The story of Paystack, one of the most important Nigerian startups to date
The story of Paystack, one of the most important Nigerian startups to date
Built on a pragmatic yet ambitious vision, Paystack is now widely considered to be one of the most consequential African startup success stories of this past decade.
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Back story
The Paystack story begins with two computer science graduates from Nigeria’s Babcock University, Shola Akinlade and Ezra Olubi. Shola got the initial idea for Paystack while working as a consultant for Nigerian banks, building software for them. He realized that he was able to charge his card directly from the software he built, disintermediating the many steps he thought were required to do so.
He went on to hypothesize that this system could be used by Nigerian merchants to easily accept a wide variety of payment methods. Until then, most of the so-called payment gateways/processors such as Interswitch were built with a focus on large companies, making them too complex and expensive for the traditional Nigerian SMB to integrate. Shola decided he could change that by building Paystack, a multi-channel payment processor for Nigerian merchants enabling them to accept all forms of local and international payment methods.
Understanding the future success of Paystack requires grasping the potency and dire need for their product, but also both founders’ pedigree. Ezra had spent almost a decade working in a variety of tech roles in Nigeria while Shola had already expressed his propensity to entrepreneurship a couple of years prior.
“He (Shola) took his first shot at entrepreneurship when he founded Klein Devort, a software development and consulting company, with his friend, Mayowa Okegbenle in 2008. Their flagship product, Precurio was designed as a collaboration and content management platform for the mid-enterprise segment and businesses in emerging markets. Akinlade said that the inspiration for the project was Dropbox. Within five years of running this company, the duo had grown their small idea and had over 200,000 companies using it. It had been downloaded over 150,000 times and was available in six different languages.” - NairaMetrics
Paystack would be founded in 2014, with Shola tapping Ezra to become a co-founder just before getting accepted into the Y-Combinator W2016 batch, becoming the first Nigerian startup to do so in the process. YC was convinced by the elegance and clear need for the product the pair was building. The fact that Paystack often pitched itself as the “Stripe for Africa” (Stripe being one of YC’s biggest success stories) also helped their case.
The Paystack product and why it works
Prior to Paystack, Nigerian SMBs had a hard time accepting and processing the wide variety of existing payment options, such as card, QR code, bank transfer, etc… Even harder was the processing of online payments, where consumer trust and ease with the method was low, as well as international payments, which were made complex by the myriad of steps required for them to work. While solutions started to emerge at the start of the 2010 decade, they weren’t adapted to the small Nigerian SMB.
Paystack, as its name suggests, aims to aggregate all of the middle steps in the payment process (gateway, risk management, processing) in order to provide merchants with a one-stop shop to accept payments. Paystack hit the jackpot due to the confluence of two factors: the severe need for their product combined with the explosive growth in Nigerian e-commerce. As Shola states on the YC podcast:
“In 3 years, Paystack was processing 3 times the entire size of what the Nigerian e-commerce market was when they started. In 2019, at least 50% of online transactions in Nigeria were processed by Paystack.”
While building their product, Paystack followed the Stripe ethos in providing developers with well-documented and easy-to-integrate tools. The company’s ambition is to become a platform on which innovators across the continent can create and easily get paid. By changing the fintech paradigm from a two-player (buyer/merchant) to a three-player game (buyer/merchant/developer), Paystack is creating a powerful ecosystem of builders around its product.
Paystack’s success can also be explained by its local roots and the way it adapted its solution to the population it was serving. For example, many of the customers using Paystack for the first time were also paying with a card online for the first time. This meant tweaks in UI in order to carefully guide the customer through the process of online transactions. The Paystack team also understood that trust in online payments was low in the country and needed to be reinforced. Shola recounts that one of the first features Paystack merchants asked him for was to put up billboards across Nigeria in order to demonstrate the safety and viability of Paystack.
Lastly, a relentless focus on payment success explains the strong and reliable brand identity Paystack has built. The company has far exceeded its initial vision of serving Nigerian SMEs, as the Paystack product is now used by corporates such as Dominos and Axa insurance alike.
