Introduction
The Importance of Funding for Startup Success
The role of capital in startup growth cannot be overstated. Founders require capital to conduct market research and surveys, develop their products or services, and attract talent. As invaluable as a founder’s passion and dedication are, they are not, in themselves, sufficient to sustain or scale a business. Thus, securing funding is one of the most crucial considerations for founders, particularly in the early stages of business development.[1]
While many founders can leverage their savings in the early stages of their ventures, personal savings are usually insufficient to cover the capital requirements of launching and scaling a viable venture. This funding gap – a common issue in the startup world – is one of the primary reasons why external financing is crucial to the survival and success of startups.
Statistically, the odds are stacked against startups. The survival rate for startups is low, with the majority of new startups failing.[2] A major contributing factor to this high failure rate is inadequate funding. The success stories of global giants such as Google, Apple, Spotify, and Amazon, each of which started as a small startup, underscore the transformative power of early-stage investment. Their growth trajectories were made possible in large part due to timely and sufficient funding that enabled product development, market entry, and eventual scale.
Funding also plays a crucial role in validating and refining a business idea. In the early stages, capital is often required to develop prototypes, test product-market fit, and build the necessary infrastructure for launch. The amount of funding needed will naturally vary depending on the characteristics of a startup. For instance, startups focused on physical products require significant capital to design and manufacture prototypes, whereas those focused on digital platforms prioritize software development and user acquisition.
In essence, funding is not merely a financial input; it is a strategic enabler that allows entrepreneurs to transform vision into reality, navigate uncertainty, and lay the groundwork for long-term growth and impact. As a result, there is high competition for external funding among startups. This article examines the various funding options available to startups operating in Nigeria, depending on their growth stage, while also highlighting some of the legal and regulatory issues that may arise when pursuing these options.
The Nigerian Startup Ecosystem
The Nigerian startup ecosystem has evolved into one of the most promising and dynamic on the African continent. With Lagos often referred to as the “Silicon Valley of Africa,” Nigeria has become a hub for innovation, particularly in sectors such as fintech, healthtech, edtech, agritech, and logistics, despite the broader challenges of its macroeconomic environment.[3] The country’s youthful population, increasing smartphone penetration, and growing internet access have created fertile ground for tech-driven solutions that address local challenges at scale.
According to a 2022 report by Disrupt Africa, Nigerian startups made up 28.4% of all funded ventures across the continent and received 29.3% of the continent’s total investments.[4] Over the past decade, Nigerian startups have consistently ranked among the top three in Africa for venture capital funding. Landmark successes like Paystack, Flutterwave, Future Africa, and Andela have not only drawn global attention but have also inspired a new generation of entrepreneurs.[5]
The regulatory landscape has also seen notable progress. The enactment of the Nigeria Startup Act signals a move towards a more supportive environment, although regulatory uncertainty remains a challenge for some sectors. Additionally, the Presidential Enabling Business Environment Council (PEBEC) enacted 180 reforms aimed at improving the ease of doing business in Nigeria.[6] These reforms have improved procedures for business registration, obtaining licenses and permits, and accessing grants and funds. Further support has come from a growing network of ecosystem enablers, including tech hubs, accelerators, co-working spaces, and academic programs focused on technology and entrepreneurship. These platforms have helped fuel talent development and early-stage business growth.
Nonetheless, several structural and infrastructural challenges persist. The perennial issue of unreliable power supply remains a major bottleneck. Many startups are compelled to rely on alternative power sources such as generators, inverters, and solar panels to ensure business continuity. Access to funding, especially at the seed and early-growth stages, remains a significant hurdle for Nigerian startups.[7] Additionally, there is limited access to diverse financing options, including angel investors and venture capital. Other challenges include inflation and poor transportation systems, each of which increases the cost and complexity of doing business in Nigeria.
Despite these constraints, Nigerian startups continue to show resilience, creativity, and an ability to scale in one of the most complex markets in the world. As the ecosystem matures, collaboration between the private sector, government, and international partners will be key to unlocking its full potential and driving inclusive economic growth.
In the ensuing paragraphs, we highlight some of the funding options that startups operating in the Nigerian ecosystem usually adopt, some of which include bootstrapping, equity or debt financing, etc.
