A number of agritech start-ups in Nigeria have transitioned into proper companies, yet the majority struggle to scale. Our recent report AgriTech in Nigeria: Investment opportunities and challenges shows that low awareness of, funding opportunities and limited access to funding are key barriers to scale for most agritech entrepreneurs.
Funders active in the Nigerian agritech space include incubators, accelerators, angel investors and donors – all of whom tend to invest during early funding stages or in established companies. Agritech companies in Nigeria typically face three major funding gaps: limited availability of local capital, lack of institutional investors focusing on agritech, such as impact investors, development finance institutions (DFIs), venture capital and private equity firms, and inability to attract big-ticket investments. Our report on agritech investment in Nigeria looks at investment challenges that agritech companies experience and the how these funding gaps can be filled.
As part of our research for this report, we spoke to Oluwatoyin Emmanuel-Olubake, Acumen’s Associate Director of Portfolio in West Africa. In light of the COVID-19 pandemic, we revisited our earlier discussion to find out how the pandemic has impacted the agritech investment landscape in Nigeria. Here is what he had to say:
How has the COVID-19 pandemic affected investment in start-ups in Nigeria?
Investors have found it difficult to carry out due diligence while lockdowns, social distancing measures and transport restrictions have been in place. People are unable to move around freely, which has hampered site visits. These visits are an essential part of assessing an opportunity – particularly for investments beyond seed stage. While some roadshows have been carried out online, these do not work as well as face-to-face interactions. COVID-19 has also led to economic uncertainty, which is likely to have led to many investors to scrutinise potential investments in greater detail than they normally would.
The impact of lockdowns in different countries on the commercial thesis for investments is also unclear. For some sectors, such as fintech and logistics, investment appetite has increased. Investors see a growing need and reliance on cashless transactions. In contrast, for other sectors, such as hospitality and travel, there has been a lower level of interest. However, this could change over time.
How do you think investment in the agritech sector has been affected?
The broader agricultural sector, including agribusinesses, agritech companies and the farmers and rural communities they work with, have felt the material changes brought by the pandemic, such as the delays and inefficiencies in the supply chains. We may continue to see the long-term effects on agricultural value chains and supply chains.
However, there is still appetite to invest in agritech, particularly in early stage companies. Any reprioritisation of food security would impact investor perceptions. If local consumption reduces its dependency on imported goods, we may see a growing desire to invest in agritech. Still, there is some uncertainty in the types of solutions you can deploy capital in now compared to late 2019.
During the pandemic we have seen growth of agri e-commerce platforms connecting farmers with local consumer markets. Do you believe that this growth of e-commerce has improved investors’ perception of agritech?
Many agritech companies struggle to convince investors because they overestimate the role that technology might play in overcoming current challenges in the agriculture sector. In other words, they underestimate the importance of “offline”, non-agricultural activities to support their digital solutions. Agri E-commerce is a good example: For a platform to be successful, it must be supported by efficient logistics and warehousing infrastructures.
For investors looking to invest in agritech, the core issues at stake are accessibility, affordability and applicability of a digital solution. What this means is that solutions should bring about a number of different changes rather than simply incremental changes. For instance, only a certain demographic can afford a solar home system. For many people, this is out of their reach. You need a lower-cost product that is priced appropriately and easy to distribute. In this case, mobile money-based pay-as-you-go solar systems that are distributed through partnerships are ideal because users can access solar energy based on their means. For smallholder farmers, simply providing a technology tool that addresses the pain points they experience may not be enough. Any technological solution should be accessible, affordable and applicable from the onset. This is what investors would be looking out for.
Despite increasing awareness, COVID-19 has not yet accelerated these learnings. Some digital [agriculture] solutions have helped to deliver change, but perhaps not quickly enough. Across a number of countries, statistics on agricultural productivity and the volume of imports have yet to change significantly. Some agritech companies have been working to develop very good ideas into solutions. Within the industry, it feels as if good car parts are available but the car has yet to be built.
Do you think that a shock like COVID-19 will lead to an increase in the availability of patient capital, which can be invested and recouped over a longer time frame as opposed to traditional investment from profit-focused investors?
For those deploying patient capital, there is likely to be an increase in intention and appetite in providing patient capital. When a shock like this occurs, there is usually a need for patient capital. At the moment, there has been some emergency funding available. For example, Acumen has received and allocated some emergency funds. The rationale for this type of funding is different to long-term investment, however there is a long way for philanthropic funding to move towards these types of investments. Perhaps the need for patient capital could be a good opportunity for domestic investors to get involved.
With the pandemic leading to an economic slowdown globally, are we likely to see local investors play a bigger role?
Local capital is a crucial source of funding, and there are advantages to local capital over foreign funding. There are perspectives and passion that local investors can bring that would add value and context to an agritech company (or any company seeking investment). Local investors can also relate to the different challenges that agritech companies will have endured and provide guidance on how to navigate through any similar issues. Non-local investors will also be able to add value in different ways but may lack the local market experience and context.
With the ongoing pandemic, it is still too early to tell if there will be a strategic shift to local investment across countries in Sub-Saharan Africa. Significant sums of money have been given towards efforts against COVID-19, but there has been a lower level of desire to support low-income sectors. For agritech in particular, we have yet to see a strategic shift, but this could change.
Find out more about the opportunity to drive investment in the agritech sector in our report – AgriTech in Nigeria: Investment opportunities and challenges.