Startups are companies or ventures that are focused on a single product or service that the founders want to bring to market. A startup refers to a company in the first stages of operations. Startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. Owning these businesses can be rewarding, but they can also be challenging to grow and manage.
These companies typically don’t have a fully developed business model and, more crucially, lack adequate capital to move onto the next phase of business. Funding is one of the major problems facing startups in Nigeria and Africa at large. Due to the fact that a business needs money and financial resources to be successful, many business owners seek out investors and shareholders for help. These investments particularly for shareholders represent the equity, value and overall growth of the company.
Founders normally finance their startups and may attempt to attract outside investment before they get off the ground. Funding sources include family and friends, venture capitalists, crowdfunding, and loans. In this article, we explain all the funding terms associated with running a startup and growing it to become a giant in the industry it belongs to.
The term seed funding refers to the type of financing used in the formation of a startup. It is the first capital every business raises to begin operations. Seed funding also called seed capital – is referred to as such because it is money raised by a business in its early stages. It doesn’t have to be a large amount of money; because it comes from personal sources, it’s often a relatively modest sum.
This money generally covers only the essentials a startup needs such as a business plan and initial operating expenses—rent, equipment, payroll, insurance, and/or research and development costs (R&D). Most seed funds are bootstrapped – this means the founders of these businesses use their personal money to start the business.
The primary goal at this point is to attract more financing through venture capital, angel investors, etc.
Startup capital refers to the money raised by a new company in order to meet its initial costs. In many cases, more than one round of startup capital investment is needed in order to get a new business off the ground.
The majority of startup capital is provided to young companies by professional investors such as venture capitalists and/or angel investors. Other sources of startup capital include banks and other financial institutions. Since investing in young companies comes with a great degree of risk, these investors often require a solid business plan in exchange for their money. They usually get an equity stake in the company for their investment.
The term startup capital is often used interchangeably with seed capital, although they are slightly different. startup capital usually comes from professional investors. Seed capital, on the other hand, is often provided by close, personal contacts of a startup’s founder(s) such as friends, family members, and other acquaintances.
Bootstrapping means founding and running a company using only your personal finances. It describes a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments. An individual is said to be bootstrapping when they attempt to found and build a company from personal finances.
This form of financing allows the entrepreneur to maintain more control. On the downside, this form of financing may place unnecessary financial risk on the entrepreneur. Furthermore, bootstrapping may not provide enough investment for the company to become successful at a reasonable rate.
An angel investor is a wealthy individual who provides funding for a startup, often in exchange for an ownership stake in the company. Typically, angels, as they are known, will invest somewhere between 20 to 25 percent return on the money they invest in your company. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages. In many cases, angels are the last option for startups that don’t qualify for bank financing and may be too small to interest a venture capital (VC) firm.
Angel investors provide more favorable terms compared to other kinds of investors, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.
Venture Capital (VC)
Venture capital is a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential, Venture capital generally comes from well-off investors, investment banks, and any other financial institutions.
For new companies that have a limited operating history (under two years), venture capital is increasingly becoming a popular and essential source of raising money, especially if they lack access to capital markets, bank loans, or other debt instruments. In as much as it is a way for startups to have access to finance, the main downside is that the investors usually get equity in the company, a say in company decisions and so the founders of the startups won’t have ‘overall’ control on the company.
Many entrepreneurs prefer venture capital because its investors do not expect to be repaid until and unless the company becomes profitable.
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. This is another form of investment or funding , where a large number of people (crowd) pool their resources (funds) together to float a business or startup.
Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists.
Kickstarter, Indiegogo, and GoFundMe are among the most popular crowdfunding platforms. Farmcrowdy is a popular crowdfunding company in Nigeria. Piggyvest also has its own crowdfunding product on its app.
Is crowdfunding legal in Nigeria?
All Micro Small and Medium Enterprises (MSMEs) incorporated as a company in Nigeria with a minimum of two-years operating track record are eligible to raise funds through a Crowdfunding Portal, in exchange for the issuance of shares, debentures, or such other investment instrument as the Commission may determine from time to time. However, companies with more than N500,000,000.00 (five hundred million Naira) in assets cannot raise funds through a Crowdfunding Portal registered in Nigeria.
Equity represents the number of shares that are owned by shareholders. If all assets were liquidated and all of the company’s debt was paid off, this is the amount of money that would be returned to shareholders. It is also a degree of residual ownership in a firm or asset after subtracting all debts associated with that asset.
Equity represents the shareholders’ stake in the company, identified on a company’s balance sheet.
Shareholders’ Equity=Total Assets−Total Liabilities
Equity is important because it represents the value of an investor’s stake in a company, represented by their proportion of the company’s shares. Owning stock in a company gives shareholders the potential for capital gains as well as dividends. If liabilities still exceed assets then there is negative equity and if assets exceed liabilities there is positive equity. Every investor wants positive equity, so as to make a good Return on Investment.
Most investors want equity in businesses they are investing in. Therefore, before you make a presentation to an investor, be clear about the amount of money you need and how much of your company you’re willing to give in exchange.
Initial Public Offering (IPO)
An initial public offering (IPO) refers to the process of offering shares of a private company to the public.The final funding round of a company may be an initial public offering (IPO) in which the company sells shares of its stock on a public exchange. An IPO allows a company to raise capital from public investors. By doing so, it raises enough cash to reward its investors and invest in further growth of the company.
An IPO begins when the business has shown scalability & viability for some time, with a relatively small number of shareholders including early investors like the founders, family, and friends along with professional investors such as venture capitalists or angel investors.
The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. An IPO can be seen as an exit strategy for the company’s founders and early investors, realizing the full profit from their private investment.
An IPO is a big step for a company as it provides the company with access to raising a lot of money. This gives the company a greater ability to grow and expand.
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