Self-funding/bootstrapping in business
Self-funding, which is also known as bootstrapping, is the practice of building and growing a business using personal savings or revenue generated by the business itself, without relying on external investors or loans.[8] For many Nigerian entrepreneurs, bootstrapping is not just a choice but often a necessity, given the limited access to formal funding in the early stages. However, beyond financial constraints, bootstrapping can be a strategic move, especially in the formative years of a startup.
Pros of Self-Funding
- Full ownership and control: founders retain 100% ownership and have complete control over decisions, direction, and company values.[9]
- Financial discipline: with limited resources, bootstrapped startups tend to be more cost-conscious, resourceful, and efficient.
- Faster decision-making: without the need to consult investors or boards, founders can move quickly and adapt to market feedback.
- Stronger product-market fit: bootstrapped founders often stay closer to their customers, allowing for organic, need-driven growth.
Cons of Self-funding
- Limited capital: scaling may be slower due to restricted funds, especially for marketing, hiring, or infrastructure.
- Personal financial risk: founders shoulder the financial burden, which can be stressful and risky if the business does not succeed.
- Slower growth: without external capital, it may take longer to achieve key milestones or compete with well-funded rivals.
- Capacity constraints: hiring, product development, and operations may suffer due to budget limitations.
When to Bootstrap vs. Seek External Funding[10]
Deciding between bootstrapping and raising capital is a strategic choice that depends on several factors unique to each startup. Founders must carefully assess the nature of their business needs, risk appetite, and long-term goals to determine the most appropriate path. The several factors to consider include:
- Stage of business: early-stage ventures with uncertain product-market fit may benefit from bootstrapping until there is a validated business model. This helps avoid premature dilution and retains flexibility.
- Control and ownership: founders who prioritize maintaining full control and equity may prefer bootstrapping. On the other hand, those willing to share decision-making power in exchange for access to capital and expertise may find external funding advantageous.
- Capital intensity: Businesses that require heavy upfront investment, such as manufacturing or infrastructure, may need external funding early on. Conversely, service-based or digital businesses can often start lean and scale organically.
- Market opportunity: if the market is rapidly evolving or highly competitive, external funding may be necessary to capitalize on opportunities and scale quickly.
- Founder’s vision: some founders prefer building at their own pace, without the pressure of investor expectations. Others view external capital as a means to accelerate growth and access valuable networks.
Choosing between bootstrapping and external funding should align with the startup’s strategic objectives, growth trajectory, and long-term vision. While bootstrapping fosters discipline and sharpens business fundamentals, unlocking scale and market positioning at the right time can significantly accelerate growth.
Debt financing in Nigeria: Bank loans, credit facilities, and government-backed support
Debt financing remains a critical source of capital for Nigerian businesses, especially those looking to scale operations without diluting ownership. Traditionally, this form of financing has been dominated by commercial banks, which offer structured repayment plans over a defined period. However, access remains a significant challenge for many small and medium enterprises (SMEs) due to stringent collateral requirements, high interest rates, and perceived credit risks by lenders.[11]
In recent years, financial institutions have begun offering more flexible credit products tailored to SMEs, including invoice discounting, asset-backed lending, and revolving credit lines. These facilities allow businesses to manage cash flow, fund inventory, or invest in expansion, though they still often require detailed documentation and a proven track record.[12]
To bridge the financing gap, various government initiatives have emerged to improve access to affordable credit. Agencies such as the Bank of Industry (BOI), the Development Bank of Nigeria (DBN), and the Central Bank of Nigeria (CBN) have launched intervention funds and single-digit interest loan schemes targeted at key sectors like agriculture, manufacturing, technology, and creative industries.[13][14] These programs often come with more favourable terms like longer tenors, grace periods, and lower collateral thresholds, making them a lifeline for businesses that would otherwise struggle to secure private sector funding.
Grants and matching funds are also available through both local and international development agencies. Though highly competitive, these non-repayable funding options play a pivotal role in supporting early-stage innovation and impact-driven businesses, particularly in underserved communities. The Tony Elumelu Foundation, the African Development Bank (AfDB), and the World Bank have become important supplements for entrepreneurs, particularly those in innovation, agriculture, and gender-focused ventures.[15]
As the Nigerian economy continues to evolve, the expansion and proper structuring of debt financing options will be instrumental in empowering businesses to grow sustainably and contribute to national development.