An aptly managed ship
Throughout the course of its existence, Paystack has always stood out as a pragmatic and serious company, set on shipping new features instead of participating in online hype. Their modest fundraising as well as the astute choices they made when choosing how much and from who to raise demonstrate the founders’ strategic shrewdness.
Following a local seed round and YC’s investment, Paystack raised an $8M Series A in 2018 led by Stripe, Visa, YC, and Tencent. Notice that the round’s main investors are so-called “strategic investors” and not VCs. These investors have less of a vested interest in getting on a company’s board, which enabled Shola and Ezra to essentially run the company by themselves, with no outside board, for the entirety of its existence.
“Most strategics don’t want a board seat as they don’t want the fiduciary duty issues present with their own business and yours” - VentureDeals
Over the course of its run, Paystack only raised $10M while growing at an extremely rapid rate, demonstrating sharp capital efficiency. In my opinion, this is strongly influenced by both founders’ technical backgrounds, which made them more interested in coding away and shipping instead of spending months on fundraising roadshows.
The Stripe acquisition
The Collison brothers (Stripe’s co-founders) have kept their eyes on the Paystack team from the very start. By way of their common YC bloodline, relationships between companies were warm from the get-go. Indeed, Paystack solves a thorny issue for Stripe. Payment processing involves forming relationships with local banks, which Stripe hadn’t done in Africa. The sheer size of the market and its demographic potential made Stripe’s expansion to the continent inevitable, and Paystack seemed to be the most convenient way to do so. Indeed, Paystack had spent years curating and building the coveted relationships with Nigerian banks, a feat Stripe probably didn’t have the time or energy to do from scratch.
In 2020, Stripe acquired Paystack for over $200M (the total amount was undisclosed), sending shockwaves throughout the Nigerian startup ecosystem. The exit was substantial in numerical numbers of course but was also significant due to the true Nigerian nature of Paystack, built by Nigerians for the Nigerian and subsequent African market. The acquisition also validated the potential of the African digital economy.
“There is an enormous opportunity,” said Patrick Collison, Stripe’s co-founder and CEO, in an interview with TechCrunch. “In absolute numbers, Africa may be smaller right now than other regions, but online commerce will grow about 30% every year. And even with wider global declines, online shoppers are growing twice as fast. Stripe thinks on a longer time horizon than others because we are an infrastructure company. We are thinking of what the world will look like in 2040-2050.” - TechCrunch
Paystack’s impact on the Nigerian startup scene
Paystack’s success also represents an important PR event for the entire Nigerian startup scene. The numerical success of Paystack and its exit finally put numbers to the African demographic and growth opportunity many analysts continuously rave about. More importantly, Shola and Ezra have become an invaluable resource for scores of Nigerian founders: relatable role models.
On the investor side, Paystack’s exit is early validation of the Nigerian/African VC asset class’s viability. Indeed, emerging startup ecosystems often lack funding but it doesn’t mean the cash isn’t present in the ecosystem. Rather, local institutional investors and HNWIs understandably aren’t convinced by an asset class that has produced no relevant return. Paystack is the type of story that unlocks that Catch-22 situation, with local and international investors taking the African VC class more seriously. While not the sole factor contributing to the explosive growth of Nigerian VC funding from 2020 to 2021, I can’t help but think Paystack’s exit played a big role in it.
Finally, the ecosystem has benefitted from the inevitable creation of the Paystack mafia, made up of technical profiles trained by the Paystack coding excellence culture. As reported by TechCabal, here are a couple of companies founded by ex-Paystack employees, including:
Conclusion
Paystack is one of those startups that transforms an ecosystem. It was the first Nigerian company to get into YC, judiciously managed its funding rounds, and built a respected product that is now more and more ubiquitous in its target markets. Today, the Paystack story has become the standard to follow for many other African startups, going back to the importance of the relatable role models I talked about earlier.
Paystack has shifted the paradigm of the Nigerian and African startup ecosystem at large. And that means that for now, its impact is still unquantifiable.
The Realistic Optimist provides weekly, in-depth analyses of some of the hottest stories in our now-globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with your colleagues :)