Bank deposits rates are around 1% (if you’re lucky), and inflation rates are at 1.9%. We find ourselves laughing and yearning for the good ol’ days.
Investors have to look for a better ROI (return on investment), but this might require a little intelligence.
Private equity is one way to accomplish this difficult task. For those of you that don’t already know, private equity is when the private sector, in other words individual investors, steps in to accept the risk and fund new enterprises. Banks used to be in this position, but they are long gone. With this risk comes expected higher return. It is basic economics.
Getting in on the “ground floor” of a young company, with a great product, and a game changing scenario …it is the dream of every investor.
We don’t think so, or at least we feel there are ways to put the equation in the investors favor. It’s called due diligence. Due diligence starts at your search and doesn’t end, even after you decide to go forward and invest. It’s ongoing.
The first port of call would seem to be to ask a financial advisor, bank manager or accountant. We can assure you they will not have the answer. Private equity is a total mystery to them; when was the last time your advisor brought you a private equity project? It never happens and it never will. They will sell you a bond or put you into a SIPP or a savings plan, but will the returns be vastly different to a simple deposit account? I don’t think so! Most are mandated by their firms to only promote (sell) what the firm is carrying. If they can go outside of these parameters, rarely do the advisors have the expertise to conduct due diligence on any private project, so they are contained within the traditional listed stocks or shares. This means your returns are restricted as well, and probably correlated to whether the market goes up or down. Understand this and realize this.
We have said time and time again, by the time a company is listed, the original risk takers have exited and the real money has been made. If a firm goes public at $40/share, how hard it is to double…triple…quadruple? The original investors probably got in at 50 cents and exited at $40.
Start your search and quantify the risks.
First, realize EVERYONE wants your money! There is no shortage of companies, in every sector, who are looking for funding. Many are too young or not established enough to raise bank funding or attract institutional money. Also realize that most companies fail, for various reasons, in the first 5 years.
This doesn’t mean that we should stop before we start. There are tried and tested methods to increase your chances of finding good situations and dramatically reduce your risk.
Some of the parameters that we use at Grace Century and how to find winners:
- The Management. Grace Century believes this is the absolute and most important variable. We have seen incredible ideas and projects that failed, due to the lack of good management, and lack of proper skill sets. Like a Captain of a boat, the importance of the correct skill sets and integrity is second to none. Ben Lerer, CEO of Lerer Ventures, was recently interviewed on CNBC. As an investor in over 200 start-ups, he agrees that the people are more important than ideas.
- The business model must have distinct and competitive advantages. Whether it is a brand new, revolutionary solution to a problem or need, or a better way to do something; there must be clear benefits for the considered project.
- It needs to be scalable. We don’t want to find a “me too” project like a restaurant where there are no restaurants or something that will maybe work in one market and not another. It has to be able to be scalable at least nationwide if not worldwide. This also must be able to be done easily and cost effectively.
- We must have the exit defined before we get in. Even in a start-up or a seed funding situation.
Due diligence starts on the first day and never ends; it is the firm doing and meeting bench marks. Evaluate and, if not, keep tweaking. Business is fluid; implementation must come about as problems arise. It wouldn’t be business if there weren’t problems.
For an individual this sounds impossible, because it is impossible. It is also impossible for a financial advisor or a manager at a bank or an accountant. That is why they will never offer you a private equity project; it is NOT what they do.
If you can’t do this or won’t, find someone or something like Grace Century that does and can. The next Facebook, WhatsApp, or Twitter are out there.
True ROI is not only a return on investment; it is also a return on intelligence. This intelligence can actually reduce the risk of investing into private equity projects, while dramatically increasing your returns.
The dream is out there, and attainable. To make it a reality, you just have to realize who does what and take the first step.