SOURCES OF

STARTUP
FINANCING
EDS 311
LEARNING OBJECTIVES
At the end of this lecture, the students would be have gained knowledge on the
following
 the different sources of startup financing
 Available sources of funding startups in Nigeria
Introduction
•A start-up is a young company founded by one or more entrepreneurs to develop a unique product or
service and bring it to the market, with the intention to grow large and become a unicorn.
•That shoe seller in Balogun market does not qualify as a start-up, as he does not have a unique business
model designed to solve a problem.
•Globus bank is not a start-up because prior to its existence, it was already 'big’.
• The capitalisation requirement of N25,000,000,000 (Twenty-Five Billion Naira) for every commercial
bank in Nigeria is a huge sum, which takes Globus bank and every other bank outside the purview of start-
ups.
•For an entity to be regarded as a start-up, it must be young, registered as a company, have a product
or service designed to solve a particular problem, and possess an intention to grow and expand.
•Notable examples of start-ups in Nigeria are Piggyvest, Kuda, Flutterwave, etc.
Examples of start-ups in Nigeria
•Piggyvest,
•Kuda
•Flutterwave
•Paga
•Paystack
•Cowrywise
•Konga
•Opay etc
•Flying Doctors Nigeria
Sources of Startup Financing
Equity Financing
Debt Financing
Mezzanine Financing
Debt Financing
This option involves a start-up company borrowing money to finance its operations,
to be paid back at a future date with interest.
It is a time-bound activity where the company as a borrower needs to repay the loan
or the principal amount borrowed along with interest at the end of the agreed period.
Financing comes in various forms, but in whatever form it is, it always involves
borrowing money, with or without collateral, and an agreement to pay back at a later
day with interest.
Forms of Debt Financing
Bank loans
Government loans
Small business credit cards
Bank Loans
This is the most common type of debt financing.
This involves approaching banks in Nigeria to give loans to fund the business of the
start-up.
The factors usually considered by banks before agreeing to offer the loan include:
•the company's ability to repay the loan,
•the planned use of the funds,
•the creditworthiness of the company, among other factors.
Their finding will determine the interest rate to be charged, the amount to be loaned out
to the start-up company and the duration of the loan.
Pros and Cons of Bank Loans
Advantages
• Easily accessible
• Preserves the ownership of the company and
prevents the dilution of its equity.
• There are no tax liabilities on the interests paid on
the loan as they are seen as part of deductible
expenses.
Disadvantages
• May come at a huge cost to the startup
• Banks typically require collateral (assets) from the
borrower as security for the loan to be advanced and
usually charge high-interest rates, which can be as
high as 25% of the loan amount and this may
eventually create a huge financial liability for the
company, impacting strongly on its growth in the
long run
• in the event of failure of the business, there is a high
risk of bankruptcy and adverse impacts on credit
ratings.
Government Loan
The Government of Nigeria, to strengthen the growth of small and medium enterprise
businesses in Nigeria often produces loan plans for some of these businesses.
Some of the advantages of government loans include the absence of collateral and
little or no interest rates when compared with bank loans.
However, obtaining this type of loan usually comes with a lot of bureaucratic
bottlenecks and the amount obtained in the end may be inconsequential to facilitating
the growth of the business of the company.
Thus, as much a start-up is enjoined to explore this option, hopes should not be raised
to prevent a disappointment.
Small Business Credit Cards
A credit card is a plastic card that lets you access the credit limit your card issuer
gives you.
A credit limit is like a loan. However, instead of giving you cash, the bank permits
you to take as much credit as you desire for a period and then allows you to reuse the
loan over and over and pay it back later.
Applying for a small business credit card can be made through your bank or online.
The main traditional small business lenders include most of the banks in Nigeria
(Access bank, GTB, Zenith bank, UBA, first bank, standard chartered bank. Stanbic
ibtc Bank etc)
 Several credit card issuers specifically cater to the
small business market, and many come with special
benefits: cash back rewards, airline mileage points,
and other perks.
Small Some issuers require that the card be tied to the
Business owner’s personal credit score and credit history and a
guarantee from the owner. This would mean, of
Credit Cards course, that any defaults or late payments on the
business credit card would affect your personal credit
rating.
Interest on unpaid balances on the credit card can be
quite high.
Equity Financing
This is another viable option a start-up company can explore in raising the needed
capital to finance its business.
Equity financing refers to raising funds by selling shareholding interests in the
company to investors.
The major difference between equity financing and debt financing is that for equity
financing, the investor is given shares in the company as consideration and thus
becomes a member of the company, while in debt financing, the consideration
received by the lender is the payment of interest on the principal amount loaned to
the company.
Forms of Equity Financing
• Angel financing
• Crowd funding
• Venture Capitalists
 •Angel investors are typically high net worth
individuals who invest in startup or early-stage
companies in exchange for an equity ownership
interest.
ANGEL •These angel investors tend to keep a low profile and
FINANCIN operate in closed networks.

