Nigeria currently possesses the biggest tech market on the African continent, with thousands of tech companies sprawling from across the country. Tech in Nigeria has become a strong force to reckon with, contributing significantly to the country’s GDP.
Nonetheless, the Nigerian tech industry has been faced with a lot of challenges, paramount among these troubles is funding for startups and a considerably tax-tolerant environment. To that end, Nigerian tech startups have moved to register in other jurisdictions to meet these concerns; one such jurisdiction is Delaware in the United States.
This article offers insight as to the causes attracting Nigerian tech startups’ drive to incorporate in Delaware.
The Nigerian Startup
As of September 2022, Nigerian startups jointly had raised over 2 billion dollars in total, with over 90% of that entire revenue coming from foreign investors. Startups’ drive to incorporate in foreign countries is principally guided by these figures.
In 2022, the Nigerian government signed into law the Nigerian startup Act, which seeks to, among other things, offer funding support to Nigerian startups. Nonetheless, the biggest of the startups in Nigeria are registered in foreign countries; a survey in 2021 showed that seven in ten startups choose Delaware to incorporate their presence, with Mauritius, and Dubai coming in at 2nd and 3rd place.
Why Nigerian startups register in Delaware
1. Venture capitalist firms requirement
When seeking funding from a venture capitalist firm, most often, there is a demand that the company to be funded isn’t situated in some countries or continents, including Africa. The cause of this trend is largely political, with some countries having varying political instability, policies that affect the overall success of the startups are bound to be made.
To avoid these unfavourable policies, venture capitalist firms demand that startups seeking funding must be registered in certain jurisdictions, including the United States. This affords the investor to gain increased assurance in the success of the business; the reason being that as an international company, the startup can seek compensation for abuse by the Nigerian government and can call on the country of registration to intervene.
2. Hopes of expansion
A majority of tech startups in Nigeria were established with the hopes of expanding into the global market space; with this expansion idea in mind, startups move to gain a presence in countries that appeal to the global market to expand their user base.
The US is currently the world’s biggest financial and tech hub having over 30% of the world’s unicorns. The US is also the headquarters of some of the best-performing tech companies in the world, from Amazon to Microsoft, Meta, Alphabet and others; this leverage the US has in its market has attracted thousands of Nigerian startups to register in the US market.
For Nigerian startups, having a presence in the US or a foreign country places them at an advantage to trade with startups that are domiciled and doing business in the US.
3. Strong financial environment
Perhaps the most significant reason for Nigerian tech startups incorporating in Delaware. The Nigerian financial sector is principally guided by the Central Bank of Nigeria and dominated by commercial and micro-finance banks.
This trend offers a limitation because the banks are positioned to offer funding on a low-risk basis after extensive due diligence and credit checks on the corporation, in addition to the collection of assets of the corporation by the bank.
For startups, especially those in pre-seed and seed funding stages, the banking system would not be best suited, banks would be sceptical of investing in startups that are yet to have a single client and are still in the building stage.
The likelihood of the bank’s funds not being paid is high. In the United States, the financial sector is largely different; the US has a strong financial industry played by hundreds of venture capitalist companies with a combined value of over 60 billion dollars. Nigerian startups can register to tap from this wealth to improve their establishment back home.
Delaware operates a more private and commendable system than any other in the world. Company records do not disclose the officers and the directors of the company, also, the company records are rarely given for public concerns.
These factors cause an overreaching attraction to Nigerian startups, who seek presence in a foreign jurisdiction but want to hide under a veil to offer services and gain investment funding in the long run.
For flexibility, hundreds of platforms offer services for the incorporation of foreign businesses in the state of Delaware, some states in the US or countries globally can be difficult to find, but Delaware has a series of agents that help to get startups registered.
5. A progressive legal system
The Delaware legal system is one of the most progressive in the United States in particular and the world in general. The legal system is filled with excellently progressive laws that meet companies’ present concerns, following tax holidays, tax efficiency laws, reduced duties and VATs, just to mention a few.
The progressive legal sector of Delaware is guided principally by a strong relation and favour to corporations in the state, this has seen thousands of corporations move headquarters to the state. Nigerian startups hope to benefit from the Delaware tax and corporation-friendly atmosphere to scale their business needs. This saves the startup costs as the investment would be made tax-free to the startup.
6. Free market
Delaware operates a free market economy for corporations in the state. There are little or no restrictions to foreigners owning and registering a business in the state, corporations can register with a single shareholder and a single director; corporations need not have a physical office or a resident shareholder or director. In addition, minimum share capital isn’t required, companies can choose whatever form of the corporation they intend registering from Limited liability company(LLC) to series LLCs and others.
Startups in Nigeria have come a long way by breaking the odds in a conservative country to pull through to becoming Africa’s largest tech hub. Nonetheless, with the coming of the Nigerian startup Act 2022, experts hope that the fears pushing Nigerian startups to incorporate in foreign countries can be laid to rest.
Frequently Asked Questions (FAQs)
Dubai, Panama, the Cayman Islands, and others have strong tax-free economies
Kenya is the second largest tech concentration on the African continent.