In the past few years, the Nigerian startup scene has been on the rise. In fact, a report shows that Nigeria produces five out of seven unicorn companies in Africa. Furthermore, the Nigerian startups collectively raised over $1.6 billion in funding in 2021. This makes the country one of the largest hubs for technology investment in Africa. It is therefore not surprising to see that many financial experts predict that Nigeria will soon become an important tech hub like rivals Silicon Valley and Singapore, as investor interest continues to grow. However, how do you invest in Nigerian startups? There are several ways you can get involved with this exciting new market.
You can invest in a Nigerian startup through the following means:
- Offering capital for the startup’s idea in return for repayment with interest
- Debt to stock investments
- stock and equity investments.
- Dividends investments
There are several other investment strategies for startups that apply in other regions. However, if you are looking to specifically invest in a Nigerian startup, the four points mentioned above will suffice. The goal of investing in a startup should be to help the startup develop its product and business plan with your investment. This will help the company get off the ground more quickly and increase its chances of success as well as yours.
In this article on how to invest in Nigerian startups, I am going to explain the processes of investing in Nigerian startups, how to find startups worthy of your investments, how much money you need to invest in a startup, and much more.
How to Invest in Nigerian Startups
There are four (4) ways you can invest in Nigerian startups. However, it is essential to note that some of the investment patterns for Nigerian startups will depend on the profitability of the startup and your plan for the money you are investing.
Without further ado, let me walk you through the four investment patterns for investing in Nigerian startups.
Offering Capital for the Startup’s Idea in Return for a Repayment (Debt System)
As earlier mentioned, the problem for most startups is funding. They have brilliant ideas but do not have the money to finance their ideas and bring their concepts to reality. As an investor, you may lend your money to help a business start-up and the start-up will repay it at a predetermined time. That is what this debt system is about. You are borrowing startup money to get their business running, so it can be paid back in cash as well.
Although this method is rarely used, investing is investing, and if the startup is only looking to borrow your money to get running, there is nothing wrong with that. I would not advise this method unless you are sure of the profitability of the company.
Debt to Stock Investments
The debt-to-stock investment model is just like the first model, but the difference is that instead of the startup paying you back in cash, what they owe you is converted into stock shares when the startup is acquired by a VC or successfully funds a funding round. In this model, you borrow the startup money but do not get it back. Rather, you wait till the company becomes a little more established and earn shares equal to what they owe you.
This kind of investment requires a lot of paperwork. Not being thorough about legal due diligence can lead to serious contention when the time for the debt-to-stock conversion comes.
Stock and Equity Investments
This is the most commonly recognized means of investing in a startup. Here, you invest in a startup for an amount in shares or percentage equity. Startups give investors equities and shares for their investments, and as the startup grows, these equities and shares become substantial returns. When you get equities from a company, you become eligible to vote and share in the profits of the company.
That’s what actual investments in a startup are about. You get equity from a startup when it is a seed round or any other agreed round. However, it is more advisable for investors to focus on investing in a startup that is already in the seed or series A, B, or C funding rounds than a pre-seed round.
Dividends Investments
The dividend style of investment is one where the investor has the leverage to buy shares of stock that pay annual dividends. This style of investment is often adopted by later-stage startups. Investing in a startup that is barely established using the dividend style is not a wise investment strategy. A company that offers this style of investment is fully established.
It is also important to note that you would need a lot of investing ability to adopt this investment mode.
How Much Money Do You Need to Invest in a Startup?
You don’t need to have a specific figure in mind when you invest in a startup. The amount of money you invest will depend on how much the startup wants from investors. Some startups will want $5000, or $25,000, or $100,000, or more. The amount you invest will always depend on what the startup wants from investors.
In determining how much they want from investors, startups consider a lot of things. They look at how much is needed to move their startup from where they are and how much risk they can accommodate. The determination of the funding amount they will request from investors will also depend on the funding round they are in.
A startup at the pre-seed or seed stage may not ask for anything above $1,000 or any sum within that range. When a startup approaches the series A round, you can expect them to request money from VCs, charging in six and seven figures.
How to Find Nigerian Startups to Invest in
Startups are being formed across all areas of Nigeria. Many of them are promising, and as an investor, finding the right prospect to invest in makes all the difference. The following are places where you can find credible Nigerian startups to invest in.
LinkedIn is a professional platform where professionals from all nations come to connect, find prospects, and grow their businesses and careers. The LinkedIn Nigeria community is crowded with startups and companies looking for the right connection and trying to spread the word about what they are doing. It is a good place to look when you want to invest in a Nigerian startup.
By making a connection, studying the business, and discussing it with the founders, you can decide whether the startup is worth your investment.
Crunchbase is a top destination to get company insights from early-stage startups to the Fortune 1000. The Crunchbase hub for Nigerian startups is a comprehensive list of Nigerian startups with details about the companies, the founders down to the employees.
- Nigerian Investment Promotion Company
The Nigerian Investment Promotion Company is another great place to find Nigerian startups you can invest in. They are the government agency in charge of investments in Nigerian startups and companies. It is a good place to start as they provide investment guides and regulations. One of the noteworthy initiatives of the NIPC is the establishment of the One-Stop Investment Center (OSIC), which brings relevant government agencies to one location to provide fast-tracked services to investors.
- Lagos Startup Week
Lagos is the commercial hub of Nigeria and it is common to find startups shooting out of the state. One event where you can find Nigerian startups to invest in is Lagos Startup Week. The Lagos Startup Week is a week-long event for tech startups in Nigeria. It is laced with keynote speeches and innovative tours. Most importantly, the event features an exhibition and a startup showcase. Here, you can find startups to connect with that need funding in different forms.
TechCabal is a website that reveals the happenings and events in the African tech ecosystem. The website discusses startups, fundraisers, exits, expansions, and regulations in the tech industry. Their Startup category is where they discuss startups. Their discussion ranges from startup acquisition to expansion, fundraising, closure, and much more. It is a cool place to check when you are looking for a startup to invest in.
- Startup Grind Lagos
Startup Grind is a global community powered by Google. The community has a presence in Lagos and organizes monthly meetings for entrepreneurs to connect and get in front of investors. As an investor, you can attend any of the events, connect with entrepreneurs, and sort through startups you find worthy of being invested in.
It is important to note that some of the best places to find Nigerian startups to invest in include startup pitching events and communities. The Nigerian investment sector does not give room for crowdfunding services like Kickstarter, Indiegogo, Y Combinator, and the like.Hence, most Nigerian startups have to find investors by direct pitching and through startup events.
Final Thoughts on How to Invest in Nigerian Startups
We hope this guide has provided you with some insight on how to invest in Nigerian startups. If you’re ready to get started, there are plenty of ways for all types of investors to get involved, from private equity funds and angel groups down to online platforms that let you invest directly into companies through secondary markets.
13 thoughts on “How to Invest in Nigerian Startups”
A well researched and written piece.
Kudos