Startups are just like babies, that need proper care and nutrition. However, in this scenario, a startup needs funds and a good market strategy to grow.
As a startup owner, one needs to continually fend for the startup by providing funds and developing market strategies until the startup is grown and capable of fending for itself.
A lot of businesses fail because of a lack of funds. The business ideas are not going to survive on their own without funds, so as a startup owner you also have the responsibility of sourcing funds for your business.
There are various stages startups pass through as they grow and funds are necessary at each stage.
There are several stages of startup funding in Nigeria, however, not all startups go through all these stages.
The stages a startup goes through are dependent on the startup money needs.
Listed below is what you need to know about the stages of startup funding in Nigeria
Pre-Seed Funding
The pre-seed fund is the money used to set up the startup. Here, the startup is kicking off operations. This pre-seed fund is mostly outsourced from the startup founders, family, and friends, crowdfunding too.
At this stage, people investing their money asides the founders do so with little or no interest in returns.
Some startups don’t go through this stage, this brings us to seed funding.
Seed Funding
This is the first equity investment in a startup, the money invested here is used mainly for research and also for the development of the startup products or services.
Seed funding can also be used to employ more hands to join the founding team to be able to meet up the investors’ demands.
Seed funding can be gotten from various sources the most common seed fund investors are angel investors.
These types of investors fund your startup for equity even when the risk of doing so is still very high provided there is a detailed business plan.
There are other possible investors at this stage, incubators or seed accelerators. Y-Combinator and 500 Startups are examples of seed accelerators.
The Funds obtained from this stage can in some cases help a company grow stability and be able to fend for itself, however, if there’s still a need for funds. The next stage is sourcing funds from venture capitalists.
Venture Capitalist Funding
The Venture Capitalist Funding stage provides funds for startups after due diligence has been carried out. Venture Capitalists are investing other people’s money hence the scrutiny to ensure that their investment is a profitable one.
Investors at this point may offer to join the startup. Venture Capitalist Funding helps startups to scale quickly and seek out other business channels. This opens up more funding opportunities.
Series A Funding
This is the first investment in a startup by the venture capitalist. Before the startup is funded due diligence and valuation are carried out on the startup.
The valuation of a startup helps the venture capitalist make informed decisions about investing in a startup, as it tells where the startup is in its management, finances, market value, the risk among other necessary information
The general rule before a Series A Funding is that the startup though in its pre-profit stage must already be generating income and these funds are given for startup equity.
Series B Funding
This stage of funding is done for further development and valuation of the startup. The startup here has started generating profits and other operational arms are stable.
New investors can come in here as the risk of investment is considerably low. The venture capitalist from series A can still fund in this round. Also, the equity here is convertible.
Series C Funding
This stage of funding usually prepares a startup for opening up its operations to the public, merger, or acquisition and at this stage, the startup is said to be a company.
Most Venture Capitalists stop funding at this stage, however, some go-ahead to conduct more series of funding. Funds here are still raised by the selling of startup equity.
Mezzanine Funding
This stage of funding happens if there’s an additional need for capital before the Initial Public Offering. Mezzanine Funding can either be in the form of a debt or a subordinated note that is convertible.
There are various forms of mezzanine Funding, cash interest funds, payable in kind interest funds, and equity/ownership funds.
Mezzanine Funding is paid off when the startup eventually goes public.
Initial Public Offering (IPO)
This stage of funding opens a lot of expansion possibilities for the startup and it is also an exit stage for most of the early investors both angel and venture capitalist investors can exit at this stage with good returns on their investment.
When a startup goes public, it changes the startup from privately owned to a publicly owned company. The startup sells shares to raise the needed funds. Some shareholders even get voting rights on decision-making in the startup.
IPO requires a lot of meticulous preparation as every aspect of the company will be under scrutiny once you go public.
Some necessary steps include the selection of an investment bank, underwriting due diligence, and filings, deciding on stock prices, and ensuring stabilization of the stocks and lasting market transition.
There are mandatory ‘quiet days’ after the IPO as directed by the Security Exchange Commission. These quiet days last for twenty days after which the new valuation of the company is disclosed.
These are the likely stages of startup funding in Nigeria.
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