How To Properly Vet An Investment Opportunity
How to vet an investment opportunity is timely knowledge that every entrepreneur should have. This is because, while you can become the next Jeff Bezos or Mark Zukerberg, your chances of rising to that level of wealth are slim, if you are no investor. Yes, the richest men in the world today are people who built something from nothing – people who invented their industry. However, the next group of people that follow are investors. Some well-known investors are Warren Buffet, commonly known as “Oracle of Omaha,” and worth $79 bn. Some of his known portfolios are in Apple, Bank of America, and Coca Cola. Other well-known billionaire investors are Micheal Bloomberg, who is worth approximately $51 bn, George Soros, Carl Icahn, Joseph Safra, Thomas Peterffy, James Simon, Ray Dalio, Abigail Johnson, and Steve Cohen amongst others.
Note that these are all billionaires with significant shares in investments, and are still actively in business. This means that because you have a company does not mean you don’t have to invest. See it as a way of spreading your wealth and accumulating more. Otherwise, keeping money idly in your bank is a waste of opportunity.
Before we proceed, we must escalate the meaning of the word investment, so you don’t confuse it with gambling or Ponzi schemes.
What is a monetary investment
To invest is to allocate money in the expectation of some future reward. Usually money as well. Investopedia defines it as the act of putting money to work to start or expand a business or project or the purchase of an asset, to earn income or capital appreciation in the long term. Investment is oriented toward future returns, and thus entails some degree of risk. The expectation of a profit or price appreciation is the core premise of investing. Risk and return go hand-in-hand in investing; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk. While Ponzi schemes and gambling can be characterized as an investment, the former is an illegal practice and the other, while a form of investment, according to some, is a short term win or lose stake.
Why you should invest
Who wouldn’t want to make money without lifting a finger? Certainly not me. While your business might be doing great, there are only plus sides to investing – the only negative side being wrong investment choices that result from not correctly vetting a business opportunity. As an investor, with the right portfolio, you can live the rest of your life without ever lifting your finger to work. If you have to work/run a business, why stockpile your wealth in a bank when it can work for you. This is a term preached by Robert Kiyosaki, the author of “Rich Dad, Poor Dad.” He stated that keeping your money in the bank offers low returns, and will not make you rich. Putting your money to work by investing puts you in a different class of wealth.
Types of investments
In recent years, the word “investment” has become overused. Contrary to what you might have been made to believe by commercials or the internet, there are only three main types of investment. Every other form of investment fall under these three categories of investment. These Category of investments are
Note: Anything that depreciates in value with use is not an investment.
Ownership investment is one of the most commonly known forms of investment. When the term investment is mentioned, many times often, the mind thinks of categories of ownership business – Some of which I will outline below. Ownership investment covers some of the most profitable forms of investment, and here are a few examples:
Stocks: Owning stocks means owning a part of a company. Without being mild, all traded securities, from futures to currency swaps, are ownership investments. Investors purchase them to share in the profits, or because they will increase in value or both.
Real estate: houses that are purchased with the hopes or purpose of being rented out or sold is an ownership investment. However, the house you live in, if owned, is not an investment. While the value may appreciate with time, it fulfils a basic need “shelter,” and it shouldn’t be purchased with the hopes of profit. Furthermore, the mortgage meltdown of 2008 highlights the dangers of considering your primary residence as an investment.
Precious metals: Gold, diamond and other precious stones are also a part of ownership investment. Arts and signed jerseys are also considered to be ownership investment, as long as they were bought to resell. Like every other type of investment, their value may rise and even fall.
Business: The sum put into starting or running a business as an entrepreneur is also an ownership investment. Though the comes with higher risk, it pays out the highest reward.
Lending money is another category of investment. Some examples of these types of investment are:
Savings account: a regular savings account is an investment to the bank. The bank loans the sum to businesses at higher interest returns, and pay some of it to the account owner. While this pays the lowest returns, it is the safest form of investment, as all bank funds are secured.
Bonds: This is another form of lending investment. This is a catch-all category for a wide variety of investments from U.S. Treasuries and international debt issues to corporate junk bonds and credit default swaps (CDS). While the profit from this type of investment is relatively low, it is quite safe.
Cash equivalent investments are as good as cash. This means that they can be converted back to cash with relative ease. An example is the Money market fund.
How to vet an investment opportunity
The question of how to vet an investment opportunity is a fundamental question every investor starting must have an answer to. However, you must know that there is no one size fits all in vetting an investment opportunity. So, we are going to run through the approach that is common with investors.
Disclaimer: Guidlines below works mostly for investment in startup ventures
Without a captain, no ship will find it’s way to it’s desired destination. This principle applies to all businesses. Do you want to know how well a company will do? Start with the founder. Ask these questions:
How well do I know the founders and their abilities?
Do I know that they are responsible, smart, prudent with money, hard-working, and able to overcome unexpected challenges? If you worked with them before directly or indirectly, and they were recognized as a superstar, then hell yeah.
Do the founders have some specific knowledge or different insight about the market or the problem that they are trying to solve?
If you don’t know founder(s), and neither does your trusted friends/colleague, then take the time to do due diligence on the background. Contact people, they have worked with, preferably their supervisors, and learn all there is to know.
After the captain comes the crew. Just like a boat cant sail to its desired destination without a captain, the same goes for the captain’s crew. After evaluating the founder(s), your next step is the team. Are they committed to the companies vision, passionate about it, and are they committed? Do they have the skills that complement the company? These questions will give you a firm grasp as to the body of the company.
As you would already know, without offering value to the desired audience, then there is no business. If there is no exact value to a customer, then such a business shouldn’t be trusted with an investment. Some investors even insist on interviewing a broad set of customers as part of their diligence process (which makes a lot of sense).
Focus on industries you are knowledgable about
A good salesperson can only sell you a load of crap if your knowledge of that product is limited. This is why it is essential to stick with industries, you know. This will help you quickly determine if the firm’s business ideas are viable and desired. This will also enable you to guide the business into a more successful outcome due to your experience in the given field.
This is perhaps the most crucial step in a vetting process, and also the first thing to look into before taking any further action. Questions such as, am I excited about this idea? Is the product viable? what are the results of the market research? – it wouldn’t hurt to carry out your market research. Even if the market today is small, is this a market that will grow? If the market is already big and established, is this product/idea differentiated enough, i.e., is it x5 better than what is already being sold?
Evaluate the business plan
Some businesses look good on paper, but not in reality. A business plan is just what it is – a plan. What matters is the action that backs it up. This is why you must evaluate the business plan. Have a team look into their results, and confirm that everything is as they say.
For businesses already in existence, in addition to the above-listed rules on how to vet an investment opportunity, here are a few more things to look out for.
Business age, revenue, and profit margin
Ask questions such as how long has the business been in existence? What has been the annual ROI of the company?. When asking these questions, it is essential to note that firm records might lie. Kylie Jenner lost her Forbes billionaire status after it was discovered her billion-dollar business was only so on paper. Again, ensure to have your team carry out the financial due diligence. If you have ever asked the million-dollar question of how to vet an investment opportunity, here is your basic guide.