Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How to spot the best opportunities with unlisted companies
Unlisted companies are the driving force behind the UK economy and are currently achieving unprecedented levels of survival and success. The opportunity for investors with a sharp eye to achieve tax-efficient, risk related returns that aren’t subject to the short-term sentiment driving the main financial markets is exceptional.
Obviously, not every business will reach its potential and any capital invested into anything is at risk. Nevertheless, the opportunity to achieve superior returns from being an early participant in the ones that succeed is exceptional.
Ways to invest
Retail investors can access unlisted companies via equity crowdfunding, venture capital trusts or various investment funds.
If you’re going down the route of investing in individual companies, there are five key areas to consider when looking for the best opportunities.
1 Is the business solving a genuine problem?
In other words, it there a true need for the product or service and can it really be commercialised?
2 You only want to invest in a company that owns the intellectual property, not a company that has a right to distribute it. Licence agreements can be torn up on a whim.
3 Is it disruptive and scalable? A lot of people talk about disruption, but true disruption is not only something that changes the way we do things; it must be scalable as well. It must be something that appeals to many people or serves a unique niche with few competitors.
4 Does the opportunity offer recurring revenue streams? Software-as-a-service (SaaS) models are ideal as they provide a constant flow of regular revenue, which enables cash flows to be managed efficiently. Companies with lumpy revenue models often struggle with cash flows as fortunes ebb and flow.
5 Is there a quality team involved? You could probably discount one of the above items, so long as the team is strong and has an excellent track record. This includes proof of building up and selling businesses and providing investors with timely returns. If the team is inexperienced, do they have one or two experienced advisors behind them who have done these things?
Saving you time
Picking prospects which are scalable, have a strong management team and operate in sectors where they have competitive advantage and the ability to disrupt, is not easy.
But focusing on these five things will certainly help you identify them, and at the very least save you a lot of time on extra due diligence.
Let’s face it; wouldn’t you have rather invested in Google, when the founders were operating out of their garage?
By Jason Kluver, chief operating officer at investment platform Shadow Foundr