Posted on 18th June, 2015
Posted on 18th June, 2015
by Justin Urquhart Stewart
Is small dangerous? Why investors need growth companies
Today's seedlings will be tomorrow's giants. Well, obviously not all of them, in fact very few of them, but unless there is a steady pipeline of new and growing businesses, we will find ourselves seriously cut short of tomorrow's successes. As I have written before, this is a structural issue that has been missing from the UK economy for many decades now, but it is also a key issue for investors’ portfolios.
Good investing should fulfil the goals for each investor. As such we all as investors need to sit and plan what we need to achieve, by when and at what risk. Sometimes that’s easier said than done. Although investors like something that is steady and predictable, they are also often willing and, in fact keen, to take on something with a greater level of excitement, risk and hopefully return - albeit with a smaller proportion of their available funds.
This has been helped over the past few years by governments of various colours encouraging investors to take greater risks with the tax incentives in the EIS and SEIS wrappers. There is a clear issue with this though – it is important investors invest in a viable and positive project and not just in a tax wrapper. After all, a bad investment, albeit in a nice tax wrapper, is still a bad investment - a nicely wrapped stale chocolate bar is still a stale bar, no matter how attractive the wrapping.
So here then is the need for good research, or as the investment analysts put it "due diligence". Higher risk investing should not be like me at the horse racing, where my technical knowledge is close to zero and my decision is more likely to be based on its name, colour and the number of working legs. I expect that any company looking to attract my hard earned investment money puts out a clear and compelling case for investment, but as well as that, I expect my investment platform of choice to have vetted and evaluated the company for me.
This to me is the great difference with companies such as Venture Founders. Just as I would expect to find in a stock market flotation, I need to be able to assess my view based on some clear and independent research and evaluation, and not just take a risk on an offer sign alone. Investment platforms that don't carry out such research and analysis are thus going to be riskier and less reliable and, in the absence of any effective regulation at present, are going to be both financial and investment disasters waiting to happen.
Investing in such an exciting area as this can provide excellent rewards, but the sad reality is that a high proportion of such entrepreneurial enterprises are going to fail. Thus, it would be wise for any investor to be prepared to build up a small portfolio of such companies, rather than investing impulsively in off the pogo stick of one company.
To me though the idea of backing British businesses directly and, where possible locally, makes me feel that I am putting something back, albeit in the hope that it will give me something back at a later date.
So, in terms of portfolio construction, this area will inevitably be a small part of our investments, and probably in the category of money that I don't want to lose, but am prepared to see go if the business fails. Hence then, for a range of such businesses across various sectors, I would always try and choose something that I have at least an interest in, if not necessarily any expertise - the latter being more common in my own case.
So with eyes wide open and a healthy dose of realism, I am prepared to invest in selective companies where platforms have done the hard work of the diligence, and I can enjoy the excitement of the investment.