Equity Unlocked: Strategic Pathways Through Market Challenges

In today’s competitive business landscape, every entrepreneur faces a crucial decision: should debt be taken to accelerate growth, or equity be relied upon to maintain control and drive innovation? Essentially, this births the question of leveraging the power of equity capital for sustainable growth.

Welcome to another edition of ‘Treasure Trove with Nola’—where we’ll uncover the fundamentals of equity capital, offering strategies to balance risk and reward, attract the right investors, and ensure your business is poised for long-term success. Whether you’re raising your first round of investment or navigating the complexities of an IPO, mastering equity capital could be the game-changer that drives your business to new heights.

In today’s business environment, securing the right kind of funding can make or mar your growth strategy. Assets, including accounts receivable and fixed assets, are typically low and therefore cannot serve as collateral for debt. For these reasons, startups are financed almost exclusively with equity. One option to raise money without having to worry about repayments is through equity financing, which entails attracting investors who are aligned with your company's objectives. But with greater access to capital comes the need to understand the nuances of equity: the opportunities, the risks, and the long-term implications for your business.

The global equity market is valued at over $100 trillion in 2024. The approximate value for 2023 was $130 trillion. Additionally, the total value of global fixed-income markets in 2023 was $140.7 trillion, which marked a +5.9% increase from the previous year. The decline in the equity market points to considerable volatility and headwinds that have influenced investor confidence, perhaps as a result of changes in consumer behaviour, geopolitical unrest, and economic concerns. As investors seek security in the face of uncertainty, the contrast in the fixed-income market draws attention to a larger story about the behavioral nuances of the market: fixed-income assets are becoming more popular, indicating a flight to safety, while stocks are undergoing volatility.

In recent years, global IPO activity has peaked with over 2,388 IPOs raising more than $453 billion. However, the market has since slowed. In H1 2024, there were 551 IPOs globally, generating approximately $52.2 billion, a -16% decrease from H1 2023. Despite this, private equity (PE) and venture capital (VC) backing surged, accounting for 41% of proceeds in H1 2024, particularly in the Americas. The outlook for IPOs is improving as interest rates stabilise and investor confidence grows.

What does this mean for African Equity Markets?

In 2022, Africa saw a +38% rise in IPO activity, particularly in technology and energy sectors, demonstrating increasing investor interest. Africa’s equity market remains appealing for investment, particularly in areas like fintech and infrastructure, with strong growth potential and an expanding entrepreneurial landscape that offers promising opportunities for future investment opportunities on the continent.?

The Nigerian equity market (NGX) ranked 1st in the African stock market with a +35.17% increase in H1 2024 relative to Q4 2023. The NGX capitalisation increased by +38.33% in H1 2024 (to NGN 56.602 trillion) compared to Q4 2023 (NGN 40.918 trillion), driven by new listings like Transcorp Power Plc, significant acquisitions, and an increase in share prices of companies like Geregu Power Plc.

For African entrepreneurs, equity capital has emerged as a critical tool for growth. Unlike debt, equity financing allows businesses to raise funds without the pressure of immediate repayment, giving entrepreneurs the freedom to innovate and grow sustainably. Access to VC and PE funding has increased, especially in hubs like Kenya and Nigeria, where startups are securing millions in capital to scale their operations. In 2023, African startups raised approximately $4.5 billion across 603 deals. The median deal size was around $2.4 million, reflecting a cautious investment climate favouring smaller transactions. Notably, Nigeria, Kenya, Egypt, and South Africa accounted for about 68% of total funding, with Kenya leading at $805 million.?

Breakdown of Start-up Funding in Africa by Country?

Why Do Businesses Choose Equity??

Different types of equity appeal to different types of entrepreneurs, so when evaluating equity investments, consider the risk you are willing to bear and the return you require in compensation for undertaking that risk. One key advantage is the flexibility it offers. For growing businesses, especially those that are pre-revenue or cash-strapped, equity financing can provide a much-needed runway. Moreover, equity brings more than just cash—investors often provide strategic guidance, industry connections, and valuable resources.

For businesses, equity financing means sharing ownership and, in some cases, decision-making with investors which can be a paradox because, although it frees up cash that is desperately required, it can also lead to dilution of control and profits. For investors, equity investments come with the promise of high returns, especially in high-growth sectors, but they also carry the risk of losing the entire investment if the business fails. The more equity an investor owns, the more they stand to gain—or lose.

