Startup Funding: Raising Capital as a Startup in Nigeria

Seun Timi-Koleolu
Aderonke Alex-Adedipe
A major indicator that a startup may thrive is the availability of capital.

Lack of financing is a major constraint which businesses experience at the startup phase. Seed capital is required for startups to fund their operations and scale, thereby returning profits to founders and investors.

A major indicator that a startup may thrive is the availability of capital. Where capital is low or inadequate, the business operations will be impacted and the startup will likely fail. Research conducted on small businesses in the U.S. indicates that 79% of businesses fail because they start out with too little money and are unable to fund their operations.

It is therefore essential that founders are familiar with the several ways in which capital may be raised and identify the funding path that is best suited for the startup. Below are several funding sources that founders should consider when seeking capital.

  1. Crowdfunding

The proliferation of technology has seen the emergence of digital solutions aimed at solving every day problems. An example of this is the growth of crowdfunding sites which enable founders raise funds from the public. Crowdfunding[i] entails pitching the business idea of a startup to willing investors via an online platform. Investors may receive equity in exchange or a percentage of interest over a period of time. Crowdfunding is particularly advantageous to founders because they can decide the terms of the investment and easily retain control of their company.

  1. Incubators and Accelerators

Incubators and accelerators nurture and prepare startups to scale. Incubators are focused on startups  at the conception stage while accelerators target startups that are viable and ready to scale. Startups who successfully pass through incubators or accelerators typically receive a seed investment at the end of their program from the incubators/accelerators or investors/mentors introduced to the startups in exchange for nominal equity.

  1. Business Loans

Although, not typical, startups may apply for loans from banks or microlending companies. These may however attract high interest rates. Startups therefore must consider their revenue flow and ability to repay loans obtained from banks and other lending institutions.

  1. Angel Investors and Venture Capital Funding

Angel or seed investors typically fund startups at the beginning of their lifecycle while venture capital firms usually provide funds to startups that are viable with a recognized customer base and established revenue stream. These funding sources provide much needed capital in exchange for equity in the startup. The terms of the funding and equity participation are contained in agreements such as Simple Agreement for Future Equity and convertible loan agreements.

  1. Bootstrapping

Bootstrapping means growing a startup without external funding. Startups would have to rely on funding from its founders to operate and rely on revenue from sales. Bootstrapping is perhaps the toughest method of funding startups as it means that growth might be stifled or delayed due to the absence of funds required to scale their operations. However, where founders subsequently decide to receive external funding, it portrays a sense of seriousness to investors that the startup depended on the sweat and faith of its founders to grow and generate revenue. With bootstrapping, founders are also assured of absolute creative and operational control of the startup.

Conclusion

Although there are several sources of funding which startups can take advantage of, startups must consider which funding source is most suitable by weighing the pros and cons of the funding options available to them.

[i] Equity-based crowdfunding in Nigeria is potentially regulated by the Securities and Exchange Commission (SEC). Please find our article on the crowdfunding rules proposed by SEC here https://pavestoneslegal.com/review-of-the-crowdfunding-rules-proposed-by-sec-nigeria/

You can also watch a brief analysis of the crowdfunding rules by our Partner, Aderonke Alex-Adedipe, here https://furtherafrica.com/2020/05/05/insights-funding-startups-in-nigeria-video/

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About the author

Managing Partner

- Nigeria

Seun Timi-Koleolu is the Managing Partner of Pavestones, a modern full-service, solution driven and commercially savvy law practice with a particular interest in technology and innovation. Pavestones is licensed by the National Information Technology Development Agency of Nigeria as a Data Protection Compliance Organisation in Nigeria.Seun has substantial experience in protecting the interest of businesses in various industries and driving the successful completion of major regional and cross border transactions, including the first major Information Technology Outsourcing Project in Africa.  As a result of her passion for supporting the growth of businesses particularly companies utilising technology to solve problems, she works  with a team of lawyers to assist such companies in understanding their regulatory terrain and in pushing past barriers to the success of their operations. She also advises these businesses on data privacy and the proper use of data to further their business.  She is recognised as a highly skilled commercially minded lawyer, who is able to balance her passion for excellence with her desire to ensure clients achieve their commercial goals. She has strong strategic thinking skills, which she utilises to positively impact the growth of her clients’ businesses.She has a Bachelor of Laws degree from the University of Warwick and a Masters in Corporate and Commercial law from the University College London.

Partner

- Nigeria

Aderonke Alex-Adedipe has been in active legal practice for over a decade. She has extensive experience advising local and foreign financial institutions on project finance transactions, which cut across various sectors. She also advises local and foreign investors on the Nigerian business environment- regulatory requirements, business formation, corporate structures, investment incentives, immigration, local content requirements and general corporate commercial transactions. She has acted in conjunction with both indigenous and international law firms in advising on several commercial transactions. Aderonke has co-authored the Nigerian chapter for several notable international publications on Acquisition Finance and Commercial Law, including Getting the Deal Through. She also contributed to the text on Banking, Theory, Regulation and Law Practice which was edited by Dr. Dapo Olanipekun. Aderonke was recently recognised by IFLR 1000, a guide to the world’s leading financial law firms, as a Highly Regarded Lawyer in the Project Finance, Oil and Gas and Real Estate sectors. Aderonke was also recognised by the Esquire Nigerian Legal Awards as one of the 40 outstanding lawyers under the age of 40 who have distinguished themselves and are clearly setting new standards in the legal sector. She was previously a Partner at Strachan Partners where she was in charge of the firm’s Transactions department. Aderonke holds a Bachelor of Laws degree from Obafemi Awolowo University and a Master of Laws degree from George Washington University. She is a member of the Nigerian Bar Association.

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