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How venture capital fuels global tech innovation: Lessons from India and Africa’s struggles in the ICT sector. By Segun Oruame
Bangalore, once a small Indian village in the 1980s, is now home to hundreds of high-tech companies, including Infosys and i-Flex. With Infosys posting over $2 billion in profit in its latest financial report, Bangalore has solidified its reputation as “India’s Silicon Valley.” Much like California’s original Silicon Valley, this transformation was driven by venture capital (VC), also known as equity or risk capital.
Back in 2000 in the UK, venture capital played a significant role in the dot-com boom, particularly in e-commerce, creating millions of high-paying jobs. Debbie Ariyo, director of Lagos-based DMA Consulting, highlighted the critical role of VC in this growth. Risk capital, often referred to as ‘angel funding,’ has been instrumental in the rise of tech hubs across Asia, allowing them to develop products for markets worldwide, including in Nigeria.
In 2005, Nigeria imported technology products from Asia worth over $6.7 billion, including software solutions, telecom equipment, and hardware. Indian banking software like Flexcube and Finacle dominate Nigeria’s financial sector, underscoring the impact of foreign tech imports.
Venture Capital’s Global Impact
“In leading universities worldwide, VC funding turns research into multi-billion-dollar businesses. Companies like Amazon and Lastminute.com owe their success to venture capital,” says Ariyo. Without angel funding, tech giants like Google and Yahoo might not have existed.
In the U.S. alone, venture capitalists invested $20.4 billion in tech deals in 2004, marking a resurgence in confidence after the late ’90s tech bubble burst. The software industry alone saw investment rise from $4.1 billion in 2003 to $4.9 billion.
Africa’s Tech Struggles and Mobile Success
While venture capital has transformed economies in the West and Asia, Africa’s story is more complicated. Although mobile companies have thrived, contributing to significant market growth across the continent, funding for small businesses and “technopreneurs” remains scarce.
Mobile operators like MTN, Vmobile, and Globacom have invested billions in Nigeria, with MTN alone spending $120 million to build a transmission backbone. Yet, the broader ICT sector faces funding challenges, leaving many small tech companies to struggle. Without venture capital or adequate financial support, Nigerian startups often fail to survive beyond five years. Notable exceptions include companies like SystemSpecs, Progenics, and theSOFTtribe in Ghana.
Asia’s Blueprint for Success
Asia’s tech sector has flourished thanks to strong financial support and infrastructure. India, for example, transformed from an underdeveloped nation into the world’s second-largest software exporter within 20 years. Bangalore, now home to over 100 tech companies, has become the hub of India’s information industry, driven by thousands of skilled engineers.
Similarly, South Korea’s small high-tech businesses have overtaken older, larger firms like LG and Samsung. Malaysia’s Vision 2020 agenda has propelled it into one of the fastest-growing economies in the world.
Nigeria’s Venture Capital Hurdles
In contrast, Nigeria’s venture capital scene remains underdeveloped. Although organizations like the Venture Capital Association of Nigeria (VCAN) aim to stimulate high-tech ideas, most ICT entrepreneurs are unaware of its existence. VCAN’s role in funding new tech ventures remains minimal, and banks often refuse loans to tech startups because of the perceived risks.
Nigerian banks, which now have reserves of over $170 million following a sector consolidation, remain focused on funding large, established firms like mobile operators, leaving small startups in the lurch. Dr. Chris Nwannenna, President of the Nigeria Computer Society (NCS), notes that software companies rarely receive bank support due to a lack of understanding of their operations.
“Banks don’t give loan because unlike commodity that you can see, import and sell off within 60 days, software is invisible. You cannot see it. It is in your brain and banks are amused that you are asking them to invest in your brain. And even telling them that your brain is enough collateral,” said Austen Onwughai, managing consultant at Lagos based Orsin O’ Perri Consulting.
Local computer Hardware maker, Omatek, offers a rare story of how banks’ SME (Small Medium Enterprises) fund could impact on indigenous enterprise. Omatek started as a dealer of foreign brands such as HP and Dell. But it later ventured into producing its own systems locally with the brand name ‘Omatek’. SME funding from Zenith Bank and Guaranty Bank helped sustain the Omatek brand.
Encouraging Signs for Africa
Despite the challenges, Africa’s tech sector has potential. Successful mobile operators and Nigeria’s financial sector reforms provide a glimmer of hope. South Africa’s venture capital market, though small compared to the U.S. and Europe, has steadily grown, and the country’s private equity firms have raised substantial funds for high-tech businesses.
Africa’s liquidity issues, combined with a perception of high risk, continue to deter investment. However, as Paul Inbona of Modern Africa Growth & Investment Company points out, African investments offer high returns, often exceeding other emerging markets. With increased focus on mitigating risks, African economies could see a surge in venture capital funding, propelling the continent’s tech sector forward.
The new president of the Association of Telecommunications Companies of Nigeria (ATCON) Dr. Emmanuel Ekuwem said the association would explore ways of building a synergy with financial institutions to get the much-needed funding for ICT enterprises.
The Path Forward
For Nigeria and other African countries, the solution lies in fostering better financial support for ICT startups. Initiatives like VCAN must become more proactive, engaging with tech entrepreneurs and providing long-term funding solutions. While mobile operators have paved the way, the broader tech ecosystem needs stronger support to drive sustainable growth. With the right financial backing, Africa’s tech landscape could mirror the success seen in India and beyond.