Equity financing in Nigeria: Angel investors, venture capital, and private equity
Equity financing has become an increasingly popular funding option for Nigerian startups, particularly those in the technology, fintech, healthtech, and logistics sectors. Unlike debt financing, equity involves raising capital by selling ownership stakes to investors, thereby allowing founders to access substantial funds without immediate repayment obligations.
In the early stages, angel investors, typically high-net-worth individuals, play a critical role in providing seed funding and mentorship to promising startups. Nigeria boasts a growing network of angel investors, which invests in innovative, scalable businesses with strong founding teams.
Beyond the seed stage, venture capital (VC) firms have been pivotal in fueling Nigeria’s startup boom. With Lagos emerging as a leading VC destination in Africa, startups like Flutterwave, Paystack, and Mono have secured multi-million-dollar investments from global and regional VC funds.
Venture funding typically comes with value-added benefits such as strategic guidance, access to networks, and market expansion support. Notable VC firms active in Nigeria include TLcom Capital, Future Africa, Ventures Platform, EchoVC, and international players like Y Combinator, Tiger Global, and Sequoia Capital.
As startups mature, Private equity (PE) becomes more relevant, offering capital for expansion, restructuring, or acquisition. Though PE investments are more common in established companies, some growth-stage startups in Nigeria have attracted PE funding, especially those in fintech, e-commerce, and fast-moving consumer goods (FMCG). PE funds such as Verod Capital, African Capital Alliance, and Helios Investment Partners have taken active positions in the Nigerian market.
Equity financing, while powerful, also comes with trade-offs. Founders must be prepared to share control, meet investor expectations, and adhere to stricter corporate governance structures. Nevertheless, it remains one of the most effective ways for Nigerian startups to scale rapidly, attract talent, and gain credibility in both local and international markets.
Alternative funding options: crowdfunding, peer-to-peer lending, and startup competitions
As traditional financing channels remain difficult to access for many Nigerian startups and small businesses, alternative funding options have become an increasingly viable pathway for securing capital. These non-traditional routes, including crowdfunding, peer-to-peer (P2P) lending, grants, and startup competitions, offer flexibility, reduced entry barriers, and a way to validate business ideas in real-time.
Crowdfunding, though still relatively nascent in Nigeria, has gained traction in recent years. Platforms like Cellulant, Farmcrowdy, Thrive Agric, and international sites such as GoFundMe and Kickstarter have been used by Nigerian entrepreneurs to raise small contributions from a large pool of backers in exchange for rewards or early access to products.[16] While regulatory frameworks are still evolving, crowdfunding has proven effective for mission-driven or consumer-facing startups, especially those with strong community support and compelling stories.
Peer-to-peer lending, where individuals lend money to businesses without the use of traditional financial intermediaries, is another alternative gaining ground. Fintech platforms like FINT,[17] Renmoney, Kiakia, and Carbon Fintech have begun offering digital credit solutions that utilize proprietary credit scoring algorithms to evaluate borrowers.[18] These platforms help close the credit access gap for individuals and MSMEs that lack the collateral or financial history typically required by banks. However, risks related to default and regulation continue to be monitored by the Securities and Exchange Commission (SEC) and the CBN.
Grants and startup competitions also serve as powerful funding and visibility channels, particularly for early-stage ventures. Programs such as the Tony Elumelu Foundation Entrepreneurship Programme, Lagos Innovates by LSETF, the Orange Corners Nigeria Incubation Programme, and global challenges like the Hult Prize or MIT Africa Innovate Competition provide not only funding but also access to mentorship, networks, and incubation.[19] These non-dilutive funds are especially attractive for social impact startups, women-led enterprises, and innovative tech businesses.
While alternative funding may not always offer the large ticket sizes of venture capital or government loans, it can be a critical launchpad, especially in the early stages. Moreover, the increasing digitization of financial services in Nigeria is likely to further expand these funding models, helping to democratize access to capital and foster inclusive entrepreneurship.