Remember Wale, the Lagos-based tech entrepreneur who faced the challenging decision between debt and equity financing for his startup? Well, let me introduce you to Adebayo, the founder of a promising fintech startup based in Abuja, Nigeria. Just like Wale, Adebayo had reached a critical growth stage for his company, but instead of looking at debt, his focus was firmly on equity capital. For fintech companies like Adebayo’s, especially in an emerging market like Nigeria, equity capital plays a critical role in fueling growth. At inception, Adebayo bootstrapped his operations with NGN 39,000,000 from personal savings and contributions from close family members. This initial funding helped him build a minimum viable product (MVP) and begin early market operations. In the first year, he projected modest monthly revenues of NGN 7,800,000, leading to an estimated annual revenue of NGN 93,600,000.

However, as his digital payments platform gained traction, the need for external funding became unavoidable. Rather than overextending himself with debt and risking repayment issues, Adebayo turned to equity financing, a move that would allow him to scale without the immediate burden of debt repayments. As he explored his options, he realised that equity capital came in different forms, each with its unique set of pros and cons. His initial funding came from angel investors, a group of early-stage backers who believed in his vision for fintech in Nigeria. He raised NGN 390,000,000 from these angel investors at a NGN 1,950,000,000 valuation, representing a 20% equity stake in his company. This funding provided capital, guidance, and mentorship—crucial for a first-time founder navigating the fast-paced tech industry. Following this injection, Adebayo's monthly revenue grew from NGN 7,800,000 to NGN 23,400,000, a 200% growth by the end of Year 2, culminating in an annual revenue of NGN 280,800,000.

After securing that first round, Adebayo’s next step was to seek venture capital (VC). This was a bigger deal—both in terms of the capital raised and the level of scrutiny. He secured NGN 3,900,000,000 in venture capital at a NGN 15,600,000,000 valuation, which involved giving up 25% equity to institutional investors. This round was critical as his company prepared to scale operations across Africa, starting with key markets in West Africa. The VC funds were primarily allocated to establishing operations in Ghana and Ivory Coast and improving the platform’s infrastructure to handle higher transaction volumes. Following this investment, Adebayo projected a 3x increase in monthly revenue, reaching NGN 70,200,000 by the end of Year 3, with an expected annual revenue of NGN 842,400,000.

For Adebayo, taking on equity investors meant striking a delicate balance between giving up ownership and gaining the resources needed for rapid growth. Like many founders, he worried about the dilution of control—would he still have the final say in key business decisions? However, his strategic choice to work with investors who shared his vision for financial inclusion in Africa paid off. Over 5 years, revenues are projected to grow by 300%, reaching NGN 3,900,000,000 annually by Year 5, assuming sustained growth and further scaling into additional African markets as part of a comprehensive continental strategy.

One key lesson for entrepreneurs from Adebayo’s experience is that equity financing isn’t just about the money. It’s about finding the right partners who can offer more than just capital. For fintech startups, particularly in emerging markets, investors often bring much-needed regulatory expertise and networks, which are invaluable in a complex, evolving industry. With a projected 5x revenue increase by Year 5, Adebayo’s fintech aims for a NGN 39,000,000,000 valuation in the next funding round, positioning itself for potential strategic partnerships or a sale to larger financial services firms.

As I reflected on his journey, I recalled Wale’s story and the similar crossroads he faced when choosing between debt and equity. Just as Wale learned that financing is not one-size-fits-all, Adebayo realised that the right equity partners could help drive his fintech company to new heights—without the weight of high-interest debt holding him back.

The Decision Making Process

For entrepreneurs seeking to scale their businesses, equity investments can be both an opportunity and a challenge. Understanding key fundamentals—like valuation, ownership dilution, and return on investment (ROI)—is critical to making informed decisions that align with both short-term needs and long-term goals. Valuation plays a pivotal role in the equity investment process. It determines the price at which investors buy into a company and, consequently, how much ownership an entrepreneur must give up.?

This year, Africa’s venture capital landscape continues to face significant challenges. In the first half of the year, total funding dropped to $393 million, a -57% decline compared to the same period in 2023. While higher valuations are generally favourable to entrepreneurs, ensuring that you are grounded in realistic growth projections is crucial. Over-valuation has been cited as a major factor in the disappointing returns of certain tech startups, where future growth failed to meet inflated investor expectations.

One of the most delicate considerations is ownership dilution. When new shares are issued, existing owners find their stake in the business reduced. Founders, on average, retain about 15% to 20% of their company by the time they go public, according to research by The Founders Institute. While this dilution may seem drastic, raising capital often fuels the kind of exponential growth that makes it worthwhile.?