G •Angel investing in startups has been accelerating,

and high-profile success stories like Uber,
WhatsApp, and Facebook have spurred angel
investors to make multiple bets with the hopes of
getting outsized returns.
 •The quality, passion, commitment, and integrity of
the founders
•The market opportunity being addressed and the
potential for the company to become very big
WHAT •A clearly thought-out business plan, and any early
ANGELS evidence of obtaining traction toward the plan
•Interesting technology or intellectual property
CARE •An appropriate valuation with reasonable terms
ABOUT (angel investors are investing at an early stage when
risk is highest, so they typically require lower
valuations to compensate)
•The viability of raising additional rounds of startup
funding if progress is made
 • Other entrepreneurs
• Lawyers and accountants
• AngelList
WAYS TO • Angel investor networks

FIND • Venture capitalists and investment bankers

ANGEL • Crowdfunding sites like Kickstarter and Indiegogo

• The best way to find an angel investor is a solid

INVESTO introduction from a colleague or friend of an angel.

• Use LinkedIn to determine what connections you
RS may already have.
• Angel investors are much more likely to invest if
they know your sector well, so it often helps to start
with your connections in that sector.
 “Crowdfunding” is the practice of raising funding through
multiple funders, often via popular crowdfunding websites.
Crowdfunding gives startup entrepreneurs the opportunity to
raise startup funding for their business and can help a company
promote its products or services.

Crowdfundin Setting up a crowdfunding campaign is not very difficult.

You set up a profile on a crowdfunding site, describing your
g company and its business, and the amount of money you are
trying to raise.
People who are interested in what you are trying to do can
donate to your campaign, typically in exchange for some kind
of reward for their donation (one of your products or services, a
discount based on how much donated, or some other perk), or
for some form of equity or profit share in your business.
Crowdfunding Contd.
• The key to successful crowdfunding campaigns is to have a
compelling story about your product, service, or company, and to offer
a meaningful reward for donations. Some startups have been able to
raise thousands to even millions of dollars via crowdfunding
campaigns.
• Rewards-based crowdfunding is a particularly attractive option for
startups, as you are not giving away equity or part ownership in your
company—you are just offering some of your products or services, or
a discount on those products or services.
• And rewards-based campaigns are not burdened with interest or
principal repayments the way small business loans are.
• A crowdfunding campaign can also work to build a community of
people interested in your company or products, and provides a sense
of engagement for the donor.
Crowdfunding Contd.
•The use of crowdfunding as a source of equity financing is
highly regulated by the Securities and Exchange
Commission ("SEC").
• The SEC has made guidelines detailing the process,
procedure and requirements for crowdfunding.
•It is important for start-ups considering this option to be
aware of the limit of the amount that can be raised via this
platform.
•The SEC guidelines state that the maximum amount which
may be raised shall not exceed ₦100 million by a medium
enterprise, ₦70 million ($180,000) for small enterprises and
₦50 million ($128,000) for micro-enterprises.
 •Kickstarter
•Indiegogo
•Crowd Supply
•Crowdfunder
Crowdfundin •SeedInvest
g Sites •Crowdcube
•Fundly
•GoFundMe
•iFundWomen
Venture Capital
•Startups seeking financing often turn to venture capital (VC) firms.
•These firms can provide capital; strategic assistance; introductions to
potential customers, partners, and employees; and much more.
•Venture capital financings are not easy to obtain. 
•Venture capitalists typically want to invest in startups that are pursuing big
opportunities with high growth potential, and that have already shown some
traction; for example, they have a working product prototype, early customer
adoption, etc.
Where Do Venture Capitalists focus
their Investments?
•Specific industry sectors (software, digital media, semiconductor, mobile,
SaaS, biotech, mobile devices, consumer, etc.)
•Stage of company (early-stage seed or Series A rounds, or later stage
rounds with companies that have achieved meaningful revenues and traction)
•Geography (e.g., San Francisco/Silicon Valley, New York, etc.)
What to do before approaching a
Venture Capitalist
• Try to learn whether his or her focus aligns with your company and its stage
of development.
• VCs get inundated with investment opportunities, many through unsolicited
emails. Almost all of those unsolicited emails are ignored. The best way to get
the attention of a VC is to have a warm introduction through one of their
trusted colleagues, or another professional acquaintance of the VC, such as a
lawyer or fellow entrepreneur.
• A startup must have a good “elevator pitch” and a strong investor pitch deck
to attract the interest of a VC. 
Pros and Cons of Venture Capital
Advantages Disadvantages
• Venture capitalists always invest a large pool of • It often leads to the dilution of ownership and
capital operational control. when they do invest in a
business, tend to invest a lot
• Provision of mentorship and guidance to the start-up,
provided it is contained in the agreement between the
start-up and the VC
Available Sources of Funding for
Startups in Nigeria
• Tony Elumelu Foundation (TEF)
• African Development Bank
• Bank of Industry (BOI)
•The African Women’s Development Fund (AWDF)
•Lagos State Employment Trust Fund (LSETF)
•Development Bank of Nigeria
Tony Elumelu Foundation (TEF)
•This is entrepreneurship program is funded by a $100million commitment by the
Tony Elumelu Foundation to empower 10,000 African entrepreneurs over a 10-year
period. The goal is to create at least 1million jobs and contribute over $10billion in
revenue to the African economy.
•Through its flagship Entrepreneurship Program, the Foundation empowers African
entrepreneurs and the entrepreneurship ecosystem across 54 African countries.
•The Foundation has empowered 7,531 entrepreneurs thus far, through the provision
of small business grants to qualifies persons and businesses.
•It is arguably the largest source for small business grants in Nigeria.
 African Development Bank
•The Nigeria Trust Fund (NTF) was created in 1976 by an agreement between the
Bank Group and the Nigerian government.
•The NTF is a self-sustaining revolving fund. Its objective is to assist the development
efforts of the Bank’s low-income regional member countries whose economic and
social conditions and prospects require concessional financing.
•Its initial capital of $80 million was replenished in 1981 with $71 million. In 2008,
the Federal Republic of Nigeria and the Bank Group agreed to a ten-year extension of
the NTF. NTF resources can co-finance operations with the ADB and the ADF, as
well as fund stand-alone operations, in both the public and the private sector.
•Supplementary loans for Bank Group financed projects can also be considered.
Bank of Industry
•Bank of Industry (BOI) is one of Nigeria’s principal financing institutions and it
provides long-term support to different industries and various sectors of the economy.

