Sources of Capital for FinTech Startups in Nigeria

 

Alt: = "Fintech startup"

Funding FinTech in Nigeria can be quite challenging at the beginning as the ideas most times are novel and innovative. Lack of funding or access to credit has led to winding up of some innovative tech businesses. Silicon Valley say 50 percent of startups don’t survive first 5 year, and lack of funds is said to be the prime cause. Like every other business, Fintech companies can sources their capital from different sources. These sources can include:

  • Personal savings
  • Seed funding or series round
  • Venture capital
  • Bank loan
  • Equity funding
  • Capital market

Personal Savings

The first source of fund for your business as a startup should be your personal savings. Having fantastic business idea alone is not enough you need to have some finance to commit to the business. Investing your own money first is a signal to prospective investors and grant donors how serious you are in your business pursuit. No one will be willing to invest his money in your business idea when you are not will to invest in it. Putting in your finance and getting some works done have the capacity to turn your business idea from a mere business idea into a potential business opportunity. Promoters of fintech would need to finance their business for the first few month or years, before they would be able to get funding through seed funding or series round, bank loans to expand their business.

Read also: Sources of Finance for Entrepreneurs in Nigeria

Bank loans

Bank loans are the foremost commonly used source of funding for little and medium-sized businesses, unfortunately, most banks in Nigeria no longer give loans to startup entrepreneurs. Banks usually ask for some form of security through collaterals (assets in choice locations) and strong account statement. Consider the very fact that each one bank offers different advantages, whether it's personalized service, interest rate or customized repayment. It is a good idea to move around and find the bank that meets your specific needs.

Seed Funding or Series Round

Seed funding or series rounds is another veritable source of capital for FinTech startups in Nigeria. In fact, it has become the main source of external funding of tech startups in Nigeria in recent times.           

Most startups go through a Series A, B and C round, to secure sufficient funding to grow and scale their business, add new products to their portfolio, and return good profit to investors.

Venture Capital

The first thing to bear in mind is that risk capital isn't necessarily for all entrepreneurs, but then it is a viable source of capital for tech startup. Right from the beginning, venture capitalists are looking for technology-driven businesses and corporations with high-growth potential in sectors like information technology, financial technology, communications, agritech and biotechnology.

Venture capitalists invest huge sums of money in emerging or expanding tech companies with tremendous growth and traction potential, and typically invest much more capital than angel investors. They take an equity position in the business to assist it perform a promising but higher risk project. Therefore venture capital is an ideal source of funding for FinTech business as most financial technology projects are innovative with high risk. But know that it involves giving out some ownership or equity in your business to external party. Venture capitalists also expect a healthy return on their investments, often generated when the business starts selling shares to the general public. Ensure to choose investors who bring relevant experience and knowledge to your FinTech business.

Capital Market

Fintech companies can raise fund by listing in the capital market and conducting initial public offering (IPO) to sell its shares the general public, although this source of funding is mainly for existing tech companies with financial books, and it is more common their international equity markets. Coming home, Nigerian Stock Exchange is repositioning the Alternative Security Market ASM to provide Growth Board for listing opportunities and capital funding for SMEs, startups and venture/seed capital companies targeted at creating window to accommodate starts with innovative prospective business that could transform the capital market in the nearest future.

To leverage the Growth board, which is primarily targeted at startups, tech companies and venture business, such business must be a public limited liability company, have minimum market capitalization of at least N50 million, a public minimum shareholders of 10% and 25 shareholders. Such company is required to submit its semi-annual and annual company`s statement, while the Nigerian Stock Exchange on the other hand will provide strong support structures for the company including accounting, audit and legal services at a pre agreed and prepaid rate with the startup.

Capital market remains surest way capital funding for businesses. Big tech companies like Facebook, Alibaba were able to scale up their businesses through the capital market. Facebook raised $16 billion via Initial Public Offering in 2012.

Most African tech companies are usually skeptical of the capital market, maybe they do not want to lose control of their businesses when they go public as having more shareholders leads to dilution. Another reason may be the stringent reporting requirements.

Read also: List of  Top CBN Approved FinTech in Nigeria

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