Every idea need support systems for it to move past the ideation level to being a sustainable and profitable venture or business; hence comes the necessity of venture capital fund.
One impediment of businesses in Nigeria is the lack of funding to bring to light every strategy and business offering of an average entrepreneur.
Thus far, Funding has helped entrepreneurs realize their dreams of establishing and running a business.
There is a kind of funding that exists simply to help entrepreneurs, founders, or business owners to launch into the business of their desires and, it is called venture capital fund.
What is a Venture Capital Fund?
A venture capital fund is a type of funding or investment capital that is provided for startup companies or small businesses by investors who believe that such companies have the potential for long-term growth and expansion with high returns on investment.
In other words, a Venture capital fund is simply that type of financing where investors give funds to early-stage businesses that have a long-term growth potential in reciprocity to enjoy valuation in the business.
Also read, Top Venture Investment Funders in Africa
Though, there are risks associated with this kind of investment funding. This kind of investment could come from high net worth individual investors, investment banks and, other financial institutions that are willing to take up the challenges of competing to be tops in the consumer/ user market.
However, venture capital does not always come in monetary form, it could come off as some technical or managerial expertise.
It is important to note that the fund is managed by a venture capital firm. Over the last few years, Nigeria and indeed the whole world has seen an exponential increase in entrepreneurial activities.
These entrepreneurs have undoubtedly caused a shift in the usual way of doing business by introducing better methods.
This has caused our society to advance rapidly. Due to the diversity of new business models, Nigeria and the rest of the world have experienced growth and all-around development.
An Idea is abstract, Yes. But, in its abstract state, most billion-dollar companies came into existence.
These ideas transliterate into service offerings or products that solve the problems of thousands of people in the most sustainable and efficient way possible.
Also read, The Upside of Venture Investment Fund
But, no matter how great an idea is, without funding or supporting resources, the idea won’t be converted into reality, it will just be buried.
Some startup founders believe in the saying that goes thus: “chase the vision, the money will follow you”. The money in this context is called a Venture capital Fund.
Any small company that desires to gain an entry into any market and still positions itself to be scalable in the long run is likely to receive funding from investors who are willing to support the birthing of new ideas.
Below is a basic overview of a typical venture capital fund structure:
How venture capital works
The venture capital industry has four major stakeholders and, they are namely:
- Startup entrepreneurs who need funding
- An Investor who wants profitable or High returns
- Investment banks that need companies to sell
- Venture capital firms who market for the other three mentioned above and make money from it
Due to the high risk involved with funding a startup in Nigeria, Venture Capital(VC) firms guard themselves against the risk by co-investing with other firms.
This is how it works, there will be a “major” or “lead” investor and various followers.
This means that, at each stage of financing, different groups of investors may be involved as facilitated by the venture firms handling the funding process.
By doing this, the workload on the shoulders of VC partners will be reduced, there will be an increase in the portfolio of venture capitalists, it will be more credible, and more capital will be invested into various deals.
Stages of venture capital funding
There won’t be Venture Capital Funding until a startup or growing business submits a business proposal or plan to a venture capital firm.
The firm in turn then conducts in-depth due diligence into the startup’s business history, management, products and, even the founders.
After the due diligence, the outcome will then aid the venture capital firm in making its decision whether to invest or not.
When a growing business convinces the venture capital firm to invest, the funding will be released at different stages or rounds.
Ultimately, the investor may decide to leave the company after a period of time by calling for an Initial Public Offer (IPO), or by doing a merger or, even by acquiring the business.
There are four major rounds of funding for startups and they are:
A tree cannot be without planting a seed, the life cycle of a tree begins with a seed.
Using this analogy, seed funding is the first kind of investment that a startup raises. with seed funding, a startup would have the necessary resources to begin operations for companies in the Research or Developmental stages.
Series A funding
This kind of funding is given to a startup that has established impeccable track records and has a significant consumer base or users.
Here, a group of investors participates in this round of funding and it is mostly dominated by venture capitalists.
One thing to be considered by investors at this stage is whether the company has developed a strategy that will turn their ideas into a profitable business.
In other to attract investors for this kind of funding, companies must be able to develop business models that project benefits for the long term.
Series B funding
Here, one major focus of the investors is to ensure that startups grow past the developmental stages.
Startups are to leverage their developed products and consumer base to drive growth in the business.
At this stage, more venture capital firms would begin to be interested in investing in the company.
Series C funding
In this stage, more investors are attracted to the company because of its growth, formidable user base, the low risk associated with it and, constant revenue inflow.
There is a high possibility of proceeding to Series D and E but most companies end equity rounds at this stage before proceeding to an Initial Public Offering(IPO).
There are factors considered by Venture Capitalists before investing in startups and they are;
Large potential market
The investor considers the target market of the company to determine its expansion potential.
Long-term growth potential
one question investors ask is; Can the company grow to become a larger corporation in the nearest future? Once the answer to this is positive, investing is possible.
Investors put into consideration the kind of product offering the company gives and juxtaposes it with the solution it offers.
A product that solves real-world problems has larger tendencies of succeeding.
After all factors have been considered, the venture capitalists then take a deep look into knowing who the founder(s) is by examining their technical expertise or know-how as well as experience before investing.
Regulation of Venture Capital fund in Nigeria
Venture capital fund is primarily regulated by the Securities & Exchange Commission (SEC) and the role of the Securities and Exchange Commission to venture capital funding in Nigeria is to regulate the operations and involvements of institutions and individual investors in Nigeria.
The SEC rules of 2007 make special provisions for the approval of venture capital funds with the commission. (See Rules 282-283).
In addition to the SEC Rules, an additional rule (Rule 249D) was issued and was made effective on the 28th February 2013, so as to aid in regulating the activities of private equity firms with a minimum commitment of 1 billion naira investment funds.
Tax Incentives Available To Venture Capitalists
Generally, the law encourages investment through tax reliefs so as to ensure that people get motivated to invest in certain areas of the commercial economy.
The Venture capital (incentives) act, Cap V2, laws of the Nigerian federation contains incentives that would encourage venture capitalists’ involvement in growing businesses in Nigeria. Section 4(a) of the Venture capital (incentives) act, CapV2, 2004 states thus:
“The following incentives shall accrue to venture investments – an equity investment by venture capital in a venture project company shall for purposes of capital allowance under the Companies Income Tax be treated as follows:
- the first year, deduct 30 percent
- the second year, deduct 30 percent
- the third year, deduct 20 percent
- the fourth year, deduct 10 percent
- fifth year. deduct 10 percent
Though, there are several options of fund sourcing available to new businesses; some of which include raising capital from family and friends, crowd-funding, saving towards a business goal, etc, venture capital fund has proven to be the most operable financing strategy for startups over the years.
A venture capital fund is a unique method of ensuring that a startup business grows over a period of 5-10 years before selling its shares.
Venture capitalists or investors do not only provide funds, they offer mentoring and other technical expertise from their streams of experience.
Thus, it is imperative to say that Venture Capital is the hel[ping hand of entrepreneurs or startup founders.