•With the vision of providing financial support for the development of micro, small,
medium and large businesses, BOI focuses on businesses that engage in
manufacturing, processing, Oil and Gas, information technology amongst others.

•It is the largest and oldest financial institution in the nation.

The African Women’s Development
Fund (AWDF)
•This is a grant offering foundation that supports local, national, and regional women
organizations, working towards the empowerment of African women and the
promotion and actualization of their rights.

•Their aim is to strengthen and support the work of African women organizations. By
amplifying African women’s voices and achievements, AWDF supports efforts that
fight hurtful stereotypes, and promote African women as active agents of change.
 Lagos State Employment Trust Fund
(LSETF)
•This trust supports Small and Medium Enterprises (SMEs) with ₦25 billion.
•The fund is divided into two categories: micro and small businesses or the micro category.
Businesses in this category can access up to ₦500, 000 loans with an interest rate of five
percent and a tenure of one year – this is mainly geared towards youth entrepreneurship
support.

•The small business category businesses can get up to ₦5 million for a tenure of three years.
The criteria for accessing the funds include: membership of a business organisation that will
recommend the business for the loan, Lagos State tax receipt for at least six months, and
Lagos state residency card. Till date, up to 8,000 businesses have received over ₦6 billion
from LSETF.
 Development Bank of Nigeria
•Development Bank of Nigeria (DBN) is a bank owned by the federal government of Nigeria
and assigned with the task of catering to the financial challenges faced by Micro, Small and
Medium Scale Enterprises (MSMEs). DBN was launched on the 23rd of March, 2015.

•The federal government launched the DBN to see to it that Nigerians put their creativity to full
use. While youths have complained (time after time) about the unemployment rate and the lack
of opportunities, the Federal Government listened to these pleas by creating this avenue for
creativity.

•The plan was to allow financial inclusion for youths and older adults who have limited
opportunities in terms of converting their dreams to reality.
Mezzanine Financing
This type of financing combines both debt and equity financing. It occurs where a lender
provides a company with a loan.
So long as payments are made on the loan, the company will retain full control over the
business and the loan will be treated like any other loan. However, if the business takes a
downturn and the company cannot repay the loan, the lender can then convert the loan into
equity interest, effectively seizing a portion of the company and establishing a claim to any
future profits generated by the business.
A start-up can go for this option with some money lending institutions. This type of loan is
made available for a short period of time and usually only require minimal or no collateral.
The risk involved in this option is the likelihood of the equity of the company being diluted
in the event of failure to meet the loan obligation
THANK YOU