5 Things You Should Know About Investing in Small Business
Investing in small business can be financially and personally rewarding, but it also poses a huge risk. If you go about investing in a smart, calculated way, the rewards can be incredible. You just need to be the right type of person with the right skill set, temperament, and knowledge to ensure a lucrative investment – if you make the right choice, industry statistics show you stand to yield returns that are between five to 100 times more than the original investment. It’s all about doing your research, knowing the market, and conducting due diligence on the business in order to mitigate risk.
Roughly, 100,000 new businesses are founded in Nigeria each year. Similar entrepreneurial enthusiasm can be witnessed worldwide, and in fact, in China, 12,000 new companies are registered each day. According to Statistics, only around 40% of all new companies survive their first five years in Nigeria. This goes to show that if you’re eager to invest in the early stages of a small business, you’ll have a lot of options, but it’s necessary to be selective, think carefully, and make the right decision.
According to a cofounder of a successful mobile technology venture capital firm in China, it’s right to invest in a great deal of small businesses. In his time he said, he learnt how to keep an eye out for during the prospecting stage of investment, warning signs that an investment shouldn’t be considered, and what safeguards should be put in place. Below are just a few things to keep in mind when it comes to investing in a small business.
Do your research on the market
How can you feel confident about an investment if you know nothing about the market and you’ve done no research? This is a critical first stage of investment and it will improve the likelihood of future success. Do all you can to learn about the market i, talk to industry experts such as venture capitalists, economists, scientists, and the customers that the small business is trying to target. This will give you a fair, all-round picture of whether what the company is trying to achieve is realistic.
Do homework on the founders, managers, and the competition
Before jumping into an investment, analyse the business’ competition, the size of the market, what this new company has to offer in terms of a competitive advantage, and the personal brand of the CEO. It’s essential to investigate the people involved in the company – after all, the brains behind the business are the most important factor. You are investing in them as much as you are in the business. Look into the backgrounds of the founders, research their education, experience, any previous companies they were involved in building, and see what they can bring to the table. You need to see if they have what it takes to make a business a success. The personal brand of the CEO is critical to consider, as it’s the culmination of a company’s identity. It will shape the company’s image, voice, and it will help to drive sales. Personal branding can make all the difference when it comes to getting an edge over the competition.
Diversify your investments
When investing in a small business, as with any investment, you should remember the importance of diversification. That means spread your investments around so that your exposure to any particular asset is limited, which reduces the volatility of your portfolio and increases the possibility of success. When it comes to diversification, investors should also keep in mind up-and-coming emerging markets. For example, investments in the real estate sector are a great choice right now, given all the recent advances and all the long term potential.
Ask the right financial questions
Is the small business you want to invest in charging for its services at a reasonable price? Will they be able to scale their business down the line? What are the founders of the company going to use your money for? Can the founders showcase a roadmap of where they want the business to be, financially, in the next few years? How much are the founders intending to pay themselves in terms of salary? These are important questions that need to be answered, or else you might end up making a venture investment that can’t sustain itself.
Remember venture investing in a small business is for the long-term
Investing in a small business is a long, high-risk, high-potential-reward process. As such, don’t anticipate immediate results. Make sure that any money you have allocated towards a startup isn’t needed in the near-term, as despite all your research and scrutiny, it’s difficult to predict when your investment will produce returns. You should remember to reserve some follow-on capital for investments that you believe show the most potential. This is an effective way to hedge your bets and make wise returns on a carefully-selected investment.
When investing, remember that a small business will need all the help, and money, they can get. Any profits they make will likely be put right back into the business in order to improve it further and to secure a solid financial future. Be patient, though, and have faith that you made the right decision and one day the investment will pay off.