Have you ever had that million-dollar idea you felt pretty good with, but could not pursue due to finance issues? How to set up a business and turn it into a unicorn company is one of several questions ravaging the minds of young entrepreneurs in Nigeria. Although the odds of startups being successful in Nigeria are not promising with one of the major problems being inadequate finance, we are here to offer possible solutions.
Now, let us look at possible finance sources according to the progression level of your startup business. Note that the progression of the business mentioned below is purely hypothetical.
Now, let us look at the major phases in startup financing: Seed Investment and Series Funding.
SEED INVESTMENT: In this phase, the startup is still in incubation. You explained the idea to a friend, and they loved it. You developed a business plan, things are getting serious, and now you need to buy work tools and pay CAC (Corporate Affairs Commission) incorporation fees. The work tools and CAC incorporation fees are costing about ₦300,000 to ₦1,200,000. Now, how do you raise the funds?
You could start by breaking into your savings. If your savings are adequate, you could bootstrap. If not, another source is required.
You could go to a Bank for a Loan, pitch the idea to them and they may approve the loan for you. If they do, you have gotten your seed investment.
You ask Friends and Family and they give you what they are willing to risk for a share of your company or just from their generous hearts. You have succeeded in raising part of your capital and you have some hope.
In need of more funds, you go to your Local Accelerators (these are local groups for youth empowerment). They see your business potential. They give you some money or other form of benefits such as service/product preorder, manpower or access to some tools.
The local accelerators inform you of NGOs willing to give out business grants. Grants could be obtained from NGOs or government institutions. You need to carry out your research to find these grant-givers.
You have gotten your seed money and your startup is operational. In addition, you could make use of Crowdfunding which involves requesting funds from strangers on the internet space through sites such as Indiegogo, GoFundMe, and Kickstarter, etc. The drawback with crowdfunding is that you must put in a lot of work into advertising your market offering and business model to the public and this is harder than it seems. This is because the givers must be very convinced to give out money to a stranger over the internet and there are lots of people seeking the same. The upside to this is that you get to feel the buzz for your market offering which will help you estimate the demand level for it.
SERIES FUNDING: Your seed investment can only take you so far. Unfortunately, just like most growing companies, you may incur losses in the early stages of the business. However, the confidence in your business model still exists so you need to obtain more funds. At this point, you then go into a series of funding: Series A, B and C. These are various stages where the startups seek funds from outsiders through equity investment i.e. the investors offer you funds in exchange for part ownership of the business. These investors could be Angel Investors or Venture Capitalists.
Angel Investors are individuals looking to invest in new startups with high growth potentials. They are usually people who have successful businesses of their own are looking out to be a part of ‘the next big thing’.
Venture Capitalists are firms that set out to invest in small, upcoming companies like yours. That is their business model.
You seek out these investors, hold meetings with them to convince them that your market offering is worth it. If they agree with you, you negotiate the percentage ownership of your business you are willing to give them and how much funds they are willing to invest. You may also choose to let them know of other investors. Upon the successful completion of this meeting, your Series A funding round is complete. Series B and C are similar to Series A. The difference is that they occur in the later years of the company’s life.
The business funding model is regularly reviewed for every business and this review is made easier when the business owner is aware of all the possible funding opportunities available for their business.
Please share with friends and families, drop your comments in the comment box, and engage with us via our social media platforms @ broadstreetfinancialreview on Facebook, Instagram and LinkedIn; @ broadstreet_fin on Twitter.
Thank you for reading and look out for our next article!
106 Must-Know Startup Statistics for 2021. (2021, August 31). Embroker. https://www.embroker.com/blog/startup-statistics/
Grant, M. (2021, November 7). What You Should Know About Startups. Investopedia. https://www.investopedia.com/terms/s/startup.asp
Harroch, R., & Sullivan, M. (2019, December 22). Startup Financing: 5 Key Funding Options For Your Company. Forbes. https://www.forbes.com/sites/allbusiness/2019/12/22/startup-financing-key-options/?sh=26f5208f2a84
Johnson, S. (2021, March 22). What Is Crowdfunding? Business News Daily. https://www.businessnewsdaily.com/4134-what-is-crowdfunding.html
S. (2021, June 17). Complete List of Unicorn Companies 2021. Eqvista. https://eqvista.com/complete-list-of-unicorn-companies-2021/
The Rest of Us. (2016, June 2). Startup Funding Explained: Everything You Need to Know [Video]. YouTube. https://www.youtube.com/watch?v=677ZtSMr4-4&t=28s
Wood, M. (2021, August 27). Small Business Grants: Best Options for Free Money in 2021. Fundera. https://www.fundera.com/blog/small-business-grants