The gestation period to profitability in a typical Nigerian startup is long. That long gestation is also the reason why many startups or small businesses collapse few years of founding. Typically, one way to deal with this is to raise capital, ramp up market entry to grow fast enough to attain profitability. But in our extreme volatile economy, if the timing is off by months, the company can collapse. You just run out of cash.
This is one problem we deal with in my Practice as we work with clients: how do you invest without getting into a trap where one sneeze in Saudi Arabi or Iran [America coming with shale gas] can kill your business because Nigeria’s economy would be affected due to its dependence on crude oil.
According to a report by Pearl Mutual, a consultancy, an average of 5.7 million Nigerians are considered to spend within US$10 to US$20 per day. The country has an estimated $115 billion annual consumption spending.
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That is a big one but the market is extremely fragmented that economies of scale rarely happen due to lack of infrastructure. Kano and Osogbo have little in common except that Osun and Kano states go to Abuja to collect cheques monthly. So the average national statistics has little meaning in the real execution of business strategy in Nigeria. We have heterogeneous markets making things more challenging.
While you may think that raising capital may help you, most people have noticed that you can raise capital and still crash. Think of Efritin which just gave up on Nigeria. It happens daily. They think that market growth is the solution when the path to profitability is what matters [path to profitability may not matter to a U.S. founder because they have massive sources of new capital. We rarely have here].
Yes, your new business problem in Nigeria is not just capital but the long gestation period required for profitability, affected by many factors at scale.
We have refined a strategy on this problem for consumer facing startups and companies. We have noticed that when clients deploy that model, they attain better outcomes. We ask firms to discover “anchors”. And when they do, they always do well.
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Advisory Services: Most times, after our presentations and workshops, clients usually engage us for Advisory Services. This is totally decoupled from the first two. In other words, you can engage us for either the presentation or workshop without the advisory services. Yet, we always welcome the moments when clients ask us to come and lead the implementation. Because we are already practitioners, making things happen is always the most exciting part of our works.
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Back in school we were thought that the gestation period for new firms is 5 years. Within this period the firm could fail or make profit. In my final year project and that of my colleagues, our results showed that Nigeria’s economy doesn’t always conform to theory. Thus, start-ups in the country won’t attract much FDI having longer gestation period.
Using technology companies, one will need scale. Your 5 years should be fine but in Nigeria you are a LGA as you provide your water, light, security, etc and those make getting to profitability harder. That is why most of the startups keep raising money – buying generators, etc which should not be in any balance sheet in most economies.
True. This reminds me of a market feasibility gig I did for a potential foreign investor in 2015. When I presented her with the result she concluded that “Doing business in Nigeria is expensive. In my country (the USA) everything works. I can’t invest now. Maybe later in the future let’s keep our fingers crossed.”
Please tell her that the future is really DEEP into the ages as nothing is going to change in Nigeria very soon.