How to Develop Financial Strategy for Entrepreneurial Business in Nigeria

According to data from Disrupt Africa and Statista, Nigeria currently has around 481 active startups, with the majority concentrated in Lagos; however, the survival rate for Nigerian startups is considered low, with reports indicating a significant failure rate, often exceeding 60% due to challenges like access to capital, currency volatility and economic instability. These myriad problems underlying the startup industry in Nigeria, call for sustainable financial strategies in order to combat unfavourable macroeconomic conditions, liquidation and closure of entities to ensure long run business stability and in turn long run economic growth and development. I support the school of thought which posits the reason for a decline in survival rate of startups is due to inadequate business strategy, to be specific financial strategy. Thisarticle serves as a clear financial strategy roadmap for existing and booming startups in Nigeria.

One of the issues stated earlier, which seems to impede the growth of most startups in Nigeria, is the lack of access to capital. There are various financing options available to startups in Nigeria which include; Venture Capital, Angel Investing and Crowd funding. According to Wikipedia, venture capital is a form of private equity financing provided by firms or funds to startups, early-stage, and emerging companies, that have potential for high growth or that have demonstrated high growth in terms of number of employees, annual revenue, scale of operations, etc. Venture capital firms usually funds invest in these early-stage companies in exchange for equity, or an ownership stake in the startup.

Venture capital firms in Nigeria include Future Africa, EchoVc partners, GreenHouse Capital, Ingressive Capital, Chrysalis Capital, Tlcom Capital and Microtraction. To apply to a VC firm for your startup, you will need to;• Understand your startup stage and sector; This involves identifying the stage and sector your startup falls under. Some VC firms specialize in seed or early-stage funding, while others target growth or late-stage rounds.

• Make a list of VC firms that meet your investment criteria
• Evaluate the VC firm; This is a crucial step to determine which VC firm brings value to your startup beyond funding, factors such as their expertise, track record and network should be considered.
• Conduct due diligence; Conducting due diligence on each VC firm is also a relevant step to take, this will enable you gain key insights into how investment decisions are made and which fund the investment will come from in that particular firm. Connecting with startups that have been previously backed by the firm to ask questions is also important. 
• Reach out and pitch to the VC firms; This involves drafting out a list of your competitive advantages as a startup and reaching out to these VC firms, this can be done by sending cold emails, leveraging someone connected to the firm or applying if the firm has an open application process. 
• Finally, negotiate and close the deal; This involves negotiating the terms of the investment to ensure they align with your startup’s goals and expectations.

Angel investing and Crowdfunding are viable options to solve the issue of access to financing for entrepreneurial businesses or startups in Nigeria. An angel investor is a high networth individual who provides financial support for small startups and entrepreneurs typically in exchange for ownership equity in the company. You can get angel investors for your startup by researching angel investor networks, attending pitch events and conferences, tapping into business networks, and being proactive on social media. Then, you can pitch your business to them and secure the valuable funding it needs. The predicted value of the global crowdfunding market was over $1.4 billion in 2023, and it is expected to double by 2030, according to stripe.

Crowdfunding is a method of obtaining money to fund initiatives and enterprises with the help of friends, family, customers and individual investors. There are different types of crowdfunding which include;

• Reward based crowdfunding; In reward-based crowdfunding, investors provide money to your firm in return for a “reward,” which is typically a good or service that your business provides. Startups that are introducing a new product or service and require finance for development or manufacturing usually employ this model.
• Equity based crowdfunding; In equity-based crowdfunding, investors receive shares of your company in return for their investment. This form of crowdfunding is used most often by startups with high growth potential. 
• Debt based crowdfunding ; Debt-based crowdfunding, also known as “peer-to-peer lending” or “P2P lending,” functions similarly to a traditional loan. Instead of borrowing from a bank, the borrower receives funds from a group of individual investors. The borrower agrees to repay the loan, with interest, over a set period of time. 
• Donation based crowdfunding; This model is often utilized by nonprofits, social entrepreneurs, and startups, where the “return on investment” is measured in social impact or community benefit rather than financial gain. Investors contribute funds because they support the cause, not because they anticipate a financial return.

When developing a financial strategy for entrepreneurial businesses in Nigeria, the impact of local financing options, such as loans from microfinance banks cannot be overlooked. In a country with over 1,008 microfinance banks (National Association of Microfinance Banks) , access to borrowing has become relatively easier, making it a viable financing option for many businesses. However, while microfinance loans are a popular choice, the disadvantages often outweigh the advantages, particularly for early-stage entrepreneurs.

