Raising Capital as a Nigerian Startup

In January, I was in Lagos for three weeks, and during that time I had to work remotely. I asked everyone I knew for recommendations on co-working spaces with flexible plans. This led to an unplanned tour of eight co-working places in Lagos. I finally settled on Workstation — and my reasons will be the subject of another write-up.

The focus here is on what I learned during that time.

1. There is a spike in the growth of co-working spaces in Lagos.

And this is a good thing! Many of the workspaces I visited were full to capacity, and it was exciting. I visited three on the Mainland (even as far as Ojodu Berger). Four on the island, and then one in Lekki.

A friend’s four-year-old corrected me saying Lekki is a peninsula and so technically not part of the Island. I tried to bring up the 1940s landfilling of Victoria Island but I lost the argument. If you have more points I could use to win this argument, please kindly let me know.

2. Increased local investor participation

I had meetings with people who expressed interest in investing in local businesses. They mostly raised concerns about the best way to go about it.

Grapevine has it that the Lagos Angel Network has not invested as a syndicate in too long. If this is not the case, please representatives or members should feel free to correct me.

Anyway, increased local participation is always a good thing. It also increases the confidence of foreign investors looking to enter a particular market.

3. Everyone is looking for funding but very few are ready to receive it

Every entrepreneur I spoke with had a fundraising question for me. This is not surprising as we all know the challenges with access to capital in Nigeria. The numbers are depressing, so I will not go into that.

It was however interesting to see how unprepared entrepreneurs were to receive investments. So I am going to hit on some key issues that were common across the conversations I had around this point.

Get your house in order.

Your basic legal and accounting documentation should be up to date. From company registration to tax compliance documents.

You do not have to show all potential investors detailed financials before you sign a term sheet. You should at least have a high-level summary of your financials, whether you are currently making any revenue or not.

Then create your capitalization table. Trust me, it is not as complex as it sounds. This is a snapshot of who owns what in your company.

As the company grows and begins to deal in other asset classes, the table gets more complicated. Do not worry about that for now.

Team

Early-stage investors invest in people. They understand why your business plan and projections are not airtight. Yet, they give you their money because they like you and your team —  and, of course, they believe in your vision.

Please do not underestimate this point. A smart team with good dynamics will more likely succeed with a pivot when something is not working.

Here is another way to think of it — if you cannot get people to work with you on your vision, why should anyone invest their money in that vision?

If you do not have a strong team, start building one today.

The Term sheet is only the beginning.

Here, you can get by without legal help if you have done your homework and there are tons of resources online.

A term sheet is not legally binding. It is a proposal that guides the lawyers who prepare the main investment agreements. If you negotiated the term sheet without a lawyer, please make sure to get legal help immediately after negotiations.

It goes without saying that you should get legal help independent from the investor’s legal team.

Be selective about investors, it is like choosing a life partner

People always say you should look for investors that bring value asides from money, I agree. Considering the Nigerian factor, I will add another layer to that. Avoid investors that will take value away from you.

In simple terms, you have to know who you are getting married to.

Do some due diligence on your potential investor. Do you understand the source of their money? Are you comfortable with it? You want to as much as possible avoid anyone whose reputation will cause you headaches in the future.

Be Transparent

This flows from my previous point. We all know that there is a big trust deficit in Nigeria, but you still have to be 100% transparent on material facts. This is non-negotiable.

I’ve seen entrepreneurs make big mistakes in this area. Think about the type of company you are trying to build. Many people get away with cooking up numbers and facts, but they are not you. You are an awesome person. Building a culture of transparency from the beginning is sacrosanct. And it becomes even more important as your company grows. This Milost — Unity Bank story that broke yesterday is an interesting case study.

Some practical tips when dealing with a potential investor

1. Be confident. Your idea is great, and you have put in the work.
   
2. Do not force it. As I mentioned, the relationship you are building is akin to a marriage. If there is no meeting of minds, let it go.
   
3. Ask the investor when last they made an investment. The job of an investor is to invest and if they are not investing, they might actually be a waste of your time. If the last time they made an investment was as long as six months ago, please ask them why.
   
4. Some founders create term sheets on their own and then shop around for investors with it. This is a BIG no! especially for the Nigerian market. Clients pay me for this type of information so I will not be telling you why it is a bad idea for free. Please do not be angry.
   
5. Finally, it is 100% normal if an investor asks you to pay their lawyer who worked on the transaction. You could try to argue but you will come off as someone who has not done their homework. Usually, both parties agree on a cap on legal fees.

If this has been helpful, please let me know and I’ll follow up with a post on valuation.