Economy
How to Avoid Rookie Mistakes When Looking for Investment
By Philani Mzila
In the startup universe, one of the most valuable (if not the most valuable) finite resources you have at your disposal as a founder is equity. This is because startups generally don’t have the capital to scale in the market or products developed significantly enough to leverage to fund ongoing enterprise growth.
This makes your startup’s capitalisation table (cap table) an integral representation of how your venture is funded from an equity perspective (including convertible notes, warrants, and equity ownership grants). The cap table represents how much of a claim each party has on the value created by the business and what they paid for their ownership stake. Managing the cap table well is, therefore, a strategic imperative for any startup founder. As a startup scales, the evolution of its cap table has serious implications on how easily the venture can attract and raise new investments.
Cap tables and investor risk tolerance
At the beginning of a startup’s journey, the founding team owns 100% of the company. Depending on the resources they have available, founders tend to self-fund the venture as much as possible (called bootstrapping) up to and including the pre-seed stage in order to protect their equity value. At some point, however, the resources they have can only take them so far, and they need to raise external capital.
At the pre-seed stage, a startup hasn’t necessarily found product-market fit, and its revenue is often not the best measure of its potential because founders are honing their minimum viable product. At best, the venture has signals of product market fit, i.e. user growth, engagement and active usage and retention. The lack of product-market fit and bankable recurring revenue is typically a deterrent for investment by later-stage investors due to their inherently lower risk tolerance.
This is where angel investors and early-stage venture capital (VC) firms step in. Angel investors are high-net-worth individuals who are highly risk-tolerant and have the financial means to invest in startups and their potential future returns at the right price. That “right price” is usually an ownership stake in the business, ranging anywhere between 5 and 15%, with that percentage being a symbol of the risk angel investors accept in return for their capital and operational expertise. Early-stage VC firms, on their end, typically provide additional institutional capital, operational and governance support as well as credibility to ventures.
Angels and other types of early-stage investors, like Founders Factory Africa, play a vital role in the VC ecosystem. Without the high-risk tolerance these investors bring to the table, most early-stage startups would not break out of the pre-seed stage due to a lack of funding.
The role of a term sheet at the point of investment
Given the importance of a startup’s cap table in its future trajectory, it’s worth highlighting the vital role a VC term sheet performs at the point of investment. A VC term sheet is a document that outlines the terms and conditions of a VC investment. It includes details on the amount of money to be invested, the equity being granted to investors, the timing of investor liquidity, and investors’ rights in the venture.
Some of the key terms founders and investors must be familiar with when reviewing this document include:
Valuation – The value of the company which is being used as the basis for the investment.
Pre- and post-money valuation – The pre-money valuation is the value of the company prior to the investment, with post-money valuation is the value of the company after the investment.
Voting rights – A representation of how much say investors have in the future strategic direction of the business.
Liquidation preference – This is a clause that determines the order in which investors and founders are paid back in case of liquidation or bankruptcy. Be aware: liquidation preference typically relates to any liquidity event, not just a liquidation.
Anti-dilution-provisions – These clauses can help protect investors from dilution because of a future financing round of financing. They can have the effect of decreasing a founder’s shareholder value.
An alignment of interest with the future in mind
As both an investor and a venture builder that helps startups improve their product and find product-market fit, at Founders Factory Africa, we often advise founders to be extremely careful when exchanging equity for capital. When an investor decides to invest in a startup, they are looking for an alignment of interests where the founders can make a meaningful return for starting and scaling the venture, thereby providing a higher chance of a successful exit for the investor.
Some of the errors we typically see include founders raising their initial funding at too high a valuation. This creates unrealistic expectations for future funding rounds. At times, founders ask for too much capital without deep thought into what metrics and milestones they would like to achieve with the capital, leading them to give up too much equity very early on without considering the need for future funding rounds. These scenarios, in turn, stunt the venture’s ability to raise funding and scale due to the lack of alignment of financial interests with investors.
As a startup matures and goes through its different funding rounds, the equity allocated to founders is diluted as larger sums of investment are raised at Series A, B, or C. If the cap table is not thoughtfully constructed, the startup may find it increasingly difficult to raise capital as questions around incentives for later-stage investors increase.
The startup ecosystem is binary. Either a business grows and succeeds, or it fails. There is no in-between. The value that a startup places on its equity, and the partners they choose on its journey and collectively creates is the golden thread that runs through every startup’s success or failure. A thoughtful cap ensures that a startup can become successful. A badly designed cap table can do the exact opposite.
Philani Mzila is an Investment Manager at Founders Factory Africa
By Adedapo Adesanya
The sum of N1.48 billion has disbursed by the Bank of Industry (BoI) in loans to 29,000 small business owners in Imo State as part of efforts to drive economic growth across the country.
The Managing Director of the bank, Mr Olasupo Olusi, said this at a town hall meeting on the federal government’s loan scheme for Micro, Small and Medium Enterprises (MSMEs) in Owerri.
Mr Olusi, represented by the bank’s Divisional Head for MSME in the South, said that the loan scheme was intended to address challenges facing businesses in the state, such as access to finance and cost of doing business.
He said that business owners could access up to N5million each at an interest rate of 9 per cent per annum with a three months moratorium and a tenure of up to three years.