Choosing the Right Financing Option: Key Factors and Legal Considerations
Selecting the right financing model is a strategic decision that can significantly shape the future of any business. In Nigeria’s evolving funding landscape, where options range from equity investment to debt financing, grants, and hybrid models, entrepreneurs must evaluate funding sources carefully based on their business goals, growth stage, and long-term strategy.
Key factors to consider
- Equity Dilution
Equity financing involves raising capital by selling shares of the business to investors. While it can provide substantial funding without immediate repayment obligations, it also means relinquishing ownership and potentially sharing control over business decisions. Founders must weigh how much equity they are willing to give up and to whom.[20]
- Interest Rates and Repayment Terms
Debt financing, such as bank loans or credit facilities, preserves ownership but comes with repayment obligations often at high interest rates in Nigeria’s volatile lending environment. Entrepreneurs should compare loan terms, including grace periods, repayment flexibility, and penalties, to determine affordability and sustainability.
- Control and Decision Making
Some funding sources, especially equity and venture capital, may require giving investors seats on the board or influence over key business decisions. Business owners seeking to retain control may opt for less intrusive financing options like government-backed loans or revenue-based financing.[21]
- Stage of Business
Early-stage businesses may benefit more from grants, angel investment, or crowdfunding, while growth-stage companies may be better positioned to secure venture capital or structured debt.[22] Aligning financing with the company’s current and projected growth trajectory is crucial for success.
- Cost of capital
Beyond nominal interest rates or equity percentages, the total cost of capital, including legal, administrative, and compliance costs, should be factored into decision-making. Some funding sources may have hidden costs that can erode margins over time.[23]
Legal and Regulatory Considerations
Different laws and regulatory bodies govern Nigeria’s financing ecosystem. Key laws include the Companies and Allied Matters Act (CAMA) 2020, Investment and Securities Act, 2025, and relevant tax legislation. The primary regulatory authorities include the Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN), and tax authorities like the Federal Inland Revenue Service (FIRS).
- Equity funding must comply with share issuance rules, including the relevant SEC regulations, and there should be proper shareholder documentation.[24]
- Loan agreements must be documented appropriately, sometimes requiring stamp duty, collateral registration with the Corporate Affairs Commission (CAC), and in some cases, registration at the National Collateral Registry (NCR).[25]
- Foreign investment comes with capital importation documentation and repatriation protocols under CBN and NIPC (Nigerian Investment Promotion Commission) guidelines.[26]
- Grants and donor funding may require reporting obligations, especially if tied to NGOs or social enterprises.
Founders are encouraged to seek legal advice to navigate these frameworks and avoid non-compliance, which could lead to penalties or disputes.
Recommendations for Startups Seeking Funding
For startups in Nigeria navigating the funding landscape, strategic preparation and positioning are essential. The competition for both equity and debt financing is intense, and success often hinges on clarity of vision, strong business fundamentals, and the ability to communicate value effectively. Below are key recommendations for startups actively seeking funding:
- Build Investor-Ready Documentation
Before approaching any funder, be it a bank, venture capital firm, or grant body, startups should have their key documents in place. This includes a concise pitch deck, a well-structured business plan, financial projections, and evidence of market validation. These materials not only communicate seriousness but also improve a startup’s chances of passing initial screening stages.[27]
- Understand the Right Type of Funding for each Stage
Founders should align their funding needs with appropriate sources. For instance, early-stage startups with unproven business models may find grants and angel investments more suitable, while those with existing traction can explore venture capital or debt financing options. Government-backed loans and accelerators can also serve as bridges to more substantial capital.[28]
- Leverage Startup Support Networks
Participating in incubators, accelerators, and entrepreneurship programs can enhance visibility and increase access to both funding and mentorship. Programs like the Tony Elumelu Foundation, Google for Startups Africa, and the CcHub Incubation Program have supported hundreds of startups by offering seed capital, training, and investor connections.[29]
- Maintain Strong Governance and Compliance Structures
Funders are increasingly prioritizing startups with sound internal controls, financial discipline, and regulatory compliance. Incorporating proper governance from the onset, such as legal incorporation, intellectual property protection, and basic bookkeeping, builds investor confidence and ensures long-term credibility.[30]
- Consistent Networking
Funding decisions often come down to trust and resonance. Founders should refine their storytelling ability to communicate their “why” and demonstrate the problem-solving nature of their product or service. Attending pitch events, demo days, and networking meetups is also crucial for building visibility and establishing investor relationships.[31]
- Openness to Alternative Funding Channels
Beyond traditional VCs and bank loans, startups should explore crowdfunding platforms (like GetEquity or Kickstarter), revenue-based financing, cooperative funding models, and diaspora networks. These alternative sources can be more accessible and founder-friendly.[32]
Conclusion
In conclusion, success in fundraising is not just about having a great idea, but about building a business that is investable, scalable, and aligned with the realities of the Nigerian and global markets.
