The difficulty of doing business in Lagos is driving out tech startups

When East-African motorcycle-hailing startup SafeBoda announced its expansion to Nigeria last year, the initial plan was to launch in Lagos — the major economic hub. But that soon changed.

The startup’s proposed expansion came in the thick of regulatory tensions between Lagos’ state government and motorcycle-hailing startups that had grown ubiquitous on the premise of offering flexible, faster and on-demand transport in a congested city home to 21 million residents. Lagos’ proposals for expensive licenses as well as episodes of harassment faced by other startups at the hands of local transport unions ultimately proved defining for SafeBoda which instead chose to launch in Ibadan, a major city in Nigeria’s southwest that’s two and a half hours from Lagos.

It’s a snapshot of the simmering sentiments among industry stakeholders as they rethink the merits of setting up shop in Lagos amid the state government’s increasingly costly regulatory environment.

Indeed, after proposing pricey licensing fees for motorcycle-hailing startups, the government effectively banned them from operating in the state within a year, forcing some to sell off assets at a loss. The government’s long regulatory arm has recently extended to ride-hailing firms like Bolt and Uber who are set to face a new licensing and service tax regime. And, as the state deals with the economic effects of the coronavirus pandemic, there are indications that its tax drive will not be slowing down.

Beyond taxes, startup founders and ecosystem leaders are also weighing other costs that come with doing business in Lagos. The city’s notorious traffic jams make commuting a stressful daily routine, impacting productivity and quality of life. The associated higher costs of living in Africa’s largest city also drive up companies’ overheads and employees’ living expenses.

It’s why Sim Shagaya, former founder of Konga and stalwart of Nigeria’s Lagos-based tech ecosystem, chose to base uLesson, his new edtech startup, in Jos, a hill-top city in central Nigeria. “The question for me was if  it was possible to assemble people, pay them a “Lagos wage” but base them here, and the implications it had on employee retention and happiness,” he says.

More than a year later, Shagaya is convinced it was the right call and believes the startup and its employees are better for it, with the company able to offer additional perks like housing and shuttles to and from work as a result of running lower operating costs. “What we’ve done will show people that this can be done,” Shagaya reflects.

Lagos traffic

Just another day in Lagos…

Leaving Lagos

As Quartz Africa previously reported, startup ecosystems started sprouting outside Lagos as much as five years ago just as tech hubs have emerged beyond legacy tech markets across the continent. But it’s a process that could be sped up in the wake of increasing difficulty of doing business in Nigeria’s economic capital.

Yet, looking beyond Lagos is a significant call for startups given the city’s standing as an economic powerhouse. Lagos has long been the epicenter of Nigeria’s $2 billion tech and startup sector and is home to Africa’s most valuable tech ecosystem. As startups also chase local scale and profits, Lagos offers the tangible prospect of Nigeria’s largest middle-class and consumer market — core targets for most startups.

As such, Bosun Tijani, founder of Co-Creation Hub, a prominent startup accelerator and incubator in Lagos, admits businesses that “interface” with the economy of the city will still require some operations in Lagos despite a move away. That’s the case for uLesson which has over 80% of its staff working at its Jos campus while maintaining a Lagos office for finance and fulfillment.

“It depends on your business model and how operationally intensive the Lagos component is,” Shagaya explains. uLesson’s model of building a content library and serving customers digitally and remotely meant a Lagos base for the company’s core engineering and content development staff was not essential. Another prominent example is TechMahindra, the Indian-owned business process outsourcing firm which expanded to Nigeria in 2011 and operates from a 171,000 sq. km center in Abeokuta, 48 miles outside Lagos.

As remote working options improve talent mobility and startup culture deepens across the country, tech veteran Victor Asemota argues more companies will look beyond Lagos. “The reason tech companies are located in Lagos was not because of market but infrastructure and talent,” Asemota tells Quartz.

As it turns out, some states are doubling down on building enabling infrastructure as they grow wiser to the opportunities that come with offering an alternative to Lagos. For instance, Ekiti, a southwest state that’s 200 miles from Lagos and known for high literacy rates, recently slashed broadband installation fees by 96% to boost local internet penetration and attract new businesses. For its part, the government in Edo, a state in Nigeria’s south, also funded and launched a tech hub two years ago to foster innovation and digital skills training.

Such proactive moves are a marker of intention, Tijani says. “Their growth as a business cluster will be based on something tangible rather than wishful thinking,” he tells Quartz Africa. And with benefits ranging from job creation and growing local tax bases to the impact of skill and knowledge transfer to locals, the upside of being a viable alternative to Lagos is clear.

Perhaps the most damning evidence of the shifting sentiment about doing business in Lagos is that long-time champions of the Lagos ecosystem, including Shagaya and Tijani are endorsing moves away from the state.

“The idea that Lagos is the be all, end all is no longer true,” says Iyin Aboyeji, the popular co-founder of Andela and Flutterwave, who has chosen Calabar in Nigeria’s south as the base for his new investment firm, Future Africa. “Lagos has a lot of competition now.”

Leave a Reply

Your email address will not be published. Required fields are marked *