Business Startups vs. Investments: Which Path Yields Higher Returns?

 Business Startups vs. Investments: Which Path Yields Higher Returns?

Desalegn Terecha

The decision between launching a business and investing in financial markets is one of the most significant financial choices individuals face. Both approaches have the potential for wealth creation, but they differ in terms of risk, capital requirements, management complexity, and return on investment (ROI).

This article provides a comparative analysis of business startups and investments, incorporating key financial principles, real-world African examples, and academic and industry references to help aspiring entrepreneurs and investors make informed decisions.

1. Understanding Return on Investment (ROI)


ROI is a fundamental metric used to measure the profitability of an investment or business venture. It is calculated as:


ROI = \frac{{\text{Net Profit}}}{{\text{Investment Cost}}} \times 100


Factors Influencing ROI


1. Industry and Market Demand: Sectors like fintech and real estate often yield higher returns than traditional businesses (World Bank, 2022).

2. Economic Stability: Political and economic conditions influence business success and investment performance (International Monetary Fund, 2023).

3. Risk vs. Reward: Higher-risk investments, such as venture capital or stocks, can yield higher returns but also pose greater financial risks (Damodaran, 2012).

4. Time Horizon: Long-term investments in stocks or well-established businesses tend to have higher compounding returns (Malkiel, 2020).

5. Management Efficiency: Effective leadership and financial management determine a company's profitability (Drucker, 1999).

2. Reasons for Starting a Business vs. Investing

Starting a Business

Provides autonomy and financial independence.

Creates jobs and contributes to economic development.


Offers the potential for exponential ROI if successful.



Investing


Generates passive income with relatively lower effort.


Provides opportunities for compounding wealth over time.


Requires less direct involvement compared to managing a business.



Case Example


In Nigeria, Flutterwave, a fintech startup, transformed digital payments, while investors in MTN Nigeria have consistently earned dividends (CBN, 2023).



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3. Time Required: Launching a Business vs. Making an Investment


Starting a Business: Requires market research, securing capital, and building a customer base, which can take months or years (Gompers & Lerner, 2004).


Investing: Buying stocks or real estate can be done instantly, but returns may take years to materialize.



Case Example


A Kenyan agribusiness startup requires land acquisition, funding, and regulatory approvals before launching. In contrast, an investor can buy shares in Kakuzi PLC and earn dividends almost immediately (Kenya National Bureau of Statistics, 2023).



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4. Managing a Business vs. Investment: Which is Simpler?


Managing a Business: Requires operations oversight, human resource management, marketing, and financial planning.


Managing Investments: Requires financial literacy and market analysis but is less labor-intensive.



Case Example


In Ethiopia’s manufacturing sector, factory owners face supply chain issues, while investors in Dangote Cement stock experience lower management burdens (National Bank of Ethiopia, 2023).



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5. Wealth Accumulation: Small Business vs. Stock Investments


Entrepreneurship: A successful business can build generational wealth (Kiyosaki, 2011).


Stock Investments: Investing in high-growth stocks and dividend-paying companies generates long-term financial security (Bogle, 2017).



Case Example


South Africa’s Patrice Motsepe became wealthy through mining (African Rainbow Minerals), while long-term investors in Shoprite Holdings have seen strong market performance (JSE, 2023).



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6. Capital Requirements: Business vs. Investing


Starting a Business: High initial capital is often needed for equipment, marketing, and operations (OECD, 2021).


Investing: Can start with minimal capital and gradually grow through reinvestments.



Case Example


An Egyptian tech startup may need over $50,000, while an investor can start with as little as $100 in EGX-listed stocks (Cairo Stock Exchange, 2023).



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7. Skills Necessary for Success


Entrepreneurs require leadership, marketing, and operational management skills.


Investors need financial analysis, risk management, and economic trend evaluation abilities.



Case Example


A Ghanaian cocoa entrepreneur must understand exports and supply chains, while an investor in the Ghana Stock Exchange must analyze financial statements (GSE, 2023).



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8. Determining What’s Best for You



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Final Thoughts: Which is More Profitable?


There is no universal answer—it depends on individual goals, risk tolerance, and financial capacity.


Starting a business is best for those who enjoy leadership, market innovation, and direct control over operations.


Investing is ideal for those who prefer passive wealth-building strategies and diversified risk management.



Blending Both Strategies


Many successful entrepreneurs also invest to diversify their income sources:


Elon Musk built Tesla and SpaceX while investing in cryptocurrencies.


Warren Buffett amassed wealth primarily through stock market investments.


Aliko Dangote built his fortune through manufacturing but also invests in capital markets.



A hybrid approach—starting a business while making strategic investments—can maximize financial security and growth.


Would you rather start a business or invest? Share your thoughts in the comments!

References

Bogle, J. (2017). The Little Book of Common Sense Investing. John Wiley & Sons.


Cairo Stock Exchange. (2023). Market performance reports.


Central Bank of Nigeria (CBN). (2023). Financial market analysis report.


Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.


Drucker, P. (1999). Management Challenges for the 21st Century. HarperBusiness.


Gompers, P., & Lerner, J. (2004). The Venture Capital Cycle. MIT Press.


International Monetary Fund (IMF). (2023). World Economic Outlook.


Johannesburg Stock Exchange (JSE). (2023). Annual investor report.


Kenya National Bureau of Statistics. (2023). Economic survey.


Kiyosaki, R. (2011). Rich Dad Poor Dad. Plata Publishing.


Malkiel, B. (2020). A Random Walk Down Wall Street. W.W. Norton.


National Bank of Ethiopia. (2023). Financial Stability Report.


Organisation for Economic Co-operation and Development (OECD). (2021). Entrepreneurship at a Glance.



This article is based on expert financial analysis and real-world case studies. Stay informed and make the best financial decisions for your future!


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