Irrespective of how laudable a business idea is, it needs to be financed. Running a business, especially a startup can be very tasking in terms of generating the finances to keep it afloat. Capital is very important to keep the business running from the idea stage to when it starts making profit as it continues expansion. Capitals can come from different sources such as bootstrapping, loans, donations and investments. While the others are good, they can’t have a lasting impact on the expansion of the business as raising capital or funds from investors would.
In recent years, there has been a surge in the number of Nigerian startups who have raised capitals from investors. Receiving funding from investors are in different stages, depending on the growth and needs of the businesses, as well as the value placed on the business by investors. Some investors may choose to invest at the early stage where there is greater risk but also greater reward, while others only invest in later stages, when trust and structure have been built. Let’s look at each funding round and what it means for founders, companies, and investors.
Pre-Seed Funding Round
Pre-seed funding is the earliest stage of funding a company. It takes place when founders are getting their companies off the ground at times as an idea. Often, it usually involves an investment from the founder’s personal savings called bootstrapping. Other investors at this stage are family, friends, supporters, a network of other founders and micro investors. Micro Investors are people who invest in emerging companies with amounts of finance that is typically less than that of traditional venture capital. In the pre-seed level, the value of a startup can be anywhere between $10k to $1M. Investment obtained at this stage is used for market research and building a minimum viable product (MVP). This stage is the ‘Pre-Market Launch Stage’.
Edukoya, an online learning platform raised $3.5 million in 2021, in a pre-seed round led by Target Global
Seed Funding Round
Seed funding is the first official funding a company raises, and it is the stage where investors expect some equity in exchange for funds. As the name “seed” implies, this is the capital which the rest of the company is able to grow and flourish. During this stage, founders validate their product/service’s potential demand and conduct a proof of concept (POC).
Seed funding can come from family, friends, but more from angel investors, incubators, accelerators and private equity firms. Incubators and accelerators are organisations that nurture entrepreneurs to build their startups by providing essential building blocks such as capital, space, utilities, legal assistance, etc.
The funds raised vary widely according to how the startup is valued. On average, companies raising a seed round are valued between $3 million and $6 million. This is the ‘Market’ Launch stage.
Funds raised at this stage are used for knowing the customers’ demands, conducting product research, launching a product, marketing to a target audience, and building an audience, and then formulating a product or service accordingly.
Identitypass, a Nigerian identity verification startup, raised $2.8 million in seed funding to expand its business in the first quarter of 2022. The startup had raised $360,000 in pre-seed investment last November, bringing its total funding to $3.1 million.
Series A Funding Round
After building a product that solves customer’s needs, leading to a strong customer base, with a track record, it may be time to gun for Series A funding round. This capital is often used to expand a company’s product offerings, bring in more customers, and develop a long-term plan for growth.
The most common funding sources are VC companies and super angel investors. VCs manage professional investment portfolios and finance exclusively in high-growth startups. That’s why startups going through this funding round attract investors from traditional private equity firms, such as Sequoia Capital, Greylock, Accel Partners, and more.
Capital raised during Series A rounds can range from $2 million to $15 million, but with increasingly high valuations in the tech industry, high-growth companies have raised significantly more in this round.
Moove, an African mobility company with a fintech that provides financing to mobility entrepreneurs raised $23m in Series A to spread across the continent.
Series B Funding Round
Series B rounds are all about business development and how to reach the next level of growth. The capital raised in this round goes towards supporting an established customer base by hiring new talent and boosting sales, marketing, tech development, and customer support.
Companies undergoing Series B rounds tend to be valued between $30-60 million and raise an average of $33 million. A higher valuation and a proven business plan tend to attract the same high-level investors as the Series A round, in addition to later-stage investment firms.
Nigerian digital retail bank, Kuda Bank, raised a total of $80 Series B funding from investors in 2021, with a valuation of $500m. It had raised $25m dollars in a series B funding which was jointly Valar led by Ventures and Global.
Series C & D Funding Round
Very few companies get to raise beyond a Series B round. At this stage, investment is less risky as credibility and structure have been built by the company. Series C funding rounds are for successful startups that need extra funding to help create new products, acquire other companies, expand into new markets, or hire an exceptional leadership team. The capital is meant to help the company keep building.
In some cases, a startup may still raise beyond a Series C, which is Series D funding. One reason for this is that they have discovered new opportunities for growth and need some injection of capital to get there. This can include private equity firms, hedge funds, secondary market groups, or investment banks that want to cement their place in the world of successful investment. Companies in the Series C stage are often valued at or above $118 million and use this round to boost their numbers before an Exit, often in the form of an IPO.
Nigerian Fintech Giants, Flutterwave raised Series C funding of $170M in 2021, making it a Unicorn with a $1bn valuation. The Series C round came a year after the company closed a $35 million Series B and $20 million Series A in 2018.
Beyond Series Funding: Exit Options
Once the startup has travelled past the series of funding stages, the following stages represent exit options. This includes options such as mergers and acquisitions, initial public offerings (IPOs), and share sales or buybacks.
Issuing an IPO is synonymous ‘going public’ as the general public now wants to invest in your company by buying shares. Only startups with a proven track record of profitability and growth can sell stock to the general public and list on the stock exchange. When a startup decides to raise funds from the public including institutional investors as well as individuals, by selling its shares, it is known as an IPO (Initial Public Offering).
Besides launching an IPO, founders may decide to acquire or be acquired by another company. They may also sell the startup or their shares to another company, as well as to venture capitalists or private equity firms. Founders may decide to buy back their own shares from investors in order to regain control of their company.