In recent business news, Flutterwave, the African tech start-up bridging the continent’s online payment services gateway with the rest of the world, even within the continent herself, recently announced a successful series D funding round of $250million. This now presumably sees the enterprise solution provider rank as the highest valued company on the African continent. With a valuation of $3billion, the company is now posited to be worth more than the individually listed FUGAZ on the Nigerian Stock Exchange.
But that is not even the striking part nor the reason for this article. For a company that once began as a simple idea barely a decade and a half ago, imagine what your investment might have been worth today had you invested but N1million at its inception. Word making the mill is that its initial series–A investors have seen their humble investments almost triple in value and are primed to see even greater value-added to their once speculative financial backing of the company in the years to come as Flutterwave is anticipated to announce plans to someday list on a stock exchange.
It thus goes without saying that some of the planet’s richest people, and companies, have realized their wealth investing in business opportunities, particularly start-ups when others deemed these ideas too risky to even consider. It is believed that a humble $500,000 investment in Facebook at its first seed funding round is today worth over $1.8billion, despite the company’s many legal travails. This simple backing has made one of Facebook’s earliest investors a billionaire without even having to work a day in the company. The same goes for Sequoia Capital, a venture capitalist said to have staked $60million in the messaging application, WhatsApp. In under a decade, its investment is now said to be worth some $3billion. And of course, it is no longer news that one of the world’s richest investors, Warren Buffet, made his wealth investing in carefully picked start-ups, with small valuations at the time, but great future potential.
So, with Futterwave’s latest success, kudos to them, and start-up investing now being the toast of the savvy and intuitive, particularly in emerging markets like Nigeria, where a myriad of challenges are waiting for revolutionary ideas to smoothen the terrain, let us take a look at how investing in start-ups could someday make you the next Buffet.
First and foremost, understand that investing in start-ups is one of the riskiest risks there are in business. Statistically, and as you may already know, only one in ten start-ups make it to their fifth anniversary. Of those that do, only one in those ten make ten years.
This invariably means, only ten in a hundred start-ups could celebrate their tenth anniversary, and then perhaps only one in a thousand may ever make worthwhile returns to its investors, enough to see them never have to work another day in their lives.
This is why, not very long ago, investing in start-ups used to be reserved for ultra-wealthy individuals and organizations who could afford the associated risks. But with more imaginative routes of investing now being made ever available to the everyday investor seeking better returns than what traditional portfolios offer, and hundreds of start-ups devising innovative solutions to niggling everyday life, and business problems, more individuals are now equating the attendant exposure as worthwhile, because, as an investor, not only are you in it for the profits, but most can also boast of contributing to aspiring innovations and positive global change for now, and the future as well.
Therefore, investing in ambitious entrepreneurs is one of the first steps to making it big in start-up investing. Ambitious ideas are what makes the world tick, and of course, these are only possible through enterprising individuals with bold solutions to offer not just a locality, but the world. Sometimes, the more audacious an idea, the greater the chances that it, if adopted by a larger audience, could see your investment skyrocket in value, almost like a global online bookstore which eventually became Amazon or a taxi-hailing service offering vehicle owners the chance to make money in their spare time using their own cars, like UBER. However, even a no-miss idea can flounder if the entrepreneur and her team aren’t fanatical about getting it off the ground or consistently seeking new grounds to break, like the once famed Nokia. Thus, as the saying goes, good bookies bet on the jockey, not the horse. Ideas are a dime a dozen. Aggressive and inventive entrepreneurs are the valuable breeds to put your money on.
A good strong healthy horse with a winning pedigree however also greatly helps the jockey no doubt. Business ideas with enormous multiplier effects should be your next lookout. The more exponentially elastic a business idea can be made, especially to accommodate other business features, tools, Apps and money-making avenues, the greater the chances of a geometrically increased income stream for the company, and subsequently, you. Ideas that can accommodate as many clients as visibly possible, at even a small user fee, or engage millions on a periodic basis and then charge for advertising, or can even charge a premium to a growing select few, who are more than happy to pay for exclusivity, are usually justifiable ventures worth staking your money on.
Having a large and growing market is therefore crucial when looking at investing in a start-up’s idea. Companies sometimes target too small a niche and develop mono-products so focused that even when they out-compete their immediate competitions, there is no way for them to grow any further. At that point, no matter what they do or how much is spent on marketing campaigns, it becomes close to impossible to reel in more customers and grow market size. Thus, always concern yourself with the potential for continuous market and income growth before committing your funds.
Domain expertise. Start-ups and their founding members need to know the ins and outs of the space they wish to operate within. Many a first-timer has tried to simply replicate other business models in new regions without necessarily knowing anything about the inherent risks and pitfalls abound within that business. Most of these fail because the founder was trying to learn the fundamentals of the business on the go while better-grounded competitors were able to set up and operate quicker due to extensive experience. So, as much as a little replication is no crime and since there is no such thing as a truly original idea, such questions to the entrepreneur as “What makes you (and your team) uniquely capable of running the company and achieving this idea within its stipulated timeline?” is a pertinent question that must always be top of your enquiry list when querying a start–up’s merit to your hard-earned money.
Simplicity and unique selling proposition are next. Any product or service that does not stand out or one-up its competition and eventually wow the market is almost bound to fail in its early stages of initiation. Simplicity also counts for a lot when considering a start-up to invest in. If your entrepreneur comes to you with vague terminologies and mind-numbing technobabble nonsense, chances are even the market, no matter how great the idea might be, may keep their distance for the exact same reasons you could not understand how exactly the company or its product, or service, is made to function. Simplicity and ease of use thus always captures the heart of the market and should also be what captures your wallet. A product or service might not need to be overly unique, however, something about its simplicity of use, and adoption, has to woo the entrepreneur’s intended market, if not, your money is better invested elsewhere.
Investing in start-ups however, is also a great path to maintaining a balanced portfolio and diversifying your assets. “Never put all your eggs in one basket” a saying goes, and what better way to achieve this than through a company that could not only change the business scape with a simple but fantastic idea, like Flutterwave, but also spread your risks across companies, industries and locations. The greater your spread, the more likely you are to hit a clincher, and the more you are protected from eventual market upheavals. So, cherry-picking ideas across sectors, and markets, is advisable.
It is apposite to remind you that investing in start-ups can be super risky as they can be deemed illiquid investments. Until returns begin to materialize, expect that your money could be tied up for at least three to five years, if not more. In certain cases, you may have the opportunity to liquidate through intermediaries, however, it is not a guarantee that anyone will be willing to adopt such a risk from you and at the same price you bought into it. Your investment may thus likely take years, perhaps decades to mature, that is, if you’re not unlucky to lose everything, for any myriad of reasons.
Thus, mitigating these risks comes down to educating yourself about the start-up(s) you have chosen to invest in, knowing the founder, the team and their technical abilities and understanding the industry they have decided to play in. Seeking advice from business experts such as a financial advisor or business lawyer also helps you navigate the more legal or technical issues of the said industry within which the start-up hopes to make an impact in. Financial advisors also help you comprehend the finer details of the investor document and your subsequent takeaway from the company, should things go belly–up. With these said however, having a little more than foundational knowledge about financial statement analysis is also a great help as it can give you a keener picture of the start-up’s underlying health and performance ratios, as, not all profits are actual profits, and not all loses are crippling.
Finally, investing through investments clubs as explained in an earlier Nairametrics article is another cool way of mitigating overexposure to startup investing risks but still enjoying all the benefits that accrue to backing them, as long as they answer all enquiries to your portfolio diversification requirements.
Individually though, investing small amounts are usually advised. Do not invest more than 5% of your entire net worth in startups, regardless of how many you eventually choose to back, as things could go south very quickly if anything goes wrong.
Should you choose to stake a higher amount however then that is strictly up to your risk appetite and other parameters, as the ones mentioned in this article. If answers to your questions are positive, they may very well prompt greater backing into a revolutionary idea. This is fine, as long as you are prepared for any unforeseen losses, or have taken out a thoughtfully prepared insurance policy to hedge against too great a dip in value.
So, no matter your investment goals for the year, or the years to come, remember, money is simply the means, not the end, to wealth…
Brain Essien is a business consultant, with expertise in digital marketing, crowd funding and business plan/proposal formulation and design.
mcbrainandcompany@gmail.com. +234703-444-6041
