The private sector is the pillar of every economy. Yet, startup companies all over the world face many obstacles to funding, and in Nigeria, these obstacles are compounded by the government’s neglect of the private sector.
Venture Capital is one of the financing options open to privately-owned companies and small businesses. It is a type of private equity provided by venture capital firms interested in investing in startups with high growth potential in exchange for equity or partial ownership of the company.
Venture capital certainly holds the potential to drive economic development in Nigeria. It creates a ripple effect, which improves R&D, promotes innovation, and increases intellectual property assets – which also becomes a source of wealth creation.
Venture capitalists provide not only financing but also mentorship, strategic guidance, network access, and other forms of support.
The funds provided by venture capitalists fill the void created by high bank-lending rates. For instance, how many startups can reach the Nigerian prime lending rate, which according to CBN in December 2018, was 16.17% December 2018. What’s more, most growing companies cannot access public equity funds through initial public offerings because they can’t meet up with the listing requirements of the Securities and Exchange Commission.
The frontiers of Nigeria are gradually opening to venture capital investment and responsibility is placed on the Nigerian government to strategically create policies and the right investment environment needed to attract increased funding of the private sector.
Nigeria has attracted a lot of venture capital investments in recent years. Within the period of 2012-2017 alone, Nigeria accounted for 73 percent of the US$10.7 billion value of private equity funding in the West African region.
According to Partech Ventures, a global investment platform for tech and digital companies, $560m was invested in African tech startups by VCs focused on the African market in 2017, with Nigeria startups accounting for 20 percent of the funding.
Though, raising funds from VCs isn’t always a straight path, particularly with their valuations, and terms and conditions, startups using venture capital follow strategies that are more innovative and take shorter time to introduce their products and services to the market.
The provision of funds to start-ups by venture capital companies is an important stage of start-ups life cycle, but these VCs do more than that. Venture capital companies utilise huge part of their resources in understanding new markets and technologies for the investee company, providing effective coaching for startups, and providing an extensive network of contacts to investees.