ELIAN D. ALVAREZ

- VENTURE CAPITAL - ANGEL INVESTMENT -
- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

Lithuania Government and Venture Capital

Feb
16

The past research shows that the role of governments to activate the VC market is a result of direct or indirect public policy measures. They choose the optimal measures that focus on timely economic issues and also encourage private investors to fund the sector where there is insufficient capital. Different governments around the globe are making efforts to increase the development of innovative SMEs (Small and Medium Enterprises). Although, VC market is normally talked about in the context of developed countries, such as the U.S., UK, Japan, Canada, France, Australia, etc., but in 2007, a joint initiative, called the Joint European Resources for Micro to Medium Enterprises or JEREMIE, happened to take place in Lithuania and other European states.

 

What is JEREMIE and its Purpose?

The JEREMIE initiative was an effort made by the European Commission and European Investment Fund (EIF) in collaboration with the European Investment Bank Group and other financial intermediaries to have a coherence among the EU. It was formed to distribute a portion of the EU Structural Funds through new risk finance initiatives for innovative SMEs.

In 2009, Lithuania experienced a dramatic emergence of VC funds as the agreement was signed with the EIF to implement the JEREMIE initiative in the region. Moreover, VC association was also established in the country. Lithuania is known as one of the leading countries in terms of the JEREMIE holding fund agreement – a fund managed by EIF and includes pre-seed and VC fund, co-investment fund, portfolio guarantees, and credits.

 

Emergence of Financial Intermediaries in Lithuania

In 2010, three financial institutions, a consortium of MES Invest and STRATA, LitCapital, and BaltCap were chosen for equity instruments. The last two have been established to manage VC funds, whereas, the first one is for the management of Business Angels co-investment fund.

 

Launch of Seed and VC Fund

A year after the emergence of financial intermediaries, Seed and Venture Capital Fund was launched in Lithuania under the JEREMIE initiative and a team of professionals titled CEE Capital was appointed by the EIF to manage it. The purpose of this fund was to enable the establishment of seed fund in Lithuania that is supported by the State. According to the newsletter published on the website of Ministry of Economy of Lithuania Republic, the size of this fund was approximately EUR 20.7 million and its aim was to extend financial support to Lithuanian firms that have a high growth potential. It was fueled by the Structural funds that were allocated to the JEREMIE holding fund under the management of EIF. It primarily provides capital to companies that are at seed stage of the development and also help in the further expansion of new enterprises.

Although, implementation of the JEREMIE initiative increased the amount of risk capital for SMEs in the country, yet, only a few investments were made in the innovative enterprises.

 

Baltic Innovation Fund

The Baltic Innovation fund, also known as the fund of fund initiative, was formed in 2012 by the EIF in collaboration with the government of Estonia, Latvia, and Lithuania. It was created to boost the equity investment into Baltic SMEs having a great growth potential. The fund represented the investment of 52 million euros by EIF, along with the 26 million euros from each Baltic government. The aim of this fund was to focus on the Baltic States during the period of four years between 2013 and 2017 through a funds-of-funds process in order to bring more private capital and also to introduce the best market standards for equity investment in enterprises. This opportunity can definitely improve the competitiveness and employment situation in the region.

 

Progress in the VC Sector

  • The number of firms that got VC capital increased from 5 in 2011 to 16 in 2012. In 2014, the number eventually rose to 23.
  • According to Enterprise Lithuania (government agency), 63 startups were funded during the period of eight years with a capital of 101.5 trillion euros.
  • There were about 320 tech startups in the country by 2016 according to the statistics provided by The Lithuanian Private Equity and Venture Capital Association, Startup Lithuania, and Practica Capital.

Last year, Cabinet of Ministers in Lithuania approved legislation that would make the process of permanent residency easier for non EU/EEA citizens who want to do innovative businesses in the country. The VC market in Lithuania is not yet developed and its progress is really slow. However, the public initiatives would give a boost to national VC market in the country.

Hong Kong Government and Venture Capital

Jan
26

In the past few years, a growing trend of government involvement to boost entrepreneurship and innovation has been observed around the world. For example, key developments in the IT sector have risen from government funded R&D (Research and Development).

The Hong Kong government has also contributed a lot in this regard, especially via Venture Capital (VC) investments.