He added that the disbursed funds were part of FG’s N200 billion Special Intervention Fund in line with President Bola Tinubu’s prosperity agenda.
He, therefore, urged business owners to take advantage of the opportunity to grow their businesses.
He also urged stakeholders such as the National Association of Small and Medium Enterprises (NASME) and the Nigerian Association of Chambers of Commerce, Industry Mines and Agriculture (NACCIMA) to mobilise their members to be able to access the loan.
“Application is open to the public and the Bank of Industry facilitates the verification of applicants’ data to facilitate disbursement.
“ We, therefore, call on all stakeholders – MSME owners, community leaders, youth groups, women associations, and Local Government authorities to be active advocates of the scheme.
“ It is our shared prosperity and we need to empower our young people to be architects of their own future,,” Mr Olusi said.
Also, the Secretary of NASME in Imo, Mr Ugochukwu Ohaegbu, called on owners of registered businesses to identify with the association for optimal benefits.
By Adedapo Adesanya
As Nigeria sets its sight on becoming a $1 trillion economy by 2023, the Minister of Industry, Trade and Investment, Mrs Jumoke Oduwole, in the short term, has outlined plans to facilitate $6 billion in foreign investment into Nigeria’s productive economy in 2025 via the Nigerian Exchange (NGX) Group.
This collaboration was highlighted during the Closing Gong Ceremony at the NGX Group, Lagos, where the minister was giving the honour.
From the $6 billion target, $3 billion is projected to come from Foreign Direct Investments (FDIs) into key sectors such as infrastructure, manufacturing, agribusiness, technology, and renewable energy.
According to Mrs Oduwole, these sectors are pivotal to creating jobs, promoting exports, and enhancing Nigeria’s productive capacity.
Another $3 billion will be mobilized through Foreign Portfolio Investments (FPIs)by leveraging innovative financial instruments like green bonds, diaspora-linked securities, and SME-focused platforms.
These efforts aim to deepen market liquidity and align capital flows with national priorities, she added.
Mrs Oduwole emphasized the integral role of capital markets in driving economic resilience and sustainable growth,
“Deepening Nigeria’s capital markets is fundamental to improving investment flows, creating jobs, and sustaining long-term economic resilience,” she said.
On his part, Mr Ahonsi Unuigbe, Chairman of Nigerian Exchange Limited, NGX, reinforced the importance of this collaboration, noting that capital markets are powerful engines of innovation, business expansion, and economic inclusion, all of which are essential to advancing Nigeria’s industrialisation objectives.
Mr Temi Popoola, Group Managing Director/CEO of NGX Group, highlighted the Exchange’s technology-driven vision.
“We are building a next-generation exchange ecosystem designed to democratize investment opportunities, enhance market liquidity, and position Nigeria as a competitive destination for both domestic and international capital.”
Speaking at the ceremony, Mr Umaru Kwairanga, Chairman of NGX Group, commended the Ministry’s leadership and bold reforms, which have set the stage for inclusive growth.
“By fusing policy innovation with market infrastructure, we can catalyze a new era of sustainable growth and national development,” he stated.
By Dipo Olowookere
The Nigerian Exchange (NGX) Limited rebounded by 023 per cent on Friday on the back of renewed bargain-hunting amid cautious trading by investors.
During the session, the trio of NAHCO, The Initiates, and Cadbury Nigeria, appreciated by 10.00 per cent each to sell for N82.50, N4.95, and N31.90 apiece, as Beta Glass gained 9.96 per cent to quote at N109.80, and Caverton flew by 9.92 per cent to N2.66.
Conversely, DAAR Communications lost 10.00 per cent to trade at 54 Kobo, Vitafoam Nigeria declined by 9.94 per cent to N47.55, Multiverse shed 9.93 per cent to finish at N6.35, Eterna deflated by 9.91 per cent to N45.00, and Ecobank gave up 9.72 per cent to settle at N26.00.
At the close of transactions, a total of 29 equites ended on the gainers’ chart and 40 equities finished on the losers’ table, representing a negative market breadth index and weak investor sentiment.
The bourse was very busy on Friday after it resumed trading from the one-day break on Thursday for Workers’ Day.
A total of 565.3 million shares worth N15.0 billion exchanged hands in 18,367 deals versus the 393.0 million shares valued at N12.8 billion transacted on Wednesday in 17,519 deals, indicating a surge in the trading volume, value, and number of deals by 43.84 per cent, 17.19 per cent, and 4.84 per cent, respectively.
The busiest stock for the session was Access Holdings with 52.8 million units valued at N1.2 billion, Chams sold 51.6 million units worth N108.9 million, UBA transacted 36.0 million units for N1.3 billion, FCMB exchanged 34.5 million units valued at N314.5 million, and GTCO traded 31.9 million units worth N2.1 billion.
Business Post reports that the insurance sector shrank by 3.50 per cent, the banking index crashed by 1.49 per cent, and the energy counter went down by 0.17 per cent.
However, the consumer goods, the commodity and the industrial goods indices were up by 2.03 per cent, 0.61 per cent and 0.08 per cent, respectively.
Consequently, the All-Share Index (ASI) increased by 241.72 points to 106,042.57 points from 105,800.85 points and the market capitalisation grew by N151 billion to N66.648 trillion from N66.497 trillion.
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