high risk

Should You Invest in Start-Ups?

Dr Penny Pincher — Mon, 25 Apr 2016 10:30:06 +0000

Can regular people even invest in those high-flying startups? Should they?

Some of the biggest and most valuable companies today were startup businesses in someone’s garage or dorm room not that long ago. Apple, Google, Facebook, and eBay are spectacular startup success stories that come to mind. A small investment in a startup in its early stages can quickly grow to be worth millions of dollars. How can a regular person invest in a startup? And is it worth the risk? (See also: Starting Your Dream Business Is Easier Than You Think — Here's How)

How Startups Grow — And When to Invest

Initial funding for most startups comes from the founders of the business themselves. A brand new startup has no product, no customers, and usually lacks a detailed business plan. You can see why it is hard to find anyone besides the founders who are interested in investing in a brand new business.

As the startup gets rolling, additional investments to get the company growing may come from friends and family. By this time, the founders have clarified their business plan at least enough to be able to explain their business concept to others and are making progress toward launching a profitable product or business. This stage of startup financing is often the best opportunity for a small investor to get involved, since the startup is often strapped for cash. A little bit of investment can buy a lot of equity in a startup at this point.

The next funding stage for startups is typically “angel” investors. Angel investors are successful local business people familiar with the business area of the startup. They have significant assets, are willing to take a risk with some of their money in exchange for a big potential payoff. Investing in a startup as an angel investor is another opportunity for a regular person to invest in a startup, although the level of investment required at this stage of development is significantly higher than in the earlier days of the startup.

As the startup grows, the next step up for financing is venture capital. The venture capital stage of funding often involves millions of dollars of investment in exchange for a substantial amount of equity in the startup. Venture capitalists require extensive documentation of financial records and intellectual property ownership in addition to a rock solid business plan and time commitments from key personnel.

After one or more rounds of venture capital investment, the startup may sell stock through an initial public offering (IPO), raising more capital to support growth and business development. At this point, the business is no longer a startup, but is an established corporation. If you invested in a startup that reaches IPO, you are going to be rich!

How Risky Is Investing in a Startup?

An unfortunate fact is that most startups fail within a few years, for a number of reasons. Sometimes startups simply run out of cash and have to close shop because they can’t pay their bills. A key contributor may decide to pursue another opportunity and effectively pull the plug on any chance for the startup to survive. The anticipated market can fail to materialize. Technical issues can derail a key product launch and doom a startup to failure.

Many personal finance advisors do not recommend holding individual company stock and instead recommend to diversify by holding funds consisting of many stocks. This strategy reduces the risk that your investment in an individual stock will be ruined by an Enron-style meltdown. Investing in a startup is much more risky than holding individual company stock in an established company.

If you invest in a startup, there is a good chance will lose your money. The startup may fail before you have a chance to sell your equity and make a return on your investment, or even get your principal back. However, there is a small chance you could make a lot of money if the startup you invest in is successful. If you are interested in a high risk, high reward investment opportunity, then investing in a startup may be right for you.

How to Find a Startup for Investment

Investing in a startup takes a lot of work to find the right business opportunity. You need to find a startup that has a good chance to succeed based on the people involved and the business opportunity.

Some people who invest in startups have a motto: “Bet on the jockey, not the horse.” This means to look for company founders who have experience working in the type of business they are trying to start and have a track record of success rather than focusing on the details of the business plan of a startup. The business plan will likely change a lot in the early days as obstacles pop up, and talented people will have a better chance to find a way to succeed anyway.

Look for connections with startups at business development centers or business incubators in your community or at nearby universities. Another place to learn about local startups is to watch for stories about inventors developing a new product or startup businesses in your local newspapers or on TV news reports. Once you start meeting entrepreneurs, they can often introduce you to others who may be a good match for the startup investment opportunity for you are seeking.

How to Invest in a Startup Without Risking Your Money

If you are interested in getting the upside potential of a startup investment but the high risk makes you uncomfortable, consider contributing sweat equity to the startup instead of money. You may be able to convert your time and skills into equity in a startup, keeping your cash safe.

Most startups have tons of work to do as they launch initial products and seek sales, but not enough cash to hire many workers. A cash-strapped startup may be interested in taking your labor in exchange for some equity in the business. You might be able to commit to working a certain number of hours per week for a year in exchange for ownership of a percentage of the startup. If you have relevant experience or connections with potential investors, the founders will be more interested in taking you on as a partner to help the startup grow.

Would you be willing to invest time or money in a startup for a chance at a big reward?

This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

A Beginner’s Guide to Investing in Frontier Markets

Damian Davila — Thu, 21 Apr 2016 09:01:08 +0000

For many years, investors were able to capitalize in the accelerated growth of emerging markets, such as Brazil and China. However, the economic problems in Greece and China have demonstrated that some emerging market economies are experiencing a slower rate of growth and, in some cases, facing substantial economic roadblocks.

Seeking alternatives for emerging markets, some investors are turning to so-called "frontier markets." While less developed than emerging nations, frontier market nations are experiencing such accelerated growth that they may provide aggressive returns to investors willing to take on the risk.

What Are Frontier Markets?