The ex-financial secretary of the Hong Kong Special Administrative Region, Antony Leung, said in a speech in 2002 that their strategic position provides outstanding opportunities, and VCs in the country have ideally been placed to take these opportunities.

 

Development of VC in Hong Kong

Venture Capital investments started in the 90s with the change in attitude of the Hong Kong’s government, as various reforms were made to the policies of the country toward IT development and innovation. Today, Hong Kong is considered one of the largest VC centers in Asia.

The government of Hong Kong has always been aware of the opportunities created by VCs. This is why a number of initiatives were taken by the government to further enhance the growth and development in the sector. Some of them have been mentioned below.

 

  • VC Financing System

The financing system was formed by the government of Hong Kong to offer supplementary loans with a low rate of interest to VCs that are non-governmental and to provide guarantees for these loans.

  • Direct Investment by the Government – Innovation and Technology Commission (ITC)

The government formed ITC in 2000 in order to make Hong Kong the knowledgeable and world-class economy. Another reason was to harmonize the creation and implementation of policies related to IT and innovation and to make sure there is synergy among them. ITC formulated different programs over the years, including the Innovation and Technology Fund (ITF), the Applied Research Fund (ARF), and Small Entrepreneur Research Assistance Program (SERAP). Moreover, it also contributed toward the development of IT infrastructure and human capital by introducing programs like the Hong Kong Science and Technology Parks Corporation (HKSTPC), the Hong Kong Productivity Council (HKPC), New Technology Training Scheme, Internship Program and more.

  • Provision of Legal Support

The government extended their efforts for the development of VC in the country by envisioning legislations as guarantees for the VC sector. Hong Kong has its own VC laws and does its best to stay compatible with Chinese laws related to VC. Some of the measures taken include Small and Medium Enterprise (SME) Promotional Law, wherein, the government of China issued a number of opinions to guide and support the economic development of private and entrepreneurial businesses by introducing preferential measures for SME development; and Provisional Measures for the VC Enterprises Administration to make way for fund raising opportunities and to set forth several investors by offering a legal ground for VC firms to raise capital in a private manner.

  • Adoption of Preferential Taxation Treatment

The VC firms in the Hong Kong were weak in raising capital due to their high risk nature coupled with low success rate. This is why the government formed a preferential taxation treatment by providing exemptions and reductions to back the VC development. A number of steps were taken in this regard, including Profits Tax Exemption for Offshore Funds that helped in bringing new offshore capital to the country, and Avoidance of Double Taxation between China and Hong Kong that decreased rate of tax on passive income, such as, royalties, interest payment, capital gains, and dividends for strengthening Hong Kong as the gateway of foreign investment into Mainland China.

Although, the government of Hong Kong took a large number of initiatives in the region, yet, they were criticized by some specialists who believed that the government could do more to support and improve VC industry. They are of the opinion that the government has kept its focus on later stage startups and businesses while ignoring the startups that are in their early stages, which caused lack of governance. Also, a very small proportion of that money was being invested in Hong Kong.

 

Current Status of the VC Industry in Hong Kong

In 2016, the Hong Kong Chief Executive, Leung Chun-Ying, announced HK$2 billion worth of capital in his policy address in order to boost the inflow of money in IT and innovation. It was the Innovation and Technology Venture Fund that aims to encourage increased funding from private VC in IT startups via a matching process. According to the Vice President of the Hong Kong Business Angel Network and managing director of Radiant Venture Capital, Duncan Chiu, the fund was issued to provide backing to early stage companies that struggle to raise capital for their business.

 

To conclude, Hong Kong is known to have the largest population of VC professionals in the region that manage more than 30 percent of the capital, and the government has been making a continuous effort to further strengthen the VC industry for the betterment of the overall Hong Kong economy.

How Smart Angels Invest? – A Guide to Creating Your Investment Strategy

Dec
15

Investing in a startup has become more of a trend recently as it promises to return more than what it’s originally worth if it becomes successful. Some of the startups that made it big include Uber, Facebook, and Twitter. If you believe that you have enough capital to invest in the startups, but don’t know how to begin and what strategic direction to choose, it is better to start by analyzing the strategies of smart and successful angels; the type of investments they have in their portfolio and the course of their invested money over a period of time.

