The Dos & Don'ts of Investing in a Nigerian Business

The truth is that when making the choice to invest in a business, a StartUp, or an SME, there are certain factors you need to consider and important things that you must do to make sure that you are actually putting your money in an investment that will work for you and be beneficial for your wealth creation journey.

Welcome to our part of the internet at Kudade, where we are empowering Nigerians to create wealth by connecting them to funding & profitable investment opportunities in StartUps & SMEs.

In this blog, I’m going to be sharing with you 5 important things you must do before you invest in a Nigerian Business.

Your Due Diligence: I know this may come across as a blanket statement so let’s break it down. Doing due diligence on a company before investing in it means that you are taking the time to conduct thorough comprehensive and detailed research of the company's financial, legal, and operational status. The goal is to gather as much information as possible, enough to paint a clear picture of the risks & rewards involved in that particular investment so you can make an informed investment decision. Research on the background of the company: how long have they been in business? How do they make money? What’s their business model like? What services do they provide or what goods do they produce? Is there a market for it? What’s their production or delivery process? You can also research the profile of the founders and management team. How well are they managing the company and the funds that it currently has? You want to ensure that the company is solving a problem with a solution that is profitable or will be profitable in the long run. Is the management team capable of getting the business to become profitable? We’ll create a more detailed video on Due Diligence so we can fill you in on what specific documents to request, and other insider tips to help you carry out proper Due Diligence.

The second thing you need to do is consider the economic situation & the sector you're investing in: This is easy to ignore, but the economic situation of the country can have a significant impact on your investment decision-making process in many different ways. We’re talking about market trends that affect demand for goods and services, political stability, currency fluctuations that affect profitability, and of course regulations like obtaining permits, licenses, approvals, and so on. Find out what government policies are in that particular sector. Is it heavily regulated by the government or just left to demand or supply? Is there a huge risk of the company or business being run out by the government? Those are very important questions to ask yourself before taking the plunge.

Risk Assessment: Make sure that your risk matches your returns. What has been the growth rate (based on revenue) for the last few years, what's their current yearly cost and what is their current & future valuation? Based on that, you can predict your expected returns based on how much you're investing and what the company is giving to you.

Diversification: Why diversify? Nigeria is a developing country with its own unique economic, social, and political risks. So investing in a Nigerian Business means that you are willing to forego some level of risk because of the rewards attached. Meanwhile, it doesn’t mean that you have to put all your eggs in one basket. Instead, diversify your portfolio by investing across different sectors and asset classes. For example, if you have investments in the energy or oil and gas sector, you can move into manufacturing or financial services. You can also diversify across asset classes. There are 2 major asset classes: Equity & Debt. If you've already invested and have equity in various businesses (that is you receive dividend payments from these companies or have shares in them), you can choose to borrow a company some money and get interest on the loan and also the principal amount loaned. Now, before I go, I want to quickly chip in 3 bonus points - 3 things you absolutely should not do when investing in a Nigerian Business.

1. Avoid herd mentality: Just because everyone is investing in that sector or in that business doesn't mean that you should too. You still need to do your due diligence and confirm that it is the right investment choice for you at that time. Be sure that the team in charge is capable of continuing the business on a profitability track, and so on.
2. Don't invest in what you don't understand: If a company is coming up with a business model or a product or service whose profitability or growth is unclear to you, you need to take a step back and consider your choices carefully. If you don't understand how that company makes money, or how it will scale and grow, it may not be the right choice for you.
3. Avoid Ponzi Schemes: I know you hear this all the time, but we have to keep saying it over and over. Oftentimes, quick money isn’t real money. If it looks too good to be true, then it most likely is. Investments are a long-term game and not get-rich-quick schemes. Instead of putting your hard-earned money in businesses that look like Ponzi Schemes, do your Due Diligence and go for the ones that are solving real problems.