By Omoruyi Edoigiawerie, Esq
With the enactment of the Nigerian Start-up Act and the promise it brings, Nigeria is set to entrench its status as a pioneer in the start-up ecosystem on the African continent, leading the way in various sectors and increasingly becoming a focus for sustainable investment. This level of awareness will pique the curiosity and interest of not a small number of people across various spheres of human endeavor.

As a Start-up Attorney, I often have people ask me “what’s a start-up? How is it different from regular companies and why do they often receive special attention? These questions are a confirmation that there is a lot more awareness, but I also realize that just like any other sector or industry there are also a lot of words and terminologies used that people are not accustomed to and which often befuddle them. Frankly speaking, a lot of these terms are quite new and some are even still evolving.

This week, I thought it expedient to discuss these terms, attempting to simplify them for ease of understanding.

*What is a start-up?
Generally speaking, a start-up refers to a company in the first stages of operation founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. These sorts of companies are either innovative or emulative, they are sometimes experimental and unstructured, to develop a profitable business model that can easily scale.

The Nigerian Start-up Act defines a start-up as “a company in existence for not more than 10 years, with its objectives being the creation, innovation, production, development or adoption of a unique digital technology innovative product, service or process”

Although start-ups face challenges as they spring up, when they manage to tackle these challenges, they end up with very profound solutions.

*Important start-up terminologies
Having considered what start-ups mean, we will now explore different terms that are commonly used in the Start-up Ecosystem. As an entrepreneur, understanding these terms are important and will improve knowledge of the start-up scene mechanism.

1. Ideation: Ideation is the process of generating ideas and solutions through sessions such as brainstorming, prototyping, and sketching. The purpose is to come up with numerous ideas, which your team can then narrow down.

Minimum Viable Product (MVP): An MVP is a basic version of your product with the necessary features that can be used for testing to gauge customer interest in the product.

2. Pitch Deck: A presentation designed to give a summary of your company, your business plan, and your start-up vision. It needs to cover all aspects of your business concisely and compellingly. To put together a good deck, you need to do extensive research, get reasonable feedback, and graphically design and polish the final version for good aesthetics.

3. Business Plan: A business plan is essentially a roadmap for your start-up, which describes your objectives and how you plan to achieve them. It addresses topics like your business’s finances, market strategies, and management plans. It’s also a good way to ensure your business is moving in the right direction in meeting your targets going forward. A business plan is also used to attract investors during the early stages before your company has established a proven track record.

*Accelerators and Incubators: These are organisations that seek to help start-ups attain success. For early-stage start-up entrepreneurs looking to start rightly, accelerators and incubators offer great start and help grow the business. Now the terms “accelerator” and “incubator” are often assumed to represent the same concept. However, there are a few key distinctions you should be aware of. Accelerators “accelerate” the growth of an existing company, while incubators “incubate” disruptive ideas with the hope of building out a business model and company. So, accelerators focus on scaling a business while incubators are often more focused on innovation.

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4. Boot-Strapping: Bootstrapping is a term used in business to refer to the process of using only existing resources, such as personal savings, and resources to start and grow a company. This happens when an entrepreneur gets his first cash to fund his start-up, usually either from personal savings, family, or friends. If you are using little capital and improving your business model, you are successfully boot-strapping.

5. Crowdfunding: Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people via online platforms. It is mostly used by start-up companies or growing businesses as a way of accessing alternative funds. It enables the business to keep its company shares and only give away a percentage of the total funds raised to the crowdfunding portal.

6. Angel Investors: An angel investor is a high-net-worth individual who contributes with his/her own money to the growth of the small business in exchange for debt or equity ownership. They invest in the development stages of the start-up and usually start contributing when the start-up has something to present, such as a prototype of the product or service.

7. Convertible note: A convertible note is a type of convertible debt instrument that’s used to fund early and seed-stage start-ups. The investor loans money to a start-up, and the convertible note “converts” the loan (principal plus interest) into equity that is repaid at the maturity date.

8. Equity Financing: equity financing is the process of raising capital by selling shares. Angel investors, VCs, and crowdfunding are sources of equity financing.
9. Debt Financing: Opposite of equity financing, debt financing is where businesses raise capital by securing a loan from a financial institution.

There are two types of debt financing — short-term, which is commonly used when there are temporary cash flow issues, and long-term, which applies when a business is purchasing assets.

Seed round: If you’re an entrepreneur then it’s very important to get to know this term. The seed round is the first period when the start-up is looking for funding or investment. It is usually followed by a “Series A round”.

Series A, B, and C rounds: These rounds take place in the developmental stages of a start-up to raise capital. They are based on the maturity level of the business, the purpose for raising capital, and how it is allocated. These rounds are vital steps that are required to turn a start-up with a great idea into a successful company.

Series A rounds: They are meant for the optimization of the start-up’s product. Some people mix up between seed investment and series ‘A’ round, but the difference between them lies in the amount of money and the form of ownership or participation the investor receives.

Series A financing is typically in millions of dollars, while seed capital will usually be in smaller amounts. Also, series ‘A’ funding often comes from well-established venture capital (VC) and private equity (PE) firms that manage multi-billion-dollar portfolios of multiple investments in start-up and early development companies.

Venture Capital (VC): A venture capitalist is investing in a start-up in the form of venture capital funds. With venture capital, the start-up company issues private shares in exchange for money. So, they come in the later stages of development for a portion of equity or debt ownership to advance the growth of the start-up by developing its market share and they become a partial owner of the start-up.

Series B round: The second round of funding usually focuses on advancing a start-up beyond the development stage by expanding the company’s market reach. At this stage, the company has accomplished certain milestones in the development and is past the initial start-up stage.

Series C rounds: Round three of investment; at this stage, several investors contribute funds to tackle competitors; several acquisitions take place. By this time, the business has matured and owners have convinced venture capitalists or other investors that they have a functional and stable business. Investors will be encouraged by the start-up’s success rate in the long term.

Scalability: Scalability describes a business’s ability and capacity to grow and increase revenue. Scaling a start-up requires you to have measures in place to be able to handle increased market demand, such as having the right infrastructure, staff, and technology.

Exit: It’s the point at which the start-up is sold; either as a whole or some assets only. The most famous exits/ acquisitions in the region are:

Unicorn: This is every entrepreneur’s dream for their start-up to become a unicorn. A unicorn is a start-up company that is valued at over $1bn.

These terms are not exhaustive rather they only provide preliminary insight into the ecosystem and will help the average start-up entrepreneur looking to play in the ecosystem understand the language of the ecosystem.