[1] Maximilian Fleitmann, Why Funding is Important for Startups: A Complete Guide, Base Templates, August 3, 2023, available at: https://www.basetemplates.com/blog/why-funding-is-important-for-startups
[2] Kyril Kotashev, Startup Failure Rate: How Many Startups Fail and Why in 2025?, Failory, July 31, 2025, available at: https://www.failory.com/blog/startup-failure-rate.
[3] Nigeria Magazine, Business: The Evolution of Nigerian Startups: Beyond Fintech, February 18, 2025, available at: https://nigeriamag.com/the-evolution-of-nigerian-startups-beyond-fintech/
[4] Disrupt Africa, The African Tech Startups Funding Report, 2022, Available at: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://disruptafrica.com/wp-content/uploads/2023/02/The-African-Tech-Startups-Funding-Report-2022.pdf
[5] Annie Spratt, The Rise of Entrepreneurship in Nigeria, available at: https://www.afsic.net/the-rise-of-entrepreneurship-in-nigeria/
[7] Jusitice Okamgba, 51% of Nigeria startups struggle to secure funding-Report, Punch, November 19, 2024, available at: https://punchng.com/51-of-nigerian-startups-struggle-to-secure-funding-report/
[8] Brex (n.d), What is bootstrapping? Pros and Cons of Self-funding, available at: https://www.brex.com/journal/bootstrapping
[9] Ibid
[10] Muhammed Shajar, 2024, Bootstrapping vs. External Funding
[11] PwC Nigeria, PwC MSME Survey (2020): Building to last, available at: https://www.pwc.com/ng/en/assets/pdf/pwc-msme-survey-2020-final.pdf
[12] Central Bank of Nigeria. 2021. Financial Stability Report, available at: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.cbn.gov.ng/Out/2022/FPRD/FSR%20DEC%202021%20-COMPLETE.pdf
[13] Development Bank of Nigeria. 2023. How DBN Supports MSMEs.
[14] Bank of Industry Nigeria. 2023. BOI Loan Products and Services.
[15] Tony Elumelu Foundation. 2024. TEF Entrepreneurship Programme.
[16] Business Day. 2022. Crowdfinding in Nigeria: Emering trends and regulatory outlook.
[17] https://www.stears.co/article/peer-to-peer-lending-from-nigerians-to-nigerians/
[18] Nigeria’s KiaKia using big data to offer SMEs access to loans
[19] Lagos State Employment Trust Fund (LSETF). 2023. Lagos Innovates: Supporting Lagos-based Startups.
[20] International finance corporation. 2021.Start-up Financing: How to Raise Capital Without Losing Control
[21] Nigerian Investment Promotion Commission. 2023. Funding Options for Nigerian Startups.
[22] Techpoint Africa. 2022. Early-Stage vs Growth-Stage Financing in Nigeria
[23] KPMG Nigeria. 2020. Early-Stag vs Growth-Stage Financing in Nigeria.
[24] Securities and Exchange Commission Nigeria. 2021. Rules and Guidelines on Capital Raising.
[25] https://www.ncr.gov.ng/
[26] CBN & NIPC Joint Guidelines. 2022. Capital Importation and Foreign Investment Compliance.
[27] VC4A. (2023). Investor-readiness Guide for African Startups
[28] African Development Bank. (2022). Financing Africa’s Startups: Innovations, Challenges & Opportunities.
[29] Co-Creation Hub. (2023). Startup Programs and Funding Opportunities.
[30] Nigerian Investment Promotion Commission (NIPC). (2023). Regulatory Guide for Startups in Nigeria.
[31] TechCabal. (2022). What African Startups Can Learn About Pitching
[32] GetEquity. (2024). How Startup Crowdfunding Works in Africa