Last week my post on investment motivations generated a lot of great responses.
Many were of the genre that “…Yes these companies you describe sound amazing - awesome technologies, exciting markets, management with knock-your-socks off resumes, but when it comes to actually investing them….”
…How do I even have a chance of separating the wheat from the chaff?
The superstars from the also-rans?
Or, more to the point, the ones that will make money from the ones that won't.
This is the ultimate question, isn’t it?
First of all, we are certainly not referring to “stock picking” to beat the markets. Everyone knows that this is not possible. (And if you have even a sliver of remaining doubt on this point, read this article).
And we're not talking about high profile, private companies that have already raised tens (and sometimes hundreds) of millions of dollars and are deep in the investment news cycle.
High-flying venture-backed companies like AirBnB, Dropbox, Uber, TangoMe, and Domo.
For these companies and hundreds of others backed by venture capital firms, by the time the public knows about them, almost always the best opportunity to invest in them has long past.
And, for the most part, we are also not talking about businesses or projects competing in mature and well-covered like Real Estate.
For sure, there are lots of solid real estate investment opportunities, but as it is such an efficient and well-covered market – with tens of thousands of investors seeking projects and deals of all sizes that the likelihood of finding those that offer returns even slightly above average is pretty low.
And let’s also cut out investing in “things” like art, collectibles, and commodities. While in places interesting for sure, statistics over a long period of time show that their average investment returns is significantly less than that of an S&P index fund.
So what investors seeking alpha are left with almost exclusively is that most special segment: startups and emerging companies.
Companies almost always with these characteristics:
They are Small. As in less then $10 million in in revenues and less than 30 employees. Not hard and fast rule, but holds true 95%+ of the tie.
They have an Ambitious Leader. At the beating heart of these companies is almost always a charismatic individual that leads big and manages small.
A leader with an articulate “point of view” on where a market and an industry are heading.
And who can then translate this vision to the day-to-day small business discipline required to turn dreams and visions into objective reality and results.
They Compete in Big Markets. This one is easier than ever before. Why?
Well, with a 7 billion person strong, $84 trillion global economy, almost every business – even those in the smallest of niches - has a large global opportunity.
Of course, to profit from them opportunities requires great leadership and management (see above) but the opportunities are everywhere.
Companies with Thoughtful Revenue Models. This is where the ability of a company's leader to think and act both “big” and “small” are so critical.
Quite simply, companies that build asset and equity value for their shareholders are vigilant in ensuring that their monetization strategies are built around long-term customer retention and satisfaction, and NOT short-term gain.
Companies that are Lucky. The new and eternal mantra of our age is luck. Books like the Black Swan, Fooled by Randomness, and the Age of the Unthinkable profess on it.
Famous technocrati like Brian Chesky, Drew Houston, and Garret Camp pray to it.
Aspiring entrepreneurs who seek their name in lights pray to it.
And the average man unwilling to step outside of his box gets none of it.
Yes, as it has been true since Roman times in our booming deal economy for investors and entrepreneurs like Fortune does Truly Favor the Bold.
The question, of course, is will it favor you?