How equity funding helps startups thrive in challenging economy

Nigerian tech startups have raised $321million in the first half of the year 2021, despite the economic challenges and socio-political environment.

Fintech startups like Kuda have raised $80 million and Flutterwave picked a $170 million funding to take its valuation to over $1 billion, making it a unicorn company.

While many startups have been able to bootstrap to achieve results others have been fortunate to hit the big times with investors at their beck and call.

Olugbenga Agboola, Flutterwave CEO attributes his company’s growth of more than 100 percent in revenue to understanding processes. The growth he said resulted from an increase in activities in “COVID beneficiary sectors.” It is a term used by Flutterwave to describe sectors positively impacted by the pandemic.

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The process ranges from understanding intricate planning and execution of fintech operations, how to navigate through challenges, and most importantly finding the right financing as each type of funding comes with its own processes and challenges. Understanding these options and how they work can make the process a little less daunting.

“While there is the option of raising funds through either equity or debt instrument, most early-stage startups typically prefer equity financing because it puts less pressure on the business’s growing revenue,” said Amani Velly-Awela, Senior Financial Advisory Services, Mazars.

The term equity funding refers to when a person or an organisation provides a startup with finance in order to grow or develop a product. These investors usually require a long term ownership stake in exchange for capital.

Levels of equity funding

Seed Funding: This is the first money usually raised by a startup whether they go on to raise a Series A or not. This early financial support is referred to as the “seed” which will help to grow the business. Seed funding is used to take a startup from the ‘idea’ stage to the first steps, such as product development or market research. Seed funding may be raised from family and friends, angel investors, incubators, and venture capital firms that focus on startups at an early stage.

Series A Funding: This round will require a startup that has developed a track record via key performance indicators to optimize its product offerings in order to generate long-term profit. At this round, investors are looking for startups with a strong strategy for developing a business model and turning an idea into a huge money-making business.

Series B Funding: This round is very much concerned about taking startups from the development stage to the next level. Startups that are ready to expand their market reach and prepared for success on a larger scale get to this level getting help from investors. There is a higher level of demand on the products and services of startups undergoing Series B funding as they are well established, and this round of funding is used to grow them so that they can meet these levels of demand.

Series C Funding: Startups that make it to this round are already quite making profits. This level of funding is required to help develop new products and expand into new markets. Series C funding is focused on scaling, growing as quickly and more successfully as possible.

Series D Funding: One possible way to further scale a startup could be to acquire another company, hence the need for this round of funding. Usually, startups who continue with this round of funding do so because they are in search of a final push before an initial public offering (IPO) or alternatively because they have not yet been able to achieve the goals they set out to accomplish during Series C funding.

There are challenges startups face with securing this type of funding including the inability to keep proper books of account and the inability to afford professionals to work through external audits, tax compliance and business valuation services. Investors are more interested in reliable business models that are likely to result in the overextension of time, money, and resources.

These challenges can be surmounted with the application of the provisions made in the Finance Bill 2019. “Firms with an annual turnover of less than N25 million do not have to pay Company Income Tax (CIT) as required by the federal government.” Zainab Ahmed, Minister of Finance, Budget, and National Planning said.

The Minister added that since small businesses are exempted from paying tax, they will be able to invest more in themselves, become more productive and scale higher to become large scale businesses.