Investment is both a pecuniary and calculative endeavour. What this implies is that as an investor, you need not just your money but also your knowledge to be able to profit from any investment decision you make. When you have your capital settled, you can hire an expert to help you with the knowledge part, especially the highly technical aspect of your investment. However, there are some fundamentals you need to harm yourself with as a potential investor.
My previous article addressed why it is important for you to do a background check on the business or project you intend to invest in and some of the factors you need to consider while doing your due diligence. It was suggested that you should have multiple options and map your scale of preference based on the management structure, capital structure, location and risk-reward of the businesses or projects you have in mind. It was also recommended that you work with an expert to provide you with insights to be able to tick all the boxes.
In this part of our series of investment nuggets, Investors and potential investors are updated with some other salient questions they need to answer before delving into an investment. Investors need to be clear on their purpose of investing, the model of the business or project they are looking at, insurance cover on the project, and the extent of the stakeholders’ engagement. These are broadly discussed as follows:
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To what end?
Before making any investment, consider your overall financial goals. Are you investing for your retirement, to buy a house or for some other specific purposes? Is this a general savings investment? What would you like to do with this money, and how quickly would you like to access it as needed? How much do you need this money to grow, and how easily could you replace any losses?
No investment will come without the risk of either losing your money. So be careful to know the kind of money to put into investment. It is also important that you consider the future possible expenses. It gives a perfect rest of mind when you prioritize this earlier.
What is their Business Model?
In the previous article, we mentioned that you need to understand the business system, structure and people operating the business you intend to put your money in. One of the ways of knowing that a business exists and is making significant progress is to look at the model it uses. Model simply means how the company operates, what it stands for in terms of value proposition and how it makes money having deployed various resources. As good as this, some of the core components of a model do fail. This has significantly been linked with the internal and external factors.
The internal factors have largely been the failure of the business owners and employees to diligently perform the core features of each of the components, while competitive forces, national and global economic instability are driving external factors. Therefore, if you want to invest in any Company of your choice, you need to find out how it creates and captures value [generating revenue].
There is every tendency that a company that has only one source of generating revenue would falter, it’s better to be skeptical with such a company. We believe that successful companies should position themselves towards sustainable revenue generation and profit maximization.
What is their Insurance Cover?
One of the ways, we believe you can detect companies that won’t default in ROI payment, is examination of insurance cover details for products and projects. It is not a general rule of thumb that insurance cover offset the business risk as a whole. However, a good insurance cover can sufficiently mitigate the risks for the business to be able to meet a reasonable level if not all of their investors’ expectations. Thus, you need to directly or indirectly ask the company what exactly the insurance package is covering. Engaging the company is not enough. You need to find out from the insurance company and also apply principles and practices.
Who constitutes the Stakeholder, and how much are they engaged?
The strength of the company’s stakeholders plays a significant role in your investment. Before investing in a company, look carefully at who is in charge of decision making. How much experience and stake do they have in this industry? Have they run the company for a long time, or does the firm experience frequent shifts in leadership? Are they well regarded in their industry? How much do they tend to focus on their company as opposed to, say, their social media account and personal celebrity?
Strong stakeholders are essential for any company, but it is particularly crucial for ones that hope to achieve long term stability and growth. As an investor, that’s usually what you want, so make sure not to miss any red flags.
Resources:
The Rules of Investing In Nigerian Agritech Business. 2021. FIDAS Africa.