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
President Bola Tinubu has reaffirmed plans to list the entire Nigerian National Petroleum Company (NNPC) Limited on the Nigerian Exchange (NGX) Limited.
The President made this known on Thursday while receiving a delegation of the NGX Group Plc at the State House, Abuja.
The team was led by the NGX Group chairman, Mr Umaru Kwairanga, and its chief executive, Mr Temi Popoola. The President was briefed on the capital market’s growth from about N30 trillion in 2023 to N160 trillion.
According to a statement by the Special Adviser to the President on Information and Strategy, Mr Bayo Onanuga, President Tinubu said the planned listing of NNPC would form a key part of his administration’s ongoing economic reforms.
He described the move as part of broader reforms aimed at expanding investment opportunities for Nigerians and deepening the country’s capital market.
“One day, not just the arms and legs, the totality of it will be listed on the Nigerian Exchange,” he said.
The President also reaffirmed that his administration’s target of building a $1 trillion economy remained achievable, citing Nigeria’s population and human capital as major advantages.
“I can see the excitement in the room. All I can do is to celebrate you all today. When we took over, it was very challenging. I had to talk to myself and define my background to accept the assets and liabilities of my predecessor. I asked for the job, and I have to do it,” President Tinubu said.
Reflecting on the administration’s monetary reforms, the President praised the Governor of the Central Bank of Nigeria (CBN), Mr Yemi Cardoso’s role in restoring confidence in the financial system.
“My capable partner in one of the thinking and reasoning days was Yemi Cardoso, whom I put at CBN. We were in the negative with monetary policy and the reserve. We had N30 trillion printed, and there were liabilities. I thank you very much, Yemi Cardoso,” he said.
President Tinubu said the performance of the stock market reflected broader improvements in the Nigerian economy.
“If the stock market is doing well, then we are doing well. We can teach this in classrooms to our undergraduates. If they can be in the classroom without the harrowing feeling of how to pay and what to pay, then we can build a nation of success and prosperity. My assurance to you is that I won’t stop reading, thinking and supporting you,” he said.
The President also reiterated his belief in private sector-led investments, recalling his longstanding support for the Dangote Refinery project.
“If we can push the private sector to invest in the economy wisely, then we will grow. It is one reason why I backed Aliko Dangote even before I became President. God bless the soul of Muhammadu Buhari. We discussed how we can support the private sector to go into the refinery business,” he added.
On his part, NGX Group CEO Temi Popoola told the President that the total value of listed equities had increased from nearly N30 trillion when the administration assumed office in 2023 to about N160 trillion, with projections to reach N230 trillion before the end of the year.
“The picture today is that when you took office in 2023, the total value of stocks listed in Nigeria was just shy of N30 trillion. Today, Mr President, that figure is N160 trillion. By the end of this year, with the listings we are seeing in our market, we expect that figure to rise to N230 trillion,” Popoola said.
He added that the Nigerian All-Share Index had risen from 52,000 points to 244,000 points, while the reforms had created an estimated 500,000 to 900,000 new millionaires, attributing the market’s performance to the administration’s reforms and expressing confidence that Nigeria could attain a $1 trillion economy before 2030.
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange surged by 2.05 per cent on Thursday, August 6, amid fresh buying interest after a lukewarm preceding session.
The market capitalisation gained N56.21 billion to close at N2,795 trillion compared with the previous session’s N2.739 trillion, while the NASD Security Index (NSI) rose by 93.63 points to end at 4,657.59 points against Wednesday’s 4,563.96 points.
During the trading day, there were five price gainers and two price losers, led by Okitipupa Plc, which depreciated by N28.00 to settle at N252.00 per share compared with the previous day’s N280.00 per share, and Acorn Petroleum Plc, which fell by 5 Kobo to close at N1.25 per unit versus midweek’s N1.30 per unit.
On the flip side, 11 Plc gained N22.5o to sell at N247.50 per share versus N225.00 per share, MRS Oil Plc grew by N12.00 to N132.00 per unit from N120.00 per unit, Central Securities Clearing System (CSCS) Plc added N9.94 to end at N129.74 per share versus N119.00 per share, FrieslandCampina Wamco Nigeria Plc improved by N4.09 to N148.09 per unit from N144.00 per unit, and Industrial and General Insurance (IGI) Plc expanded by 5 Kobo to 55 Kobo per share from 50 Kobo per share.
The volume of securities skyrocketed by 360,690.4 per cent to 2.9 million units from 802 units on Wednesday, the value of securities surged by 47,518.0 per cent to N99.2 million from N208,240, and the number of deals increased by 300 per cent to 62 deals from two deals a day earlier.
Great Nigeria Insurance (GNI) Plc ended the day as the most traded stock by value on a year-to-date basis, with 3.4 billion units transacted for N8.4 billion, followed by Infrastructure Credit Guarantee (Infracredit) Plc with 2.3 billion units traded for N6.5 billion, and CSCS Plc with 77.0 million units sold for N5.5 billion.
GNI Plc also ended as the most traded stock by on a volume year-to-date basis, with 3.4 billion units exchanged for N8.4 billion, followed by Infracredit Plc with 2.3 billion units valued at N6.5 billion, and Resourcery Plc with 1.1 billion units worth N415.7 million.
By Adedapo Adesanya
The Naira further slipped against the United States Dollar by N2.33 or 0.17 per cent to N1,364.88/$1 from N1,362.55/$1 in the Nigerian Autonomous Foreign Exchange Market (NAFEX) on Thursday, August 6.
In the same vein, the domestic currency weakened against the Pound Sterling in the official FX market by 71 Kobo yesterday to trade at N1,838.09/£1, in contrast to Wednesday’s value of N1,837.38/£1, but against the Euro, it gained 45 Kobo to close at N1,574.80/€1 compared with the previous day’s N1,575.25/€1.
At the GTBank FX desk, the Naira improved its value against the US Dollar by N4 on Thursday to quote at N1,369/$1 versus midweek”s rate of N1,373/$1, but at the parallel market, it remained unchanged at N1,400/$1.
The NAFEM interbank FX turnover jumped to $98.804 million on Thursday, up by more than 31 per cent from $75.357 million the previous day.
Similarly, the number of deals at the NFEM interbank increased to 106 from 82, confirming higher US Dollar flows at the official FX market.
Traders expect the Naira to hold steady, buoyed by dollar sales by the Central Bank of Nigeria (CBN), whose presence in the market will help ease demand pressure.
In the cryptocurrency market, major cryptocurrencies were mostly down as the Senate delayed a vote on the Crypto Clarity Act until at least September.
The bill, which would set out which U.S. regulator oversees which digital assets, needs 60 votes to pass, and it is unclear whether it currently has 50. Several Republican senators have said publicly they oppose it, and Democrats want stricter rules preventing President Donald Trump from profiting from crypto while in office.
Ripple (XRP) shrank by 2.5 per cent to $1.02, Solana (SOL) depleted by 1.5 per cent to $72.86, Binance Coin (BNB) fell by 1.4 per cent to $587.41, Dogecoin (DOGE) tumbled by 0.9 per cent to $0.0692, Bitcoin (BTC) decreased by 0.6 per cent to $64,344.69, and Ethereum (ETH) tumbled by 0.3 per cent to $1,902.03.
However, Cardano (ADA) appreciated by 7.7 per cent to $0.2025, and TRON (TRX) rose by 0.3 per cent to $0.3267, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) traded flat at $1.00 apiece.
