Raising Start-Up Money in Nigeria

by Counseal Team

Updated February 7, 2024

a person writing out a plan on how to raise his business start-up money

Our goal is to help you weigh the best options for your business.

To decide which way to go, you need to make some considerations, such as:

  • Knowing and analyzing your capital projections and financial needs
  • While you consider what you need to get started, also consider what you will need to keep the business afloat while raising funds.
  • Craft a solid pitch and hone it to almost perfection.
  • Speak to relevant professionals
  • Consider the pros and cons of each type of financing to choose the one that best suits the vision you have for your business.
  • You need to be conversant with your business accounting. It helps you know how much you will need to get started and secure the best financing for your business
  • Connect with friendly business founders who are ready to mentor. You can check out Founder Institute Mentors which is a directory of Nigerian start-up experts spanning across various fields.

Financing Options Open to Business Start-ups 

deciding between debt financing or equity financing

Let’s group them into:

  • Debt financing: This is simply loans. It can be sourced from financial institutions, government agencies, friends, and family. You must pay back your loan with interest within a certain period. If you don’t want to give up control of your business, this is a good option. It helps when you have a history with the lender, e.g., operating a corporate account with a bank. It is a major requirement to get a business loan from a Nigerian bank. 
  • Equity Financing: This provides you with the funds you need for a stake in your business. It could be shareholding or taking up a directorial position for a specified period. The beauty of this is that there is no obligation to repay. It gives you the opportunity to channel more money into your business. The more investors you bring into your business, the less control you will have. To curb this, strive to understand fully the terms of the agreements/contracts entered into.

 Let us break them down into the most available options.

  1. Business loans: This is majorly institutional funding. Banks and other financial institutions have several business loan packages, both for start-ups and established businesses. The government also offers incentives to small and medium scale businesses to help ease their growth through the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)
  2. Crowdfunding: This raises funds by pooling resources from all and sundry. It is usually small amounts of money, but as the saying goes, “tiny drops make a mighty ocean”. In countries like the United States of America, crowdfunding can include strangers on platforms like GoFundMe. Nigeria, for now, restricts crowdfunding, especially for private businesses, unless it complies with the conditions laid down by the Securities and Exchange Commission (SEC). You can, however, do this within your circle of friends and family.
  3. Grants: This is a sizable amount of money given by the government, a charitable foundation, or a specialised grant making institution to fund your ideas and business projects. As with most money raising applications, you would have to present and defend your business ideas satisfactorily to qualify. Examples of these include the Canada Fund for Local Initiative grants in Nigeria; the Tony Elumelu Foundation Entrepreneurship Program; the Bank of Industry; and the World Food Programme Innovation Accelerator Grants. These are just a few. The more you look, the more you find one that suits your niche.
  4. Angel Investment: This is a flexible means of raising funds. It could either take the form of debt or equity financing. It all depends on your angel investor and his terms of investment. The Lagos Angel Network is a team of angel investors committed to seed funding and mentoring entrepreneurs. They are, however, limited to Lagos, Ibadan, and Abeokuta. There are also individual angel investors in Nigeria that you can look out for.
  5. Personal Contacts/Networking: These are your circle of friends and family. It also extends to their friends and acquaintances, meeting new people in your everyday life and striking up conversations about your business. This is like angel investors, as it could be debt or investment. It could also be a gift. 
  6. Self-funding: Bootstrapping. If you have it, this is the most convenient way of funding your business. Sadly, this option is not available to everyone.
  7. Venture capital: This is a major source of investment for start-ups. They are private investors who fund your business for a stake in it. They eventually ease out of the business when their investment capital and some profits are realised as predetermined by the Venture Capital Agreement/Contract.

Now, let’s assess the realities of funding a start-up.

The Realities of Funding a Start-up

Funding a start-up is hard, especially when you can’t provide the funding from your personal resources. To successfully address this, let’s consider the costs that need to be covered by business start-ups. 

