Understanding Seed Investment: A Guide to Funding in Nigeria
May 16, 2024
Adam Wakefield

You have an idea and want to see your business grow and succeed. But you don’t have sufficient capital to start and operate the business.

How do you secure the initial seed investment you need? Investors throughout the region are interested in assisting startup tech founders and local entrepreneurs to fund and grow their businesses through seed funding.

In this article, we'll break down seed investment and detail its importance, especially in Nigeria. We'll share statistics of Nigerian tech startups that have benefited from this, seed investment options for startups, and how to secure one for your business. 

Let’s get started!

What is seed investment?

Seed investment provides startups with the funding needed to cover the expenses of the earliest stages of business development. Also known as seed money or seed funding, it is the first stage of investment for a startup — the funding given to start scaling the business idea or product.

Why is seed investment important, and how does it work?

Unlike other seed rounds, such as pre-seed investment or Series A or B, seed investment provides essential capital for product development, market research, and initial operations.

Furthermore, in series A and B funding rounds, investors seek businesses with great ideas and quality strategies to transform those ideas into viable business ventures through various means. The seed funding stage is important because it helps startups test and structure their ideas. With the funds generated at this stage, startups can operate effectively without additional funds if situations get tough.

Seed investment options available for startups in Nigeria

There are several seed investment options available for Nigerian startups. Some of these include:

  • Personal funds – You can raise the initial capital for your business from your savings, stocks, or previous investments.
  • Family and friends – Here, you can acquire money from friends or people close to you who believe in your idea and are willing to invest in you.
  • Venture capitalists – Venture capitalists are private equity investors who provide funding for businesses with high growth potential in exchange for equity. In 2020, the number of venture capital firms willing to invest in Nigerian startups increased. Although the number has dropped over the years, Nigeria is still seen as a good soil for investments.
  • Angel investors – Wealthy individuals who invest in startups in the form of shares. They use convertible debt that can be easily converted into shares. 
  • Bank loans – Financial institutions provide startup funding through loans in exchange for collateral, which must be repaid over a specific period.
  • Government grants – Government agencies award grants to startup companies based on different criteria such as societal stance or influence. This funding type is often non-payable.
  • Crowdfunding – Here, startups can collect money from a large number of people through online platforms. The startup will be charged a fee from the percentage of funds that were raised

In summary, the various seed investment choices in Nigeria allow you to adopt the best funding approach to fit your specific needs and help build a flexible and strong entrepreneurial environment.

Common metrics venture capitalists expect to see before investing in startups 

Venture capitalists (VCs) assess several key metrics before committing to invest in a startup company:

  • Product validation – This shows investors that you have a viable product and there is a product-market fit.
  • Market size – Venture capitalists also want to be sure the market for your product is sizable and can assist in the business success. 
  • User acquisition – Before a venture capitalist invests in your startup, they need certainty about how you intend to acquire users or buyers. You should show them that you’re already in the process.
  • Financial projections—Investors want to know your projections. Your projections should be as realistic as possible to illustrate the growth potential.
  • Team – Who is your startup team? Are they experts in their field? Investors need to be aware of this.
  • Cost of acquiring customers (CAC) – When the cost of acquiring customers is low, investors see that you’ve found an effective way to grow your market share with minimal expense. It also shows your business is scalable long-term.
  • Growth rate – Any professional investor would want to know the market share and revenue growth of your startup company. They want to know that what they are investing in is capable of high returns.
  • Retention rate – How well will you retain old customers while acquiring new ones? A high retention rate proves your products are valuable enough for customers to pay more.
  • Capital efficiency – A startup that can manage resources well is a source of pride to investors. Many startups shut down at the seed stage because the founders could not properly manage resources. Therefore, investors want to be sure that regardless of the amount of capital you have at your disposal, you can handle resources properly.

Strong performance in these areas attracts potential investors, helping the startup raise initial-stage funds successfully.

How to raise seed investment for your Nigerian startup

Raising seed investment requires careful planning and execution. Here's a step-by-step guide for Nigerian startups:

Build a solid business plan 

Create a clear and distinctive business plan that outlines your startup’s vision, mission, target market, financial plan, competitive landscape, and growth strategy. It simply shows the viability and potential of your business.

Clearly define your funding needs

Before defining your funding requirements, you must first decide if it's the right time to seek funding. Are you willing to give up a percentage of your business to investors? Can you meet any requirements they may have?

If you answered yes to these questions, it's time to clearly define how much seed money you need and specify the terms you seek.

Decide your funding choice/option

Understand each of the funding options that are available and choose one that you’re most comfortable with.