One of the significant challenges is the rising interest rates, driven by government monetary policies and, at times, the terms set by the microfinance banks themselves. These high-interest rates can place a heavy burden on entrepreneurs, especially those in the pre-seed or seed stages of their ventures. For businesses in these early phases, the cost of borrowing from microfinance institutions can be particularly detrimental, making it a less advisable option for new founders.

Rather than relying on microfinance loans, entrepreneurs in the early stages should consider alternative financing methods that are better suited to their specific needs and financial capacity.

The failure to match the stage of business development, with the appropriate financing option is one of the primary reasons why many small and medium-sized enterprises (SMEs) in Nigeria fail.

Understanding the various stages of business growth and selecting the right type of financing at each stage is crucial for long-term success. Early-stage businesses, in particular, must focus on securing funding that aligns with their current needs, rather than taking on the risks associated with high-interest loans. 

Developing a financial strategy for your startup or business involves exploring various financing options like Venture Capital, Angel Investing, Crowdfunding, and Microfinance loans to address capital access issues. However, what if these funds are undermined by unforeseen challenges like currency volatility or adverse macroeconomic conditions due to economic instability? This underscores the critical need for risk management in your financial strategy, as the capital raised for business growth can be jeopardized by unexpected economic obstacles.

RISK MANAGEMENT AND DEVELOPING A FINANCIAL STRATEGY FOR ENTREPRENEURIAL BUSINESSES IN NIGERIA.

Entrepreneurial enterprises in Nigeria need to implement a strong risk management plan to protect money from different funding sources because economic instability frequently results in currency volatility and unfavourable macroeconomic conditions. Here is an approach designed to address these difficulties;

Diversification of Funding Sources: Avoiding reliance on a single type of financing reduces vulnerability. Entrepreneurs should blend Venture Capital, Angel Investments, Crowdfunding, and Microfinance loans, while also exploring government grants or international aid. This mix can provide a buffer against economic fluctuations affecting one funding type disproportionately.

Currency Hedging: Given the frequent naira fluctuations, businesses can use financial instruments like forward contracts or options to hedge against currency risk. This strategy involves securing exchange rates for future transactions, mitigating the impact of devaluation on foreign currency loans or investments.

Adaptive Financial Planning: Regularly revisiting and adjusting financial forecasts to reflect current economic conditions is crucial. This means preparing for both short-term and long-term scenarios, ensuring that the business can pivot or scale down operations if the economic environment worsens.

Building Reserves: Creating a financial cushion through reserves or contingency funds can help weather economic storms. This involves setting aside a portion of profits or fundraising specifically for emergency liquidity, protecting the business from immediate cash flow crises.

Enhanced Due Diligence: Before accepting funds, conduct thorough due diligence on the economic clauses of investment agreements. Understand the implications of macroeconomic shifts on repayment terms, interest rates, or equity stakes, ensuring agreements include clauses for economic downturns.

Continuous Market Analysis: Staying informed about economic indicators, policy changes, and market trends allows businesses to anticipate and react to economic instability. This proactive approach involves networking with industry peers, engaging with economic analysts, or subscribing to local economic reports.

Local Partnerships and Supply Chain Localization: Depending on the nature of your business/ startup, engaging with local suppliers and partners can reduce exposure to international market volatility. By sourcing materials or services locally, businesses can better control costs and adapt to domestic economic changes more swiftly..

REFERENCES

The Nigerian Startup Ecosystem Report 2022. Disrupt Africa, 2022, old.disruptafrica.com/wp-content/uploads/2022/09/The-Nigerian-Startup-Ecosystem-Report-2022.pdf. Accessed 12 Jan. 2025.

“Startups Struggle as Investors Cut Funding.” Punch Newspapers, 2024, punchng.com/startups-struggle-as-investors-cut-funding/. Accessed 12 Jan. 2025.

“What is Crowdfunding? Here Are Four Types to Know.” Stripe, stripe.com/resources/more/four-types-of-crowdfunding-for-startups-and-how-to-choose-one. Accessed 12 Jan. 2025.

“History & Background.” National Association of Microfinance Banks, nambnigeria.org/service/history-background/. Accessed 12 Jan. 2025.

“Top Venture Capital Firms in Nigeria.” Techpoint Africa, 2024, techpoint.africa/2024/12/28/top-venture-capital-firms-in-nigeria/. Accessed 12 Jan. 2025. 

“Share of Startups in Nigeria by Launch Year.” Statista, 2024, www.statista.com/statistics/1337954/share-of-startups-in-nigeria-by-launch-year/. Accessed 12 Jan. 2025.