Why starting a business is the best investment you can make

Why starting a business is the best investment you can make

Starting a business is by far the best investment you can make, the ROI on a business is far greater than virtually every other investment. To understand just how great the ROI on a successful business is, let’s compare it with other investments.

What is an investment?

To invest is to allocate money with the expectation of a  positive return/benefit in the future. This ranges from buying and holding assets, investing in educational material and skills development to conducting commercial activities. 

The most important thing investors look for is a positive return on investment (ROI), to determine whether an investment is good or bad, you have to look at the ROI. The best investments often have the best ROIs.

What’s the average ROI on a business?

On average, companies average between 15% and 45% of year over year growth, and these are big companies. Companies that make less than R30 Million annually grow at an even higher rate.

For tech companies, the growth rate is usually over 170% in just the first year, 100% for the second year and will level off between 70% and 150% for the coming years according to a study conducted by equidam.

For most businesses, a growth rate between 40% and 60% per year is realistic. From my own experiences, the lowest growth rate I had was 48% and that was during 2020 when the world was falling apart. My business usually grows at an average of 140% per year but that’s because it’s in the tech space.

Even businesses with extremely low profit margins and very limited scalability can expect to grow at over 15% per year.

All these numbers are meaningless without any context, so let’s compare them with other investment classes and see how they pair up.

Fixed deposits, money market funds, bonds

The highest interest rate that you can get on a fixed deposit in South Africa is currently 10% per year and is currently offered by African Bank. Other banks will give you a maximum of 8% (rounded off).

The same goes for money market accounts that are offered by commercial banks, the interest rates are ultra-low and barely hold up against traditional savings accounts. You can get around 3.50% at most when using money market accounts offered by banks.

Bonds are issued by the government as a way to raise funds from the public, when buying a bond, you are basically loaning money to the government. The government pays this money back with interest over a set period of time.

The RSA Retail Bonds, issued by the government, currently 7.25% a year in interest, it’s highly unlikely that you will ever get a return above 9% from bonds, when you subtract the fees, especially if you invested in them through a unit trust.

Forex, binary options and equivalents

A realistic ROI on Forex trading is between 16 and 20% annually and that’s for the 10% of people who actually succeed in Forex. It’s estimated that 90% of Forex traders lose money and end up quitting. It’s also fair to mention that over 90% of businesses started in South Africa will fail within 5 years as well.

With regards to these assets, it’s important to note that there will always be outliers, there are traders who claim to make over 60% per year but that’s a very tiny portion. Nevertheless an ROI between 16 and 20% is very good but it still doesn’t hold up against the ROI that is provided by startups.

Publicly traded stocks

Stocks are very lucrative, there are companies that grew by more than 200% the past year, companies like zoom grew over 1000%. Investing in stocks is not as much of a hustle as running a business. The returns can be very lucrative, especially because stocks are very passive.

However, investors don’t make as much money in the long term when trading individual stocks and trying to time the market. Warren Buffet (world’s most renowned investor) has averaged just 15% on stocks in the last 10 years. 

The S&P500 has returned an average of 13.9% during the last 10 years, which is more than any fixed deposit would have returned but still pales in comparison to the ROI on startups. Again, exceptional investors have achieved an average of more than 25% in the last 10 years but those are still outliers.

Bottom line

Starting a business generally has the best ROI, however it comes with a lot of work and responsibilities. Which might not be attractive to people who are risk-averse or people who are seeking passive income.

Cryptocurrency and meme stocks in general don’t fall in the above categories. Crypto has delivered returns over 15k%, that’s going to be hard to emulate for any business, meme stocks like GME have returned over 5000% in less than one year.

However, these come once in a while and you will have to wait for a long time before getting opportunities like these. Starting a business is still the best investment to make out of all these.

Disclaimer

This article focuses solely on the returns that are provided by these vehicles, not all the challenges and obstacles associated with each of these vehicles. Starting and running a successful business is not easy, even so, the returns are very realistic for most business owners

The main problem is that entrepreneurs quit too soon even when making good returns because they started with very little capital. If you start your business with only R1k, then a 60% return won’t be impressive because it’s not much in actual cash.

Conclusion

Starting a business is the best investment you can make because it generally has a greater yield than other investment classes. Do you have any thoughts or questions? Comment below.

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