They include, but are not limited to:

  • Outsourcing workforce and skills
  • Legal and other professional fees
  • Buying and leasing of equipment
  • Product design and prototype development
  • Payment of utilities and tax
  • Getting licensing and permits
  • Acquiring office space
  • Payment of salaries

For web-based businesses, costs could include:

  • Subscription to professional software
  • Web and application development
  • Purchase of hardware to facilitate web access
  • Cloud Storage

Making a list of your projected costs can help you focus and prevent making financial mistakes. You can build a worksheet to get a better handle on it. It helps you to:

  • Estimate profits
  • Conduct a break-even analysis
  • Secure loans
  • Attract investors. It shows how focused and diligent you are, especially when you include it in your business plan.

You need to know the challenges faced by start-up businesses to be prepared to tackle them as they pop up.

Major Funding Challenges in the Start-Up Environment in Nigeria

An image illustrating challenges
  • Financial management: this can make or break a start-up. It is one prerequisite for obtaining funding. Investors and lenders look into your finances to find out your plans and management skills. Financial mismanagement could stem from mixing your personal funds with your business funds.
  • Lack of Collateral: Getting a loan when you don’t have a credit history and no valuable collateral can be difficult. The best alternative here is to look into government aid, crowdfunding, angel investors and venture capital.
  • Lack of market access: where there is a lack of demand for the goods or services offered, it will be difficult to sustain the growth of your business.
  • Poor financial inclusion and inadequate access to credit facilities: There is a limit to the pool of funds available to start-ups. Banks are reluctant to give out tangible money to start-up businesses because of the fear of failure. 
  • Higher transactional costs in comparison with large enterprises: Large enterprises have the advantage of economies of scale, which makes it difficult for smaller companies to compete with them. This causes an inability to compete against larger firms in terms of innovation, research, and development, which is an important driver of economic growth
  • Lack of entrepreneurial zeal and know-how: Given the challenges that entrepreneurs face as startups, you can easily be discouraged and be tempted to give up. Therefore it is best and advised to do a breakeven analysis.
  • Geographical location puts some at a competitive disadvantage. The internet has mitigated this.
  • High inflation coupled with exchange rate fluctuations: The economy and the political environment play a vital role in how well a startup will strive. The recent economic downturns have made venture capital a little more difficult, especially when it is international. It would take ₦36,000,000 to repay $100,000 in 2019. That same investment will cost you roughly ₦65,800,000 to repay today.

What Investors and Lenders Look Out for

An depicting business executives trying to make a decision

Whoever gives you money will need to be sure that you will use the money effectively and generate a proper return soon. To mitigate loss and challenge their funds properly, investors and lenders have core features in a start-up company that they look out for. They include:

  • Potential growth in the market
  • Competition
  • Location
  • Strength and weaknesses
  • Opportunities and threats
  • Business revenue either globally or locally
  • Cash flow
  • Amount invested by you
  • Outstanding debt
  • Credit history

The lender will look for the 5Cs of lending. They are:

  • Character: this is about your credit history, which summarises the loans you took in the past, how you used them, and the frequency of your repayments.
  • Capacity: What’s your plan for repayment? How can you afford it?
  • Capital: This could be your savings, investment, or loan that you will put towards your loan
  • Collateral: Sometimes, when your credit history is not so good or unascertainable, lenders will ask for some form of security for the loan. A valuable property or another steady source of income usually suffices.
  • Conditions: They will scrutinise your plan for the money and how you intend to implement it. Other factors, such as economic and environmental conditions, will also play a significant role in their decision.

Key Takeaways

  • Have a workable business plan
  • Get your business registered
  • Open a corporate account and use it
  • Organise your financial records
  • Join a business community and build your network
  • Be open to advisory services
  • Be social and information driven. You can’t afford to wait for information to come to you first. You can always reach out to people. You can also use the internet to find low-cost loan facilities.
  • Use social media to your advantage.
  • Be clear on the amount of funding you require. Don’t take more or less than you need.

I hope we answered most of your questions in this article. If you have any clarifications or questions, we are happy to help. Book a time with one of our experts to get a free audit.

Frequently Asked Questions

What is a start-up and why do they need funding?

A start-up is a new or emerging business that aims to create a unique product, service, or solution to a problem or need in the market. Start-ups usually have high growth potential and scalability, but they also face high uncertainty and risk. 