Prepare your pitch deck

A pitch deck is a brief visual presentation that gives potential investors an outline of your business plan, growth strategy, and products/services. Some tools you can use to create a pitch deck are Canva or Visme.co.

To create a compelling pitch deck using Canva:

  • Choose a template – Go to Canva, and sign up if you haven't already. Then click on search. Type in the keyword “pitch deck”. Next, choose a template from the options available to you

  • Customise the template – Input your details and information, and change the font colour and type where necessary.
  • Download – Once you're done customising the template, select the share icon on the top right corner (you can present directly on Canva or choose “download”, then download as a PDF document).

Build a list of potential investors

It's time to find and connect with investors. You can find them by attending financial events, through recommendations or referrals, social media platforms, and others… 

Next, develop a list of potential investors you'd love to pitch your business to. Before proceeding, make sure to research their track record and the industries they focus on.

Hire a seed team

Ut together a team that is vested in your idea and possesses industry expertise. For example, in Nigeria, if you're launching a fintech startup, having team members with experience in finance and technology will be invaluable.

Pitch your idea

When seeking funds from venture capitalists or angel investors, pitching your business helps to get investors more interested and excited about funding the business. A pitch is a brief presentation of an idea or business aimed at persuading potential investors or partners of its value. 

Negotiate the deal

Investors may disagree with your initial offer based on their assessment of the market, risk factors, or investment preferences. It's your responsibility to negotiate and find common ground with them. Don’t jump on every offer; review the terms, seek legal counsel, and be open to walking away from that particular meeting if the offer doesn’t meet your funding needs.

To successfully raise seed investment for your Nigerian startup, plan carefully, execute strategies precisely, and communicate effectively. Following these guidelines helps entrepreneurs to secure resources for long-term success.

Seed investment in Nigeria: A simple overview + stats

Innovation and entrepreneurial skills are the key factors behind the dynamic and ever-evolving Nigerian startup funding ecosystem.  

In recent years, there has been an increase in venture capital activity, with both local and international investors actively seeking investment opportunities. 

Key statistics, trends, and reports

The Nigerian Startup Ecosystem Report 2023 from Disrupt Africa analyses actively funded startups, local funding networks, and funding activities over the past nine years. 

According to the report, Nigeria witnessed the largest number of seed investments compared to other African countries from 2015-2022. In 2022, 180 startups were funded in Nigeria, whereas in 2023, there was a 45.16% drop in the number. Studies also show that as of 2024, there are 590 Nigerian seed-stage companies and a total funding amount of $568.9M.

In summary, with various funding options available, Nigerian entrepreneurs have greater opportunities to turn their creative ideas into thriving businesses.

Challenges with startup seed funding in Nigeria

Although seed funding offers Nigerian entrepreneurs abundant opportunities, it also presents several challenges that entrepreneurs must address:

Unpredictable market and regulatory conditions

The Nigerian market has proven to be unpredictable over the years. Implementing many demanding policies has affected startups and resulted in premature closure. To tackle this, startups should stay flexible, keep an eye on market trends and regulations, and adjust their strategies as needed to stay ahead.

Lack of proper book-keeping

Neglecting to maintain proper records can result in investors losing interest. To address this, implement robust accounting and financial management practices from the outset including:

  • regularly tracking your financial transactions using reliable accounting software or 
  • hiring a professional accountant. 

Lack of supportive ecosystem

Every startup needs a good supporting system – one that informs them of opportunities or advises against wrong decision-making, including: 

  • mentorship programs
  • networking opportunities, and 
  • access to resources. 

Without adequate support, startups may struggle to overcome obstacles and achieve sustainable growth. Startups should actively seek out these opportunities and partnerships.

Inability to hire quality professionals

Due to Nigeria’s economic conditions, there has been an increase in the emigration of citizens to other countries, which has consequently led to a decrease in the number of quality professionals in the country. 

According to Businessday.ng, the immediate effect of the “Japa” syndrome on the Nigerian economy is the reduction in the number of skilled and semi-skilled professionals in various sectors.

To address this, initiatives should be focused on retaining and attracting skilled talent. This includes improving working conditions, offering competitive salaries, enhancing access to education and professional development, and creating a favourable business environment. 

You must address these challenges to ensure your startup company thrives in the Nigerian ecosystem. Stay aware of market changes and regulations, improve accounting practices, and actively seek out partnerships that can position your business for success.

Seed Investment as the catalyst for Nigerian startup success

As a Nigerian startup, seed investment can increase the potential for the growth and success of your business. 

To secure seed funding, you’ll need to clearly define your funding needs, build a list of potential investors, be open to opportunities, pitch your idea, and prepare for the challenges that may arise.

Learn more on how FFA can assist you in transforming your idea into a thriving business.