Nigeria has been identified as a top-performing technology ecosystem but most of its start-ups are incorporated in the United States due to poor ease of doing business.
A new report by AfricArena entitled ‘The State Of Tech In Africa 2021’ noted that Nigeria does not appear in the top five countries on the ranking of start-ups by country of incorporation.
According to the findings, many start-ups that raise capital in Nigeria are not incorporated in the country.
This practice enables them to see funding in their country of incorporation, the report stated.
Nigeria ranks 131 out of 190 countries globally in the World Bank’s 2020 Ease of Doing Business ranking which is an improvement compared to 146th position in 2019. However, businesses, still suffer poor and unreliable electricity supply, slow Internet speeds, high data costs and poor road network.
The report said, “Nigeria is not even in the top five countries on the ranking of start-ups by country of incorporation. It appears that most start-ups operating in Nigeria that raise capital are not incorporated in the country.
“As Africa’s top ecosystem, Nigeria ranks considerably low in Ease of doing business. Start-ups in Africa approach investors in two main ways: the “Nigerian way” – incorporating outside of the country, and the “Kenyan way” – whereby they seek capital within their country of incorporation.”
The report noted that Nigerian start-ups continue to dominate the fintech sector, largely due to fair regulations being put in place by major banks and the large population that remains unbanked and unconnected.
In 2020, fintech captured a quarter of the equity funding – with multiple big deals conducted, including Flutterwave’s astronomical raise and Paystack’s acquisition deal.
A start-up investor, Kepple Africa Ventures, was quoted as saying, “I had to spend a year to finish the registration of my local entity in Nigeria, and to get my business permit and residence permit. Until you get a residence permit, you cannot even have a local bank account, so I was unbanked for the past year. These things negatively affect investors’ sentiment and are very discouraging, actually.
Unless they significantly improve [the ease of doing business] it’s very difficult to see more foreign VCs having local operations. If you don’t have lots of VCs having local operations, it’s difficult to close the gap [that we see in investment] for seed-stage start-ups. It’s very difficult to invest remotely into seed stage start-ups.”