In my previous article on this subject matter, I named certain means of raising Investment, Seed and Working funding in Nigeria and got in response feedback mostly on the topic of Venture Capitalists & Angel Investors, something I have touched on in previous articles.
But most of these feedback enquiries came with some misconceptions about how Venture Capitalists or Angel Investors work or the Regulatory Framework governing the raising of funds through these means. It also came to my notice that many investment platforms operating do so without any idea of the legal framework governing Investment of such nature in Nigeria as well.
As a result, this supplementary article aims to provide some clarification on:-
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- What Venture Capitalists are and how they work along with their pros & cons.
- Who Angel Investors and the Legal implications of how they work in Nigeria.
- The legal safeguards to be adopted by entrepreneurs seeking Venture Capitalist & Angel Investor funding.
What is a Venture Capitalist?
A Venture Capitalist or VC is a firm of licensed Professional Managers specializing in providing early stage financing or start-ups or new companies seeking quick growth and is a profit seeking vehicle by entrepreneurs who have the objective of profiting(usually in the long run) from providing funding for start-ups mostly.
Are Venture Capitalists firms required to be licensed in Nigeria?
Yes, Venture Capitalists are required to be registered and licensed by the Securities & Exchange Commission.
What are the Legal implications of obtaining financing from offshore or overseas venture capitalists?
This is a growing topic of legal discussion in certain quarters. Offshore Venture Capitalists tend to feature most prominently in Tech start-ups and usually emerge as seed funding or round-based funding specialists hoping to profit on corporate acquisitions.
It is illegal according to SEC rules to operate as an unlicensed Venture Capitalist in Nigeria.
Okay, in that case how can overseas funding be routed without being legally defined as Venture Capital?
Offshore Venture Capitalists seeking to operate in Nigeria can do so legally as Foreign Portfolio Investors (with their Investments to be registered with SEC and given certificates of Capital Importation) or they can directly register a company structure dedicated to funding start-ups under Convertible Debt or outright Equity purchases.
They can also work through individual proxies, usually experienced professionals appointed to operate as Angel Investors.
Who is an Angel Investor?
This is simply an individual who makes available capital funding for a business or start-up, usually in exchange for convertible debt or ownership equity in the business.
How exactly do Venture Capitalists differ from Angel Investors?
The two types of investors differ mainly in the sense that Venture Capitalists are usually Professional Fund Managers investing money belonging to other people like High Net Worth Individuals, Insurance Companies or Pension Fund Managers while Angel Investors are usually individuals investing their own money through their personal structure.
Also, Angel Investors in Nigeria do not need any licensing unlike Venture Capitalist firms.
What are the typical stages of Venture Capitalism? How do their funding arrangements come to an end?
Venture Capitalists usually go through the stages of Fundraising, Investment, monitoring/Value enhancement & then exit.
What are the pros and cons of using both Venture Capitalists and Angel Investors in Nigeria?
– They both provide easier private funding alternatives for start-ups as against traditional bank loans;
– They sometimes come with value additions such as business coaching and mentorship;
– They share the risks of business along with their start-up funding subjects and demand no extra or continuous liabilities in the event of business losses and even bankruptcy;
– They serve as a very quick step to exponential business growth for start-ups.
– Venture Capitalists and Angel Investors are responsible for some of the most rampant cases of founding shareholder dilution ( company takeovers).
– Venture Capitalists and Angel Investors are not particularly quick or easy to access and a funding application can take months.
– Venture Capitalists and Angel Investors are also responsible for some of the most rampant cases of intellectual property hijackings, sometimes converting business ideas they initially rejected into major profits.
– Venture Capitalists and Angel Investors sometimes seek to exert operational control over the businesses they lead, leading to the stifling of entrepreneurial and business management creativity.
So what are the necessary safeguard measures I need to take as a start-up seeking funding?
These are the following measures you should take, some of them i already mentioned in my previous article on this subject matter :-
- Always hire a company promoter, preferably, a lawyer to represent you to the extent of providing legal guidance and documenting initial funding applications.
- Always have a non-disclosure agreement in place for your business idea and if possible, a registered Copyright, Trademark or Patent on your product/service offering.
- Always have a registered company through which you can have an equity structure to bargain with.
- Always offer first, preferably, convertible debt instruments as against equity when seeking funding.
- Always upwardly review your company’s share structure in your favour whenever you receive Venture Capitalist or Angel Funding.
- Ensure that you have a Shareholder’s Agreement written before seeking funding.
- Seek constant legal advice on the nature of funding via Private placement which typically covers Angel Investors and Venture Capitalists.
Conclusion:- It is my hope going forward that this supplementary write-up will provide some clarity regarding previous enquiries seeking further advice on the nature of Venture Capitalist & Angel Funding, especially from Offshore sources, gaining ground especially in Nigeria’s Tech Industry.