Start-ups need funding to develop their idea, test their product, launch their business, and grow their customer base and revenue. Funding can also help start-ups attract talent, access resources, and gain credibility and visibility.

What are the sources of start-up funding in Nigeria?

There are various sources of start-up funding in Nigeria, depending on the stage, size, and nature of the business. Some of the common sources are:

  • Bootstrapping: This is when start-ups use their own savings, income, or assets to fund their business. Bootstrapping can help start-ups retain control and ownership of their business, but it can also limit their growth and resources.
  • Grants: These are non-repayable funds that are given by governments, foundations, or organisations to support start-ups that have social, environmental, or economic impact. Grants can provide start-ups with free money, but they can also be competitive and restrictive.
  • Loans: These are repayable funds that are borrowed from banks, microfinance institutions, or online platforms. Loans can provide start-ups with quick and flexible access to capital, but they can also incur interest and debt.
  • Crowdfunding: This is when start-ups raise funds from a large number of people who each contribute a small amount online. Crowdfunding can help start-ups validate their idea, build a community, and gain exposure, but it can also be challenging and time-consuming.
  • Angel investors: These are wealthy individuals who invest their own money in start-ups in exchange for equity or a share of the profits. Angel investors can provide start-ups with mentorship, network, and expertise, but they can also dilute their ownership and influence their decisions.
  • Venture capitalists: These are firms or funds that invest large amounts of money in start-ups that have high growth potential and scalability in exchange for equity or a share of the profits. Venture capitalists can provide start-ups with access to large capital, resources, and connections, but they can also demand high returns and control over their business.
  • Accelerators and incubators: These are programs that provide start-ups with training, mentorship, networking, and funding opportunities in exchange for equity or a fee. Accelerators and incubators can help start-ups accelerate their growth, learn from experts, and access investors, but they can also be selective and competitive.

How do I choose the best source of funding for my start-up?

There is no one-size-fits-all answer to this question, as different sources of funding have different advantages and disadvantages, and different start-ups have different needs and goals. However, some factors that you can consider when choosing the best source of funding for your start-up are:

  • The stage of your start-up: Depending on whether your start-up is at the idea, prototype, launch, or growth stage, you may need different amounts and types of funding. For example, bootstrapping, grants, and crowdfunding may be more suitable for early-stage start-ups, while loans, angel investors, and venture capitalists may be more suitable for later-stage start-ups.
  • The size of your start-up: Depending on how big or small your start-up is, you may need different levels and sources of funding. For example, small start-ups may be able to manage with bootstrapping, grants, or loans, while large start-ups may need more capital from angel investors, venture capitalists, or accelerators and incubators.
  • The nature of your start-up: Depending on what your start-up does, how it operates, and what it aims to achieve, you may need different kinds and sources of funding. For example, start-ups that have a social, environmental, or economic impact may be more eligible for grants, crowdfunding, or accelerators and incubators, while start-ups that have a high-tech, innovative, or scalable product or service may be more attractive to angel investors, venture capitalists, or accelerators and incubators.
  • The cost of funding: Depending on the source of funding, you may have to pay different costs or trade-offs for the money you receive. For example, bootstrapping may cost you your personal savings, income, or assets, loans may cost you interest and debt, crowdfunding may cost you time and effort, angel investors and venture capitalists may cost you equity and control, and accelerators and incubators may cost you equity or a fee. You should weigh the benefits and costs of each source of funding and choose the one that offers the best value for your start-up.

How do I prepare for raising start-up funding in Nigeria?

Raising start-up funding in Nigeria can be a challenging and complex process, but you can increase your chances of success by preparing well. Some steps that you can take to prepare for raising start-up funding in Nigeria are:

  • Validate your idea: Before you seek funding, you should make sure that your idea is viable, feasible, and desirable. You can do this by conducting market research, customer interviews, surveys, or experiments to test your assumptions and hypotheses, and to gather feedback and data to support your idea.
  • Develop your product: Once you have validated your idea, you should develop your product or service to a minimum viable product (MVP) or a prototype that demonstrates the core features and benefits of your solution. You can use tools such as wireframes, mockups, or demos to showcase your product or service to potential funders.
  • Write your business plan: A business plan is a document that outlines your start-up’s vision, mission, goals, strategies, operations, finances, and risks. A business plan can help you plan and organise your start-up, as well as communicate your value proposition and competitive advantage to potential funders. You can use templates or guides to help you write your business plan, such as this one from Counseal.
  • Create your pitch deck: A pitch deck is a presentation that summarises your start-up’s problem, solution, market, team, traction, and ask. A pitch deck can help you pitch your start-up to potential funders in a clear, concise, and compelling way. You can use tools such as PowerPoint, Keynote, or Prezi to create your pitch deck, and follow best practices such as these ones from Startup Grind or [these ones] from HubSpot.
  • Build your network: Networking is a key skill for raising start-up funding, as it can help you connect with potential funders, partners, mentors, and customers. You can build your network by attending events, joining communities, reaching out to contacts, and asking for referrals. You can also use platforms such as LinkedIn, Twitter, or Facebook to expand your network and showcase your start-up.

What are the challenges of raising start-up funding in Nigeria?

Raising start-up funding in Nigeria is not without its challenges, as there are many factors that can affect the availability and accessibility of funding for start-ups. Some of the challenges of raising start-up funding in Nigeria are:

  • Limited funding options: Compared to other countries, Nigeria has a relatively underdeveloped and fragmented start-up funding ecosystem, with limited options and sources of funding for start-ups, especially at the early stages. According to a report by Disrupt Africa, Nigerian start-ups raised $307.7 million in 2021, which accounted for 29.3% of the total funding raised by African start-ups, but was still far behind the global average of $3.8 billion. 
  • High risk and uncertainty: Nigeria is a volatile and unpredictable market, with high levels of political, economic, and social instability, insecurity, and corruption. These factors can increase the risk and uncertainty of investing in start-ups, and deter potential funders from providing capital or support to start-ups. According to the World Bank, Nigeria ranked 131st out of 190 countries in the ease of doing business index in 2020, indicating the difficulties and challenges of starting and running a business in Nigeria. 
  • Low awareness and trust: Nigeria has a low level of awareness and trust in start-ups, especially among the general public and traditional investors. Many people are not familiar with the concept and benefits of start-ups, and may perceive them as scams, frauds, or failures. Similarly, many traditional investors, such as banks, are not comfortable with the high risk and low return of start-ups, and may prefer to invest in more established and profitable businesses. According to a survey by PwC, only 25% of Nigerian respondents said they would invest in a start-up, compared to 40% of global respondents. 
  • Regulatory and legal barriers: Nigeria has a complex and cumbersome regulatory and legal framework, with multiple and overlapping laws, regulations, and agencies that govern different aspects of start-ups, such as registration, taxation, intellectual property, data protection, and consumer protection. These can create barriers and burdens for start-ups, and increase their costs and compliance requirements. For example, crowdfunding, which is a popular and innovative source of funding for start-ups, is currently illegal and unregulated in Nigeria, according to the Securities and Exchange Commission.

How can I overcome the challenges of raising start-up funding in Nigeria?

Despite the challenges of raising start-up funding in Nigeria, there are some strategies and tips that can help you overcome them and increase your chances of securing funding for your start-up. Some of them are:

  • Be prepared and professional: Before you approach any potential funder, you should make sure that you have done your homework.
  • Seek feedback and advice: Raising start-up funding in Nigeria can be a learning and improvement process, and you can benefit from the feedback and advice of others who have done it before or are doing it with you. You can seek feedback and advice from mentors, coaches, peers, customers, or experts who can help you refine your idea, product, business plan, pitch deck, or network. You can also use platforms such as Counseal, Startup Grind, or Techpoint to access valuable resources, insights, and opportunities for start-up funding in Nigeria.

Be persistent and flexible: Raising start-up funding in Nigeria can be a long and difficult journey, and you may face many rejections, failures, or challenges along the way. However, you should not give up on your dream, but rather be persistent and flexible in pursuing your goals. You should be ready to adapt and pivot your idea, product, or strategy based on the market feedback and demand, and to explore different sources and options of funding that suit your start-up. You should also celebrate your achievements and milestones, and learn from your mistakes and setbacks.

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