Finally, return on investment (ROI) is the ultimate measure of success, both for entrepreneurs and investors. On average, venture capitalists seek a three to ten times ROI on their investments over five to seven years. Entrepreneurs must ensure that the capital they raise delivers sufficient returns by driving business expansion, increasing revenue, or creating operational efficiencies. In cases like Shopify, effective capital deployment led to rapid revenue growth, with the company achieving a return of more than 12x for its early investors post-IPO. Understanding how equity investments directly influence ROI is a critical part of the strategic decision-making process.

In summary, we must navigate these key fundamentals; valuation, dilution, and ROI thoughtfully. By doing so, they can ensure that the equity they raise serves as a powerful tool for growth without compromising control or profitability. Strategic decision-making in this area not only secures funding but also sets the foundation for long-term success.

Building Key Assets to Attract Investors

Picture this, Alex, a tech founder, who focuses on custom software solutions for small and medium-sized enterprises, has built a company with key assets including proprietary software, projected to generate $100,000 in annual recurring revenue, contributing approximately 70% to the company’s total valuation. Additional assets include state-of-the-art equipment valued at $35,000, and a strong brand presence valued at $25,000, collectively representing about 15% of the company’s overall value of $360,000. Alex anticipates a significant increase in annual recurring revenue over the next two years, making it an attractive investment opportunity.

Most founders are building businesses that won’t be worth anything in the long term. They make sales, they derive an income and they grow year upon year but when they decide to take a long holiday or move on, they come to realise that their business doesn’t retain value without them. Being known, liked, and trusted follows assets. In a world full of choices for every product, and countless unethical suppliers in every industry, a trusted brand has become more valuable than ever.

Investors seek companies with valuable assets to invest in. These assets, like intellectual property, a strong customer base, or a solid market position, make businesses more attractive and increase their chances of securing equity capital. Having more assets not only means more income, but also more potential for growth.

"Soft assets" like brand, intellectual property, positioning, and culture have a greater impact on income and growth compared to traditional assets such as property, factories, and equipment. African companies like Flutterwave and Andela have built strong tech platforms and large customer bases, which have made them attractive to global investors. In 2023, over 70% of African venture capital went to businesses with tech-enabled scalable models, signalling a strong shift toward tech-based investments.

Effective Strategies for Navigating Equity Investments

Navigating equity investments requires a multi-faceted approach that balances business growth with investor relations. Entrepreneurs must weigh the benefits of raising equity capital against the potential long-term costs, like ownership dilution. Dilution happens when additional shares are issued, and it can result in reduced control for the original owners. To effectively navigate equity investments, businesses should carefully assess valuation. The valuation not only determines how much capital is raised but also sets expectations for future performance.?

Founders often face pressure to raise capital at high valuations, but inflated valuations can backfire when market conditions change or growth expectations aren’t met. In 2023, down rounds accounted for nearly 17% of all global venture capital deals, a significant increase from just 5% in 2021. On average, founders experience a 28% dilution from the seed round to Series A, and an 11% dilution from Series A to Series B. By Series B, founders typically own less than 30% of the business. While this might seem like a negative consequence, successful equity investors often bring more than just cash—they also bring expertise and networks.

Forward-looking strategies include focusing on building a solid financial model that supports growth while mitigating dilution risk. As we look ahead, there's a high likelihood that equity investors will increasingly value businesses with sustainable growth trajectories rather than those chasing hyper-growth. The shift toward profitability-focused investment is projected to continue in 2024, particularly in sectors like technology and healthcare, as global markets experience more cautious investor sentiment.

African Entrepreneurs on the Global Stage: Equity Capital and Growth

African entrepreneurs are uniquely positioned to leverage equity capital for global growth, despite a challenging landscape marked by a 57% decline in venture capital and a 20% drop in equity investments in 2023. These downturns are largely due to geopolitical tensions and economic instability, prompting investors to reassess their strategies. However, Africa's rapidly expanding markets, technological innovations, and youthful population present significant opportunities. By harnessing local knowledge and forming strategic partnerships, entrepreneurs can navigate funding challenges and align their businesses with global investor expectations, focusing on solid governance and scalable models.

To attract equity investment, entrepreneurs must balance local market needs with international standards. Building key assets like intellectual property and robust supply chains, while ensuring compliance with global financial and legal requirements, will enhance their appeal to investors. As we approach 2025, those who prioritise sustainable growth strategies and adaptability for international markets will be well-positioned to succeed.??

Stay tuned for my upcoming carousel by subscribing to my newsletter, where I'll delve into debt financing and explore the crucial fundamentals for visionary African entrepreneurs aiming to make an impact on the global stage.

References

1. PWC (2024).? Nigerian Capital Market Update
2. TechCrunch (2023). How African startups raised funding?