With an increase in the number of startups being established across the continent, Nigeria has become a hub for some of these innovative startups with entrepreneurship becoming the germane force.
Venture capital is a form of private equity financing where the investment focus is startups, early-stage, and emerging companies. The finance is being provided by venture capital firms, who seek to invest in this startups that they believe have high growth potential to generate income, reach a wider market and also have something innovative about the business model as the end goal is for the venture capital is for investor capital to flow to the best ideas.
Start-ups founder are fully exploring this model to search for investors such as some Nigerian startups at their early stage before emerging as tech firms sought venture capitalists in silicon valley amongst others to invest in their growth and ambitions to expand which is beyond their present state to generate the capital to kickstart their business.
The startup scene which is dominated by microfinance and payment solutions companies have attracted a significant venture capital investment in recent years due to its potential for growth and huge profit for all involve in this business.
Nonetheless, some startups have failed after receiving funding from venture capitalists due to a lack of adequate funds to propel the business, government bureaucracy or policies that impede growth, inadequate mentorship and support services, and poor management practices being responsible for the failure.
Also, one of the significant reasons for startup failure in Nigeria is poor management, unreliable data that leases to inadequate understanding of the target market and the startup founders lacking the skills and experience needed to manage a business successfully being first timers. As a result, they may make poor decisions that ultimately lead to the failure of the venture. For example, startup founders may neglect critical areas such as financial management, marketing, or strategic planning, which can impact the viability of their business in the long run.
Speaking with a financial expert, Ms Abiodun James she explained that venture capital benefit brings about the actualization of the ambition of the start-up because if such business is successfully run it could be one of the the top 500 or 1000 in the world.
She explained that venture capitalist funds benefits the startup founders and their employees, the venture capital investors, and also the society, who has access to a new product or service that willimprove their standard of life.
She, however, stated that’s getting the process right, and ensuring capital flows to the ideas that willmake it succeed, goes well beyond just investor returns.
It is a rigorous hurdle to scale for any startup but would be worthwhile when their exist a unique business model that is sellable and will generate income as well for the startup companies and likewise the investors.
A well detail business plan with the right technology to showcase the charts while outlining the company’s sources, uses of funds and knowing the terms or percentage both parties will give in exchange for the fund sought from the venture capitalist in the business.
The venture capitalists, investors and founders are making huge profit due to their financial decisions as witnessed in some of the five unicorns in Nigeria which is evident in these companies comprising Flutterwave, Interswitch, Opay, Andela, and Jumia.
Experts revealed that the rise in the usage of smartphones and Internet connectivity have created a marketplace that can be explored by fintech as they disrupt traditional industries like retail and financial services
Hence, the fintech startups are witnessing venture capitalists funding while the growth of some startups has failed due to their growth being impeded by government policies, weak infrastructure, and lack of further investments to propel the business.
Abiodun reiterates that it is important to note that a lot of profit is generated by venture capitalist which ranges from their stakes in the business and profit sharing model.
“there are various ways the venture capitalist makes their fund which could be through a management fee for managing a firm’s fund. Another the is carried interest on the fund’s return on investment generally referred to as “The carry”
The carry is the profit participation that the VC firm sets as part of its agreement with a startup. The agreement is typically structured, so that once the funds investment starts getting distributed back to the fund investors, the VC firm gets a carry percentage of 20 Percent.
A very successful firm with a strong track record might negotiate for a higher carry. Therefore, identifying a startup to invest in at an early stage might come with a risk, but if it becomes a success with the way businesses are breaking out in Nigeria, especially in the fintech space, an investor with the pool of resources stands a chance to make a huge ton of profit from a smart and informed financial decision position that awaits him.
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