Fakoyejo OlalekanIn 2019, Nigerians were shocked when the African-based e-commerce platform, Jumia, described their online marketplace as a German company.
Jumia erased the thought among Nigerians that the firm is a Nigerian or even African firm as it seeks foreign investment through Initial Public Offering (IPO) on the New York Stock Exchange (NYSE).
Join our WhatsApp ChannelThe e-commerce giant didn’t just detach itself from the continent where it has operated for seven years before going public in 2019, it also snubbed the stock exchange of its largest market in Africa, Nigeria, by pitching a tent in the United States equity market.
But if Jumia’s revelation as a German company was shocking, more shock awaits many Nigerians when Technology (Tech) companies founded by Nigerians start travelling the path of Jumia for public investment.
Currently, Nigerian Tech startups are still raising funds in the private market through various stages from pre-seed to Series level, so the majority of their details are still private or rather, in plain sight, with little or no attention given to them.
With Nigerian Financial Technology (FinTech) giant, Flutterwave, preparing for an IPO in the United States, discussion regarding the documented identity of tech companies operating in Nigeria has began to creep up.
So Prime Business Africa took a look at some major reasons startups owned by Nigerians are incorporating outside Africa’s largest economy.
Nigerian-owned startups calling foreign countries home
There are about 481 tech startups operating in Nigeria, but only a handful are household brands, and this category of technology-driven firms is domiciled outside Nigeria.
Companies like TeamApt Inc, Flutterwave Inc, Paystack, Paga, Aladdin Scheme Limited, Branch, Patricia and Andela are some of the firms operating as foreign entities in Nigeria, but founded or co-founded by Nigerians.
In simple terms, they are owned by Nigerians, and operate in Nigeria, but are foreign companies on paper based on the location of their incorporation.
Prime Business Africa understands that these Tech or FinTech companies favour two states in the United States, Delaware and San Francisco, as locations for their headquarters.
Why do these Tech firms favour foreign identity?
A quest to bag foreign investors: While Nigerian investors have began to take interest in Nigerian startups, the firms still prioritise foreign investors, and to attract international funds, there is a need to situate outside Nigeria.
Nigerian startups that domicile their firms in the United States have a higher chance of raising funds than startups incorporated in Nigeria.
Shedding more light on the growing trend, Bemigho Awala, Chief Storytelling Officer of Storywoxs54, a bespoke PR and Communications Management Consultancy based in Lagos, told Prime Business Africa that incorporating in a country like the US is business driven.
Awala said it is strategic, as it opens access to venture capital funding, “The decision by many start-up founders to domicile their firms outside Nigeria is primarily a strategic and business-driven one. In fact, many of these organisations are registered as a Delaware C-Corp.
“One key reason behind this move is access to venture capital funding. During this past week, I recall seeing a tweet by a VC about how he doesn’t give your start-up a looking if you are not a C-Corp.
“Because many founders have fundraising at the back of their minds when they embark on this entrepreneurial journey, it is only pragmatic to choose an option that allows you to have increased capacity that C corps offer for example having an unlimited number of shareholders is a huge advantage for businesses that are looking to raise capital,” he said.
Tax and other issues: Incorporating in the United States, companies are subject to 25 per cent corporate income tax (CIT), whereas, in Nigeria, they are mandated to pay 30 per cent.
Also, Delaware doesn’t require a business license if the core business is not situated in the US state. Aside from this, it has an incomparable tax saving: “There is no state income tax for Delaware corporations that conduct business out of state; no inheritance tax on stock held by non-Delaware residents;
“no state sales tax on intangible personal property (such as royalty payments); and shares of stock owned by non-resident aliens are not subject to Delaware taxes,” the state mentioned in a statement obtained from its website.
Political uncertainty: Due to the political uncertainty in Nigeria, startups also protect their entity by incorporating overseas.
Foreign incorporation enables startups to save their international investments outside Nigeria, helping them hedge against the political risk that the country is exposed to.
The political uncertainty also raises policy concerns, which prompted Flutterwave co-founder, Iyinoluwa Aboyeji, to state: “If you are a tech company operating in Nigeria you should definitely have a detailed ‘if the government bans our business plan’ as part of your strategy. So important.”
He made this known in a Twitter post, explaining further: “But anyone who thinks the politicians will stop attacking the industry despite appeals is living in Eldorado. You are just negotiating with the taliban.”
His statement highlights many policies that have been implemented by state governments, one of which is banning the bike-hailing firms in Lagos that resulted in job losses, and forced startups in the space to pivot into the last-mile market.
Storywoxs54’s chief, Awala, opined that when local investors begin to offer business-friendly terms of engagement, Nigerian startups will start considering incorporating within the country.
“Well, a lot of these businesses are also registered in Nigeria as corporate entities as well. It’s just that they’d probably flaunt the foreign registration for reasons of expediency.
“That said, one surefire way to encourage more local incorporation of these businesses is the active participation and business-friendly terms of engagement by local investors.
“I recall in the past when start-up founders will say local investors are asking for an arm and a leg and want a huge chunk of your business while they are at it. But I think we are beginning to see some positive movement on this front with local investors who get it.”
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