In October, we will take a look at the objective of the Nigerian Startup Act and its provisions for startups, what investors consider during the due diligence process, what's new here at Aidi and awesome opportunities tailored for you and your business. Let's get right into it;

1. Approval of the Nigerian Startup Bill

In our July Newsletter, we discussed the Nigerian startup bill; the objective, focus and benefit of the bill for Nigerian startups. The bill was approved and signed into law three months after the Nigerian Senate passed the bill. It was approved by the President and is now known as the Startup Act, 2022. This happened on Wednesday, October 19, 2022. 

The Act has been signed to ensure that Nigeria’s laws and regulations are clear, planned and work for the tech ecosystem, creating an enabling environment for growth, attraction and protection of investments in tech startups. The Act has 3 objectives which include - ensuring that regulations that are harmful to the survival of startups in Nigeria are shut down, bridging the gap between regulators and startups, and encouraging the establishment, development and operations of startups in Nigeria through incentives like tax breaks, government loans and credit guarantee schemes. 

Other African countries like Senegal and Tunisia have also passed their own startup bill. How different is this different from past attempts? This act takes a collaborative approach, unlike the others. Here, the process involves all relevant stakeholders in the startup ecosystem including the government; both at regional and federal levels and across the legislative, executive and judiciary arms of the government. It is also supported by the Innovation for Policy Foundation, an organization working to increase public policy co-creation that has experience in facilitating the co-design of startup policy and legislative frameworks in more than a dozen African countries. 

Read more about the Act here and see the summary of the Act. 

2. The Kloud Commerce case; What is the role of due diligence in Fundraising?

Earlier this month, news that Kloud Commerce- a multi-channel commerce solution for Africa, has shut down. Although there has been no confirmation of this news either from the founders or the company’s social media handles, the aim of this is to take a look into the issue of the due diligence process carried out by investors during the fundraising process, as the news sparked a conversation on whether investors actually carry out due diligence and what the process is like. 

Vestbee defines due diligence as ‘a part of the investment process that helps investors, usually business angels or VC funds, to reduce risks involved in the transaction by verifying information provided in the startup pitch deck, assessing business and market potential, financial statements and forecasts, legal documents and all sorts of risks’.In simple terms, this is the verification of every piece of information presented by the founder to an investor to ensure its accuracy. Due diligence methods differ from investor to investor and so, each investor will conduct this exercise in their own way and method. However, for early-stage startups, investors analyze the team and the founder’s reputation, shareholders' structure, legal documents, financial statements and projections, and the potential of the business and market, among others. 

Here is a due diligence criteria from the Ann Arbor Spark pre-seed Fund 

I) Product/ Service;

The product or service is described completely and concisely. The need for the product or service is evident. The stage of development- prototype first, first customer, multiple customers, is defined. A development road map is included.

II. Customers, revenue and business model;

The customer value proposition is quantifiable, high and recognizable. The market need is established and the customer has an urgency to act. The product price points are identified, along with gross margins and costs.

III. Market size;

The current target and addressable market size are estimated. It is a large and growing market quantifiable to a certain degree.

IV. Management;

The key team member(s) have the expertise and skills needed to run this type of business. Clarity on additional hires and timing of recruitment? What are the significant holes in the team?

V. Competitors and competitive advantage;

The product or service is better than the competition based on features and/or price. Is current and future competition identified and evaluated for weakness or significant barriers?

VI. Capital efficiency and value creation;

A reasonable milestone event chart with value drivers, date, and capital needs is identified

VII.  Financials;

Are plans based on realistic assumptions with reasonable returns? Does it contain reasonable, justifiable projections for 2 to 3 years with assumptions explained?

VIII. Exit assumptions;

Is there a reasonable exit time/ frame? Some clarity on target universe of buyers

See below, other criteria investors consider for startups at different stages;

- Management;

Seed stage: Founders expertise and understanding of the market pain. Ability to let go and attract smarter people at the right time

Early stage: Based on market needs, can the management team take a prototype and develop a commercial product? Technology development? Sales?

Growth stage: Can the team achieve high growth, high margins? Explore geographic expansion? Manage resources- people and cash effectively? Board dynamics?

- Market;

Seed stage: Is there a need in the market? is it a growing market? Will the market expand to accommodate breakthrough products?

Early stage: Gauge ability to cross the chasm from early adopters to mainstream market

Growth stage: Arrival of me-too's: competitive pressures

- Technology;

Seed stage: IP assessment, freedom to operate, laboratory scale data, can you make it once?

Early stage: features and alignment with market needs. Market/customer level data, can you make it many times?

Growth stage: Deployment and operational efficiencies. Can you make it consistently, with high quality while maintaining costs?

- Financials;

Seed stage: Shot in the dark. Look for milestones and capital needed to reach value creation

Early stage: Test pricing and revenue assumptions, gross margins

Growth stage: Margin erosion. Ability to improve or sustain gross margins? Assess detailed financial analysis of past income statements, balance sheet and cash flows.

You may wonder- if investors carry out the long and rigorous process of due diligence, why then do companies still fail or why do the sort of issues mentioned in the news about Kloud Commerce occur? Whilst this newsletter cannot provide exact reasons why Kloud Commerce allegedly shut down even after verification processes, it can point to some reasons why startups fail despite this process. The reasons include- rushed analysis processes that fail to identify potential problems that may occur in the future, an inability to estimate the challenges in the market and the capacity of the team to handle them, ignoring the reputation, skills, background and experience of the founder(s), overestimation of the business and founding team, competition analysis failure, overlooking sales and financial data, among other reasons.

For further study, you can read up on this document that contains due diligence requirements in Nigeria. 

3. Inside Aidi

• Our Portfolio Company, Bumpa raised a $4m seed round led by Base10 Partners, with participation from Plug & Play Ventures, SHL Capital, Magic Fund, Jedar Capital, DFS Labs, FirstCheck Africa Angel Program, E62 Ventures, Club 14 and Fast Forward Ventures. Read all about the raise and the opportunities they are providing in the eCommerce space, on their blog
• Nigenius will be hosting an Edu summit on November 5, 2022. The event is for Parents, Educators and everyone in the education space interested in contributing to the growth of education in Nigeria for our children's future. Use this link to register. 
• The Accelerator Program for the S22 batch began in October. An announcement for the next cohort will be made soon. To stay updated and be a part of it, kindly follow our social media handles and read our monthly reviews. 
• Read all the previous issues and recent articles published to aid the growth of your business on our website

4. Opportunities

• Applications are open for the Techbridge Invest Accelerator Programme. Benefits include an equity-based investment opportunity of #200, 000 for startups who meet investment criteria. See more details here
• The HealthTech Hub Africa is looking for the best, high-impact innovators with business-to-government-focused solutions and business models that have the potential to drive transformational population health impact at scale for Africa. Applications are open and more details can be gotten on the website