Why Your Start-up Shouldn’t Die or Fade Away!
Entrepreneurs in Nigeria have had to face and overcome countless of issues before launching their ventures. This ranges from raising capital, identifying and engaging the right talent, business registration, putting in place the right financial and operational procedures, complying with government policies and regulations with regards to their ventures, paying taxes, identifying the right investors among others.
The Nigeria business environment is very challenging and interesting at the same time, and it takes entrepreneurs with the right mentality to scale and grow their businesses.
When an entrepreneur launches a venture without the right passion, mentality and good market understanding of the problem to address, the venture fades away or dies before reaching growth stage.
Studies by the International Finance Corporation (IFC) show that approx. 96% of Nigerian businesses are SMEs compared to 53% in the US and 65% in Europe. In addition, Nigerian SMEs are distributed in clusters, this implies huge opportunities for start-ups to make social and economic impacts, increase contribution to the GDP, and create more employment. However, with Nigeria being among the top three destination for tech investments in Africa, access to finance is now within reach for start-ups with top-notch business models addressing real problems whilst ensuring better return on investment.
The purpose of this guide is to give entrepreneurs some basic insights which hopefully will lead to a more detailed analysis required in making informed decisions about launching a smart start-up.
Ten things to consider before launching your start-up:
1. Business Model: The best business models can run themselves. A business model is a convincing plan for creating value which includes a good understanding of the target market, creating value-adding products or services, identifying revenue opportunities, developing revenue pipelines, and means of raising fund for the successful operation of a business. A business model depicts the efficiency of a business operations. A great way to assess the business model of a venture is the gross profit — which is a quick test of pricing, cost control and how sustainable the business operation is.
2. Unit Economics: Understanding the economics of any venture is vital to the success of the business and smart decision making. Unit economics from a layman perspective is revenue, cost, pricing on a per unit basis. Entrepreneurs should always ensure that the revenue generated per user (or customer) exceeds the cost of acquiring and servicing the user. When this happens, you have a viable venture. At the early stage of the business, it is almost difficult to achieve positive business metrics, it is the unit economics that makes the business a viable venture for investment!
3. Right People & Managed Growth: While a business model is a great way of assessing the efficiency of a business operations. The best way to determine the efficiency and effectiveness of business management or its management team is the quality of people. Hence, it is very important to consider the risk, cost and responsibility of employing people. It is good to start lean if there is no clear need to employ people and consider outsourcing things that are not the core of the business.
4. Location & Clusters: Start-ups and SMEs in Nigeria are currently distributed along sectors within specific locations, creating potential operational and cost synergy for them. For example, there is high-tech clusters of start-ups using technology to solve social problems in YABA with Co-Creation Hub (CcHUB), the centre of social innovation in the cluster. While I believe great venture can come from anywhere regardless of location, my honest advice to start-ups is to choose the right location, leverage on potential operational and cost synergy that can be derived from such location or clusters ; consider starting off from smart incubation spaces with innovative entrepreneurs that could give insights on how to grow your venture, whilst taking advantage of the visibility you can get there to pitch to potential investors.
5. Consider staying on the right side of the law: At the appropriate time (upon incorporation of a business name), it’s always great for start-ups to consider applying for Tax Identification Number (TIN) from the Federal Inland Revenue Service (FIRS), and the appropriate tax ID applicable in the location of the venture. This is necessary to start building the right culture at that early stage of the venture, which is quite easy to manage before the business grows big. The importance of tax compliance cannot be over-emphasized, it is now almost impossible for businesses to open a corporate bank account without a TIN, and most business transactions with some corporate organizations, and government agencies cannot be concluded without evidence of tax clearance or a certificate of tax compliance.
6. Business Structure: A good understanding of the kind of business entity that fits the objectives of the business is important for risk management, and attracting the right investors. Hence, it is very important to get it right. A limited liability structure provides owner(s) with limited liability protection, under this structure, the liability of the owner is limited to the amount invested in the business. While sole proprietorship is another form of business structure that is easy to establish and maintain, but business owner has no protection for personal assets from business liabilities.
The third form of business structure is partnership, which can be formed by two or more individuals who share in the business’ profits and losses. If your start-up is a not -for-profit one, then a limited company by guarantee is the right one. Therefore, considering the right business structure for your start-up is a step in the right direction; if not well thought out, it may have a long-lasting tax and legal implications on the business.
7. Methodology: Your business methodology is a clear step-by-step method for creating value to users of your products or services. Having the right methodology for your start-up is important for identifying opportunities, directing the resources, capabilities, and expertise of the business toward creating value in a consistent and timely manner.
8. Financial & Operational System: A business that market its products and services well, and has poor financial and operational systems can fail or would fade away with time. Having a top-notch system for cashflow management, budgeting expenses, fulfilling customers’ orders, and processes for reviewing and updating financial performance in a consistent manner is key to building a sustainable business. Hence, venture capital and institutional investors are now on the look-out for start-ups with not only great business models, but financial and operational systems that guarantee better returns on their investments.
9. Profit is good; making impact is better: It is important to understand that your start-up may or may not generate profit or positive cashflow at the early stage of business operations. In my opinion, start-ups that survive the first three years of operating activities are those that profit by making impact. Start-ups that become sustainable business in the future are those that can make profit while solving real problems.
10. Learn, Innovate & Improve: Know that starting your venture means you must be ready to make mistakes, learn, innovate, network and improve. The start-up business is a platform to learn, make money, fail, innovate and bounce back without fading away!
Should you have any questions or need more insights, don’t hesitate to get in touch via @ajanakubiodun
