26/05/2025
Advice for investing as family or friends...
__The most important investors in Africa!
If you look at the millions of small businesses in Africa today, most were started with the personal of the entrepreneur, often with "Family and Friends" chipping in. Most people who don’t stop to think carefully about such things cannot even see it.
Friends and family [F&F] are the most important investors, and probably the biggest by far in Africa, when it comes to [new businesses and small businesses].
You could be a sibling working in the so-called diaspora, or a retired grandparent, uncle, or aunt, and you decide that the best way to help out a young relative is to “Invest” in their business. If that is what you are doing, it is great. You are actually helping your country, and even the African continent, regardless of how much you actually invest.
You are not the only one doing it, by the way! Millions of others are doing it every single day. From all over the world. If we can make this work properly, then we can go a long way to improving the lot of our Continent, because most African countries have simply not put in place a ecosystem such as those in countries like China and the USA, that could be a better source of capital for these young people.
By way of advice, let me start by saying that the likelihood that your [family member or friend] might not succeed is actually very high, despite their highly infectious enthusiasm. So, if you have decided that in them is something you want to do, it helps to take certain steps to improve their [and your] chances of success:
Step #1:
Be sure you are clear about your own motives. For instance, whose idea is it to start a business in the first place, theirs or yours? If it is simply a way to sustain them without giving them “free money,” then chances are, the business will ultimately fail! If it is your idea, then you, not they, are the entrepreneur here, and they are an employee or, at best, a junior co-founder!
Step #2:
What role do you plan to play besides being “capital provider,” and how well equipped are you for that role?
Step #3:
Assuming [as I will going forward] that the business idea has come from the family member or friend, then the next key thing is to force [strongly encourage] them to adopt a disciplined formal approach. Those who do this have a better chance of making a successful investment. Those who don't will probably eventually fail, for one reason or another.
Here is what I mean:
Ask them to prepare a proper business plan, showing exactly what they intend to do for the next 3 years. Even if they don’t ultimately achieve it, this helps you to see that they are serious. And the helps them even more!
The might be done with the help of a professional, but at first, you want to be sure it is THEIR plan. They must then to you [as a potential ] and if possible (highly advised) get a friend who is not a relative, but has business experience, to sit in and critique what is being presented.
Ask your friends if they would invest if they had money, and gauge their response, even if they are being polite to you. [And if you are the friend who is asked to sit in... remember the value of . Be honest].
Step #4:
Remember that great ideas are a very small part of launching a successful venture. Young people tend to think it’s all about the idea [almost as though thinking is rare!] What you need to establish is whether this young relative and their co-founders have something no one is able to assess (fully) in advance:
__Are they actually capable of setting up and running a business?… [given that they have never done it before and have probably not worked in a place to learn how it is done!]
Much depends on their level of discipline and how knowledgeable they are about what they want to do. If you know, for instance, that your grandson lives in the city and has never visited a farm in his life, be careful before throwing money into that venture. Farming is hard and knowledge how to farm successfully is not DNA-encoded!
Focus on what your grandson knows well. Don’t back him by in an idea that he “read about on the Internet” in an industry or technology where he has never shown any aptitude in the past.
If he insists, rather suggest that you first invest in his enrollment in business courses [mandatory] and possibly technical courses associated with his proposed venture.
Don’t allow yourself to be rushed!
Step #5:
Okay; so you have decided to invest. You have already paid for [invested in] at least six months of relevant business training courses for the young . This for me is mandatory.
That six months or even a year has deepened rather than curtailed their desire to start a business? Great! You have something here!
What next?
Step #6:
It is time for them to find a lawyer to draw up the [investment] documents! Because your grandchild did a business course, they should know exactly what is required of them. But do you know what is required of YOU?
Here is an acid test for you: Do you know anyone amongst your own trusted friends who would join this investment, even if they are putting in just a nominal amount? There are many benefits of doing this. I invite you to list them below!
Step #7:
Avoid providing loans. You are an . You are also likely to be in for a very long time ["Patient capital".]... You are not a VC, hoping to sell your stake after only a few years.
As far as governance and oversight, if you are unable to sit on the company board yourself [not advisable, unless you have a professional contribution you can make] have someone you trust serve on the board for you.
Step #8
“Don’t bet your family home on this.” No matter how much you love your grandchild, it might end up destroying you and your family. Invest in your grandchild's business ONLY in an amount of money you can recover from, if they lost it all completely.
Do not under any circumstances act surety to a loan using something like a family home or other prized assets. If your grandchild asks for $10,000 [for example], I'd suggest investing $2,000, and ask them to raise the rest from others.
Raising money is a skill they need to learn at any rate. By not providing all the money, you force them to go out and acquire that skill.
All the above applies to a F&F who is living and working abroad as well, but I would add the following: Remember you are far away, and this is an investment that requires active involvement. Be extra careful, because you are not there to see what is happening on a day-to-day basis.
The first thing you need to do is to ensure that there are proper and involved beyond your relative or friend.
# Do they have a professional accredited and independent ?
# Do they have a respected and experienced involved?
# Have they set up a reputable including individuals with "skin in the game"?
The fact that your relative has an idea does not mean he or she must run the business... If they lack managerial aptitude or willingness to go and get professionally trained in business management, they must hire to carry forward the vision, grow the company, and protect the investors!
Once again, try as much as possible not to invest alone, even if you can afford it. And don’t make your investment decision simply about "family." That's a bad place to start in this day and age.
You've all heard this before and it applies to potential and investors... "Do unto others as you would have them do unto you."
Image credit: KWB-Ubuntu Hope via Ai.