While there are many lists detailing what countries are considered frontier markets, the MSCI market classification is the most widely accepted. The MSCI Frontier Markets Index is made of 120 stocks from 23 frontier economies, including Argentina, Lithuania, Nigeria, and Sri Lanka. With 500 stocks from 34 frontier markets, the S&P Frontier BMI is another index that provides a comprehensive benchmark of the frontier market economy as a whole.

Frontier markets are characterized by their high volatility. For example, the MSCI Frontier Markets Index had a 72.74% annual gain in 2005 — and a 54.10% annual loss in 2008. Investors seeking potentially high returns in frontier markets need to understand that they will be facing higher risks, such as large currency fluctuations, political instability, and unfamiliar — or relaxed — regulatory systems.

Why Frontier Markets Matter

Despite the higher risks, many companies are investing in these markets for the long run. One example is the Coca-Cola Company.

Coca-Cola has substantial investments in heavy soda-drinking nations in developed markets, such as the United States and Belgium, and emerging ones, such as Mexico and Brazil. However, frontier nations are the ones promising the most growth for the beverage company.

In 2014, Argentinians consumed the most soft drinks per capita in the world, a whopping 154.6 liters. That's one liter per person more and 18 liters per capita more than U.S. drinkers (#2 on the list) and Mexican drinkers (#4 on the list) purchased in the same year. This explains why Coca-Cola's CEO pledged to invest $1 billion in Argentina over a four-year period starting in 2016.

Vietnam is another frontier market of interest to Coca-Cola. Over the 2013–2015 period, the southeast Asian nation was one of the world's fastest growing markets for the brand. It has been estimated that the consumption of soft drink liters per capita in Vietnam increased by over 105% over the 2009–2014 period.

Just like Coca-Cola, many other domestic and international companies are interested in frontier market nations. Even governments recognize the importance of increasing trade relations with up-and-raising developing nations. For example, the Trans-Pacific Partnership (TPP) trade agreement signed in February 2016 aims to lower trade barriers between 12 nations, including Vietnam.

How to Invest in Frontier Markets

For the average individual investor, buying stocks in individual companies trading in frontier market stock exchanges may prove impractical for several reasons.

Trading volume for frontier market stocks is generally lower than that for U.S. stocks, which produces more volatility and prevents efficient market transactions.
Finding "winners" is very challenging for individual investors without connections in those markets. Many investors can track the price of Bao Viet Holdings, the largest insurance company in Vietnam and the seventh largest listed company by market capitalization in that nation, but very few can name stocks in Estonia or Kenya.
Less-developed nations are still working on implementing international financial accounting standards, putting investors in the dark about the latest developments.

Therefore, the average investor has three main ways to invest in frontier markets.

1. U.S Companies Focusing on Frontier Markets

First, an investor could invest in U.S.-traded companies that have strong interests in frontier markets. Besides Coca-Cola [NYSE:KO], Facebook, Inc. [NASDAQ:FB], and Apple, Inc. [NASDAQ:AAPL] are other companies eyeing those fast-growing nations.

Facebook is working hard on increasing its presence in frontier nations. Through its 2G Tuesdays initiative, Facebook engineers are learning how to adapt the features of the social network app to work seamlessly even on a 2G Internet network. Also, Facebook is offering free Internet access to cellphone users in Kenya, Bangladesh, and Pakistan and working on reaching similar agreements with cellphone carriers in other frontier markets.
Trying to diversify its Asian portfolio, Apple opened a subsidiary company in Vietnam back in 2015 with an investment of 15 billion Vietnamese dong (over $670,000). In 2014, sales of Apple's products in Vietnam grew five times faster than in India. Beyond Vietnam, Apple is looking to expand in other frontier markets.

2. Frontier Market Exchange-Traded Funds (ETFs)

Frontier market ETFs allow investors to include frontier stocks in their investment portfolios. For example, the iShares MSCI Frontier 100 [NYSE Arca:FM] tracks the MSCI Frontier Markets 100 Index and holds over $408.70 million in net assets as of March 2016. By meeting minimum liquidity standards, ETFs allow investors to liquidate their positions with more ease when necessary. (See also: 10 Questions to Ask Before You Sell a Stock or a Fund)

3. Mutual Funds Focusing on Frontier Markets

Structured and maintained to meet the demand of investors interested in frontier markets, mutual funds focusing on frontier markets seek to produce capital gains from stocks traded in less developed exchanges. Some examples are the Templeton Frontier Markets [MUTF:TFMAX] and the Wasatch Frontier Emerging Small Countries Fund [MUTF:WAFMX].

Investors who are particularly bullish in individual nations should consider ETFs and mutual funds focusing on specific frontier nations.

The Bottom Line

To compensate for slower growth in developed and emerging markets, investors can look into frontier markets. By investing in U.S. publicly traded companies, ETFs, and mutual funds focusing on frontier markets, individual investors can access these markets with better liquidity and more diversification. However, an individual investor should assess applicable fees for such investment vehicles, understand the higher risk involved in such investments, and limit the exposure to a number that is consistent with the investor's overall objective.

How are you investing in frontier markets?

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: