Welcome back to the episode 2 of the ongoing series on why most Nigerian startups are not getting funded. I had discussed the role of the founding team to the possibility of getting funded. Today I will continue with analyzing the impact of the target market size that the startup is trying to capture.
Size of the Opportunity – VCs want to know how large the investment opportunity is. They need to be comfortable that the opportunity is significant enough for them to deploy resources to capture. That’s why some investors have thresholds. They need to be sure the opportunity is worth their time, energy and resources. You also have to understand the dynamics of the size of the VC’s Asset Under Management. For a VC with $50m AUM, a $500m opportunity might be good enough, but for SoftBank’s Vision Fund, $500m is a joke.”
Most VCs especially in Africa will like to fund businesses they believe can scale across Africa (SSA ex South Africa at the minimum) and can potentially scale across other frontier and emerging economies. Now, that is big! Let’s put this in context, scaling across SSA alone is a huge task, let alone covering other emerging or frontier economies. So, it is important as entrepreneurs to provide solutions to problems with wide use cases.
Let’s bring this further home, Fintech has been a major buzz word within Nigeria’s technology space, but let’s really appraise the size of the opportunity vis a vis the “innovative solution” we have been seeing in the market.
Online Payment in Nigeria
Let’s take online payment as an example, how large is that market? The market is limited to the following;
- The number of cards in issue – about 45m
- The number of unique bank accounts – about 50m
- Number of online merchants (volume and the volume of transactions they perform) – (Not available)
That’s essentially it! You might wonder why data like internet penetration is not relevant. Aside from the fact that a large percentage of this internet users are on mobile (which is not optimized for payment), the other questions will be;
- What’s the percentage of internet users actually make transactions online?
- What percentage of these internet users actually “pay” online?
Additionally, a vast majority of these online transactions are not concluded online especially with the introduction of Pay on Delivery (“POD”). With all these cloud, you will agree with me that the space might not be the largest as it is today. So, if online payment is not the most interesting, focusing on a segment of the industry (Say recurrent online payment) becomes less interesting, as the business is limited to individuals paying the same amount at regular intervals. You will agree with me that the market becomes significantly smaller.
Sizing the Opportunity – Paystack
In July, Paystack was excited to publish that they processed N1bn worth transactions in a month. Paystack is arguably the largest within its space. But, looking at the numbers, assuming the whole transactions were done on Naira cards, that implies that Paystack’s net revenue for the month will be N15m, since they charge 1.5% on local cards. Let’s assume the average transaction size of N5,000, this means 200,000 transactions, implying additional 20m in fixed fees. Say about 60% of these fees are then shared with all the payment infrastructure providers including the the card Issuer, Originating/Receiving Banks, the Switch etc, thus leaving Paystack with about N14m.
With this analysis, we can put the size of the market in better perspective.
Expanding the Reach!
I have however observed few innovations from some of these payment infrastructure companies especially Flutterwave. Flutterwave through Rave recently announced its collaboration with PayPal to open-up Nigerian businesses to PayPal’s 200million users . Businesses with globally competitive product as well as readiness could take advantage of this significantly larger market to scale and grow their businesses further.
Platform VS Product
Moving your offering from being just a product to a platform can grow your market size exponentially. Few examples that come to mind is Konga. Remember, Konga started as an online retailer (that is selling its own products online), however since it has built the payment infrastructure, inventory management system and other solutions for its own business, Konga easily pivoted to becoming a marketplace. Rather than just having this amazing technology for its own products only, Konga’s marketplace allowed it to offer the same service to thousands of other retailers and or merchants.
The same way a restaurant with a delivery infrastructure can easily become a food delivery platform to assist other restaurants with food logistics rather than limiting its infrastructure to only its own business.
The size of the opportunity matters. Lagos is too small a market as most Technology businesses are only valuable to city dwellers. I will like to see more solutions (simple) to assist that grandmother and her niece living in Odosimadegun (Anywhere that is), make payment and complete transactions without cash. This is a huge opportunity (proble