, and a willingness to take calculated risks, you can make informed decisions and contribute to the growth of Nigeria’s dynamic startup ecosystem while earning rewarding returns.

Just to be clear, this is not financial advice. But then again, you’re probably not the type to take financial advice from a journalist anyway.