Nine tips on investing when you’re a small business owner

Johnson Nderi, a corporate finance manager at ABC Capital (PHOTO: File)

NAIROBI, KENYA: Entrepreneurs are always thinking of new ways to make money through investment – whether into their own businesses or in other ventures.

Johnson Nderi, a corporate finance manager at ABC Capital, spoke to Hustle on the ins and outs of investing as a small business owner.

1. Expansion should be your primary objective

If you’re still a small entrepreneur, you should first focus on growing your business. But if you have good foresight and that foresight is telling you that your business is going to collapse, then it would make sense to move into something else. Otherwise, your focus should be on expanding your business because that is what you do best.

Of course it makes sense to hold some money in things like stocks and bonds for a rainy day, and I would encourage doing that as an individual. However, you should aim to be the best you can be. Just grow and be the Tuskys, EABL or Safaricom of your industry.

2. Avoid the common pitfalls

The biggest mistake I regularly see entrepreneurs making is failing to understand their business well enough. The other one is expanding too fast when they should be consolidating their finances.

Taking on too much debt is a mistake because it diminishes the ability of your business to work for itself.

There are other methods of funding, such as bringing in equity investors, to help you cushion your business. And it doesn’t have to be from a private equity fund – an equity investor can be someone from your family and it can be a very strong basis for future growth. Your expansion strategy should have a good mix of debt and equity. Equity offers the basis to expand, and then you can use debt.

3. Understand why you need equity

When you bring in investors, you should expect that they’ll want a return. However, you are bringing them in to consolidate the basis of your business, because if you use debt financing for that, it makes your proposition very risky.

You can make more money with debt if no risk hits you, but that’s a gamble. Risks don’t have to be of your own making. They can be in the form of a downturn in the economy, a sudden increase in interest rates, a sudden increase in exchange rates and inflation.

It could be anything, and these are just the risks that are not inherent to any business, because other risks can come from within, like operational risks where somebody gets injured or dies, theft and numerous other things that can hurt your business.

Other investors help cushion you against such risks so that if they do occur, they become easy to manage. You can use financial consultants to help you calculate how much equity you should give to investors.

4. Assess the opportunity cost

If you have a number of investment opportunities, consider what you would be foregoing in other areas for the sake of your preferred investment.

For example, if you’re looking at purchasing new equipment for your business, you have to consider the cost of that against, for instance, investing money in a Treasury bond. Consider if the return of investing in this business is significantly higher than investing in other businesses, and then make your decision.

5. Weigh the risk

What is the probability of return? To understand risk versus benefit, look at betting, as an example. You can make a return of one million per cent. You can invest Sh100 and get Sh1 million. However, what’s the probability of that happening? It’s infinitesimal, far less than 1 per cent. You are more likely to lose the Sh100 than make the Sh1 million. This is an extreme comparison, but the concept is the same. What is the probability that you can make a return in business X?

6. Do your market research

This will help you accurately calculate opportunity costs and probabilities of return. By doing market research, you’re trying to minimise the risk by getting as much information as possible.

In your market research, analyse your competition, calculate the risk of execution, check if there is proof of concept (whether there is somebody else is already doing it), analyse competition risk, check what the margins look like, and so on.

7. Assess your team honestly

Evaluate if you have enough staff to deliver and enough resources to complete the product as the market would want it. Does the market for your product exist? Does your team have the ability to execute? Does your strategy allow you to execute that plan properly?

8. Get expert advice

There are consultants who specialise in every field. For example, if you want to go into the hotel industry, there are people whose primary focus is just understanding the hotel business. The same goes for mining, energy – basically every industry you would want to venture into.

These people are typically end-to-end experts. Each area has its own rules and regulations that the consultant must know and understand. They understand the market very well, the competition that’s in that business, and so forth. You need to have a 360-degree view of this. It typically does not take more than one consultant, but the maximum is usually two – a consultant in that specific area, and maybe a financial consultant.

9. Consult early

As an entrepreneur, you should be the person who understands the business the most, but it’s important to get other people’s perspectives so that you can be more informed and objective about your business.