WHY INVESTMENTS FAIL

Two Stories:

Mama Kay is now in business. She was formerly a low pay worker at a private enterprise. She got fired as the company downsized. Her new business is giving her 100% return on investment.

Mama Kay sells roasted corn.

She started her business with N5,000 and within her first week, she made almost another N5,000. She’s thrilled with the result. And not long, she started having some big dreams.

She thought to herself. If N5,000 made about N10,000 in one week, and has been doing so for some weeks now, then N10,000 will yield about N20,000. Double the income!

Mama Kay saved up money over four weeks and now had the N10,000 in hand. She decided to rack up her purchase of fresh corn and make a killing.

BUT THEN… Reality struck.

Mama Kay is on a busy street that has many buyers of her product. She was the first and only corn seller within a 2KM radius from her spot. But the population on that street, including passers-by, could not consume TWICE her former stock.

She was barely able to sell above the N5,000 worth of fresh corn. She actually was on the apex of the consumption rate of the territory.

This one incident made her lose money. The corn began to be stale, and rot. Customers complained. Some changed their minds about her. She had to let go of some and dried them up for other purpose.

Mama Kay learnt a lesson. And obviously found out that THOUGH THE BUSINESS MAKES 100% RETURN, IT HAS A CAP to how much can be invested before it begins to fail to perform, or out rightly turns into a loss except a change of model is adopted.

Mama Kay thought of opening new branches kilometers away. But that brought new problems. Staffing, management, logistics and more will ERODE that “100%” return into something unthinkable.

Story Two:

Kayode is a fresh graduate of Electrical Engineering. He’s from a fast developing remote area near Lagos, but along the Lagos-Ibadan Express. His father is a local farmer. He grew up knowing so much about farming. They have a fishpond right at their back yard. This was just 2016.

One warm afternoon, Kayode stumbles on a website blog about FARMCROWDY. Farmcrowdy, a startup company, was doing something spectacular in the agric space. They raised money through crowdfunding; that is, collecting money from many individual, and used the collective sum to invest into agribusinesses and smallholder farmers. Then they buy the produce from the farmers and pay the “investors” an agreed share of the returns gotten.

Voila! Kayode was pumped. He read deeper. There were few other similar platforms, but he stumbled on a particular farming platform. This was into catfish farming, and it was raising money from the public.

Fast forward two weeks.

Yusuf and Kayode are having lunch in a Lagos Mall. Yusuf is a techie. They both met while schooling in Zaria. Kayode is sharing his new found idea and how they can partner to make this a reality. A website, some graphic designs, photos at the farm and ads, and they can kick off.

Within the twinkle of an eye, Kayode is now a CEO.

He’s the founder and CEO of FishnFresh Farm.

The Ads are up, the copies great, people are beginning to make enquiries from across Nigeria. Both sophisticated investors and newbies.

Within two months, they’ve been able to raise about N3million from the platform, promising a 30% Return on Investment (ROI) in 7months.

Kayode is already good at fish farming, so it was easy. With the pond in their backyard, they began to run the business. First batch of 4,000 fingerlings are raised to table size and sold to the market. The seasons were just right, they got good off-taker deals and they made about 70% ROI on the total cash received.

From N3million, they had a revenue of N5.12million!

This made them excited!

We’re going to be BILLIONAIRES! They exclaimed as they enjoyed a plate of fresh fish peppersoup and local wine in a small pub in the village.

With the early payouts and no-stories-given result, people began to give FishnFresh a good review.

In their next cycle, as the ads were released, money began to flow in.

Within 1 month, N12million raised from 30 investors. Large and small sum combined.

Things are happening so fast!

But now, new challenges are coming fast!

1. The backyard cannot take 15,000 fingerlings

2. The local feed shop cannot meet the feed demand they have

3. One person can no longer handle all the matters.

4. Time is already ticking as the money has been collected!

The above list was from their last meeting, Kayode and Yusuf reckoned they must now act fast!

One week later, Kayode had to lease a land (2 acres) not too far from the house to keep cost low. Almost N1,000,000 for 3 years. This was the best deal he could get especially as he was targeting a water body on the land area. He had to call for a Payloader to excavate a natural pond, and do other construction works.

While all these were going on, they had already started farming to max capacity in the backyard farm.

The new farm will take about 8 WEEKS to become ready to receive fish, because it has to cured and treated or the fishes may not survive.

Time is ticking!

They’ve raised a total of N15million, and all they’ve invested to real fish is about N3million. Yet it is the third month.

Yusuf and Kayode are good people at heart. But things are happening so fast at a pace they never imagined. They were making obvious mistakes, but the deed has been done.

Month seven arrives.

They’ve harvested the backyard farm. The new pond is still one month away from optimal table size.

Besides, after using some of the raised money to INVEST into FIXED ASSET (land and preparations), they were unable to meet the number of fishes they needed to farm to hit their profit mark of even 30% on the original investment. Their expenses grew so rapidly: Logistics, staff, and more. After sales the projected revenue will hit about N12million which is N3million short of the initial money collected.

What will Kayode and Yusuf tell the investors? Stories?

It was at this point they began considering a new model! The PONZI model. “Let us raise money from new investors and pay out these ones, so that we will have time to make back the money and pay the new ones.”

The PONZI way or the honest end of FishnFresh Farm?

LESSONS

1. Businesses have a cap to financial/trading volume with which a return on investment is possible. If you want more capital injection, you MUST change the model or adjust the ROI or FAIL!

2. Businesses that raise capital with a short-term instrument having a high interest rate, and use that money to fund Fixed Assets like land, equipment and machinery are in danger of failure or becoming Ponzis (if crowdfunded). Newbies fall for this almost every time. It doesn’t seem obvious at first. Raise patient capital for Fixed Assets.

3. The skill to create product and deliver service is different from the skill to run a business. People with industry production experience can still fail in managing a business in the same industry. Management is a whole new ball game.

4. Fast growth is a trap! It is thrilling, but be on guard. Control is more difficult on high speed. Grow fast slowly.

5. When things are working, even the best of us begin to become more emotional than rational. Only those that have people that guide them and call them to order/ration have a chance. Some will call those people “critics”, until the words of the critics eventually come to pass!

If you want to invest, watch out for the above cues from the business.

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