A new report from Disrupt Africa finds that 301 tech start-ups are currently active in the African financial services sectors. These fintechs as they are called, were launched over the last two years, the report notes.
South Africa, Kenya, and Nigeria are identified by the report as the top destinations for fintechs in the continent. Fintechs in Africa have so far secured $92,679,000 from 2015 when the space started witnessing boom.
The attraction for investors lies in the large number of African citizens without access to basic financial services. Nigeria for instance, with its over 180 million people, can only boast of 26 million people with bank accounts. However, 98 percent of the bank account holders have less than N500, 001 saved. On one hand, the numbers might pose a challenge for financial inclusion but it also portends opportunities for start-ups in financial services industry.
Tom Jackson, co-founder of Disrupt Africa explains that “Fintech is clearly a vibrant space within the African tech scene, perhaps the most vibrant of all. Increasingly, investors are seeing the huge potential the space has to offer.”
High risks also accompany big potentials.
The business environment in front-line fintech countries like Nigeria is seen as highly volatile by many analysts. Many things can go wrong with an investors’ money. Hence it is important that investors look beyond the hype of the industry and look for the real substance that can guarantee return on investment.
Whether you are investing through a venture capital firm or as an angel investor, certain clarifications might help put your mind at rest. Let’s look some of the questions.
How far are you willing to be involved?
The outcome is slightly different for both angel investors and venture capitalists. Whereas an angel investor will be granted equity stake in the fintech giving them the opportunity to participate in decision-making, the venture capitalist takes a sit-down-look approach. To be sure, the venture capitalist will get equity share but they do not come with same level of control as an angel investor. The venture capital firm acts as middleman for the investor and the fintech.
How long do you intend to wait?
Whether you are investing because of profit or to bring about a desired change in the society, you must think about the time frame you are willing to wait to see results and remove your money. Although taking a long-term approach when it comes to investing is usually the best, but in the world of tech start-ups seven to ten years is largely recommended.
If the money you intend to invest cannot wait long term or bear risk taking, it is safer not to invest it in a fintech.
According to Salami Abolore, founder of fintech firm, Riby, startup owners do not start making money until at least three years after building their software. There is the stage of testing whether people will like and embrace the product and then going back to improve on the software.
What is the expected rate of return?
This is one of the important questions that both investor and fintech must clarify before committing money and equity. Again, it may vary for angel investors and venture capitalist. An angel investor might get something in the region of 30 to 40 percent in annual returns but venture capitalists are likely to expect a higher annual return based on the higher risk they take.
How will the investment impact outside portfolios?
Any solid investment portfolio must take into cognisance diversification. Do not put your money in one investment basket is an age-long financial advice that never goes out of fashion. It is important to find the right balance.
Do you have a clear strategy?
You must have a clear exit strategy before investing in the fintech. Find out when you can draw your from your investment or sell your equity shares in the start-up. If it is not clarified, better to wait with your money or look somewhere else.
FRANK ELEANYA
