Often overlooked, investment clubs can serve as an effective alternative to raising funding for SMEs
By Tomie Balogun
We met Mr Sunday in 2014. Mr Sunday provided an innovative transport service to millennials in Lagos. He provided a service that picked them up at home in the mornings, dropped them off at the office and picked them up again at the close of work. We didn’t have the Uber service in Lagos at the time and we (I and the other members of my investment club) thought it was an innovative business to invest in.
Mr Sunday earned predictable income from this service as the millennials prepaid him on a monthly basis. Relieved of the hassle of figuring out the logistics of getting to work and back home, young people willingly paid Mr Sunday for this service as it helped them focus on what was important – excelling and adding value in the workplace.
When we met Mr Sunday, he needed funds to expand his business so he could provide this service to more people. He couldn’t get the funding he needed to expand his fleet of cars as the banks needed collateral. My investment club took a chance on him and we provided the funds he needed to expand his fleet.
In 2017, a friend of mine decided to start an investment club with a few friends because they got a request from a woman who was in business in the event planning industry. She was about to embark on a project to build an event centre in Lagos and she needed funding. Her funding request was not unusual however her options for this request were limited. She wanted a 2-year moratorium period to build the centre and achieve stability after which she would start paying her investors dividend.
My friend, interested in funding the project, decided to rally some of her friends into starting an investment club to fund this project. They successfully raised the funds in 2017, invested in the project and just started receiving dividends this year (2019).
Mr Sunday and the event planner represent great examples of small business owners in Nigeria who need funds to grow or expand their businesses significantly and are seeking new alternatives to the traditionally bureaucratic funding options. SMEs are important to any economy, especially an emerging economy like Nigeria. They enable measurable growth in the grassroot economy when they provide employment, an opportunity for skills acquisition and an increase in disposable income for those who are business owners. They also enable growth in their communities as income is transferred in a circle from one party to another through trade or services.
In Nigeria, an investment club adds an additional step to the traditional ‘Ajo/Esusu’ (Traditional saving schemes). In an investment club, members contribute funds on a regular basis, however they do not expect to receive payment in cycles like the traditional schemes. The club invests the funds contributed in selected asset options to build the wealth of its members and more importantly, impact society.
The concept of an investment club is not new in Nigeria. I grew up going to the market with my mother and seeing the market men and women contribute to an Ajo/Esusu scheme so they could all get access to more money for their businesses or personal projects. One of the vivid images I remember, as a child, was seeing a woman stop at each market stall to request for a market woman’s monetary contribution. These women always walked around with faded jotters or sheets of paper in tote bags which they either handed to the market woman to sign-off as proof of payment or took the liberty to tick off themselves on behalf of the market woman.
Women (and men) in the traditional marketplace have always taken advantage of the power of many with the traditional saving schemes. Some of these women lack basic education and do not have bank accounts and as a result, are unable to access loans in traditional banking institutions. These saving schemes provide a way to contribute to one purse and give the women access to loans to grow and expand their businesses.
Historically, investment clubs were created in more developed countries to help members invest collectively in the stock market. One can argue that they were indirectly investing in businesses as well, since owning stocks gives you ownership stake in a business. However, it’s a long stretch for most SMEs in Nigeria to get listed on the stock exchange. Some of them might cease to exist before they ever get to that stage.
Crowdfunding is a global phenomenon and has increased in popularity because it has democratised investing in worthy ideas, products and businesses as well as increased the number of potential investors significantly from a few select ones who have the clout of high society and net-worth. Now, we see more SMEs in developed societies choosing to crowdfund for their businesses first before getting listed on an exchange eventually. At the heart of the definition of an investment club is the concept of crowdfunding. The only difference is that an investment club raises funds from its private members and not from the public.
Anytime one of my investment clubs gets a funding request from an SME (as we do more often these days), I am reminded of the inadequate funding options available to small and medium businesses in Nigeria and by extension, Africa. Entrepreneurs in Nigeria only have a few institutions to seek funding from and some of these institutions add restrictive conditions or requirements to the fund application process.
With this article, I am encouraging more people to contribute to the growth of our local economy by starting investment clubs. A quick survey asking young working professionals if they were interested in investing in SMEs showed that most of them are interested. They have friends or family members who run small businesses and need funding. However, they think their individual funds are limited and can’t invest in any significant opportunity.
An investment club offers a win/win solution. If you think your funds are limited, you can start an investment club with 5 or more friends and together, you can help an SME grow. That’s my story. All by myself, I couldn’t have invested in the SMEs my investment club has invested in, across different industries in Nigeria and Europe. However, as an investment club, we could do it together.
For the SME seeking funding, it’s time to consider alternative options for funding your business. When you approach an investment club, know that while they might be willing to invest in more high-risk opportunities with no collateral, they will also need regular business updates from you to build trust and credibility. When you need help with execution and implementation, reach out as well. When people take a chance on you with personal funds, they need you to demonstrate that your business was worth the risk.
The current economic situation in Nigeria offers great investment opportunities for both investment clubs and SMEs. It’s time for us as citizens to pool resources and take advantage of the opportunities within our borders. You should utilise the advantage of the power of many with investment clubs today.
Editor’s Note: This article was originally published in The Spark Magazine. Find the magazine here to read other articles.
Tomie Balogun is an Investment enthusiast and a leader within the financial education space. With over a decade's worth of experience across management consulting, telecommunications and value-added technology, Tomie provides strategic leadership for the companies, Vestract and Twelvevest in consonance with the vision of reducing financial illiteracy and democratizing investment opportunities for Africans. She has successfully facilitated crucial investment interventions for small and medium businesses across core sectors.