How to become a multimillionaire without earning a single cent

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

31 January 2016

It may come as a surprise to many that only one telephone company in Kenya is profitable – Safaricom Ltd. All the others have been making losses ever since the telecommunications sector was liberalised in the late 1990s. But during this time, some shareholders of these loss makers have made huge profits by selling their stakes to new owners.

The story of how Sameer Group made a killing (almost Sh2 billion) in the sale of Kencell shares to Celtel was well documented in 2004. Sameer made this profit despite the fact that Kencell was a loss making company deep in debt.

This example demonstrates how investors can make large sums of money from their businesses even when the businesses themselves are loss makers. It is not an uncommon thing: it happens all the time at the Stock Markets.

Moreover, you can become a multimillionaire without earning a single cent. Suppose you come up with a unique business idea that shows promise of becoming a force to recon with. In the early years, as you build it, it will obviously not be making any money. In fact, it won’t even be turning around enough cash to sustain itself.

So, instead of borrowing extra money, you may choose to offer shares in the business to investment partners. Instead of selling the shares you already own and pocketing the money, you create new ones and the cash goes to the company’s bank account. It is the business that needs additional money; NOT you!

Suppose you had registered the company with 1,000 shares of Sh100 each to make Sh100,000 in capital. Now you create an additional 10 shares offer them to investors.

These new shares are also worth Sh100 each in share capita in the business but you don’t have to sell them at that price.

Since your idea has great promise of future profitability, you shouldn’t have any problem selling them at, say, Sh5,000 each. That would bring in Sh500,000 into the business and goes a long way in helping you continue building the enterprise.

Again, this is not unusual: the Safaricom shares that people were offered at Sh5 (and are now going Sh15) were worth Sh0.05, that is, 5cents when they were created – ndururu!

It is important to emphasise that this Sh500,000 does NOT go to your pocket but to the company’s bank account. It is the company that has raised the additional capital – not you cashing in on your investment.

Immediately after the deal, your business is now valued at Sh5,000 per share. Since you still hold the 1,000 original shares, your net worth suddenly jumps to Sh5,000 x 1,000 = Sh5,000,000. You become a multi-millionaire overnight!

This is how Mark Zuckerberg became a billionaire at the tender age of 23 when Microsoft paid $240 million for 1.6% of Facebook. That pushed Facebook’s value at $15 billion. But none of that money went into Zuckerberg’s pocket!