It may take some time to master the skills of these angel investors, but don’t get disheartened by it because it will eventually be brought to fruition as you learn to take the right decision. Even the successful investors made plenty of mistakes before they reached this position. Following are some of the things some of the well-known angel investors believe in when they make seed-stage investments.

 

Investing in People

One of the most famous angel investors of today is Ron Conway, who has made an investment in a number of successful ideas in the past decade. According to him, the most crucial element to consider when you invest in a startup is its team. He said that the idea of an entrepreneur changes and evolve with the passage of time, therefore, it is important to invest in people.

He follows a common strategy called spray and pray by making a large number of small investments. Not every investment made by him guarantees a successful exit, but he certainly has a huge network with different types of investors who look forward to joining the league of these angels.

 

Capital Efficient Business Idea

Another successful angel investor, Reid Hoffman, who is also a founder of LinkedIn and has made an investment in Flickr, Facebook, etc., believes in innovative ideas that have a tendency to scale efficiently. Whenever he invests in a company, he looks for a product that is unique, has the potential to attract millions of users, and most of all, it can attract funding as a business grows.

 

Identify the Products that Appeal Consumers

Chris Sacca, an angel investor who has invested in Instagram and Twitter, looks for a product that will be in demand once it hits the market. An example can be his investment in Turntable.fm, in which he invested a lot of time, because he realized it in the beginning that users would become engaged in this investment.

 

Team Involved in Materializing the Idea

Another well-known name in the angel investors’ community is Chris Dixon, a co-founder of Hunch. He invested in Skype and Milo. Moreover, in 2010, he was ranked number 1 investor in Businessweek. Although, he is always on a hunt for high-tech startups, yet he believes in diversifying away from the risk, and so also invest in startups that do not fall in the category of high-tech. However, apart from the technology, he focuses on the team involved in bringing an idea to reality, and this, he believes, is a crucial part of his investment. He said that as environmental changes occur, the shortcomings in the original idea start popping up. A good entrepreneur would always adjust to the changing environment, which can only be seen through the passion of the team involved.

 

Reasonable Compensation

Everyone must’ve heard the word PayPal; its co-founder who also invested in Facebook, Yelp, LinkedIn, and Friendster, Peter Thiel, said that he keeps his focus on what a CEO is paid. If these people are being paid a lot of money in the company, the chances of an investment to run out quickly are very high, but if the CEO is paid less than average, it depicts the alignment of his interest with equity shareholders. Therefore, he sees how reasonable a compensation is in the company when he invests.

 

Provides Solution to the Problem

A famous celebrity, Ashton Kutcher, has only been on the field for four years, yet, he has made substantial investments in high profile companies, such as, Skype, Zaarly, Flipboard, AirBnB, etc.

According to him, what he looks for in a company is the tendency of its product to solve a problem, and the user it engages who demand that solution.

 

 

To summarize, whenever you plan to invest in a company, you can choose one or use a blend of these ideas in order to examine factors that may lead to finding a successful deal. All in all, what they focus on is the entrepreneur; the team he assembles, and the idea he represents that determines whether an investment would be profitable or not.

What do Social Investors Want?

Dec
02

Funding is a lifeblood of any startup. It is a crucial element for the survival of any business.

For social entrepreneurs, it is important to take steps in the right direction if they wish to secure funds. This is the reason why they have to learn what social investors really want and what their expectations are. Having a thorough understanding of your businesses increases the likelihood of attracting the right investor. Therefore, the vision of your business must be clear and well-focused.

Below are four main guiding principles every social entrepreneur must bear in mind in order to secure reasonable funds to keep their businesses running.

 

Financial and Social Objectives Must Be Well-Integrated

Social entrepreneurs have to be convincing in order to succeed in winning the trust of an investor. They not only should have a persuasive social mission, but also present a strong business case. If both these elements are properly aligned, they create a strong case that can make an appealing financial outcome to widen your impact. A great example of that can be Taxi-Electric that runs the cars on electricity and charge a fair price for providing taxi services. In addition to that, they also provide job opportunities to people who experience long term unemployment or are students. Both of these core elements have enabled them to sell as many taxi rides as possible.

Another well-known example is Tony’s Chocolonely that produce and sell chocolates. Moreover, it opposes child labor and slavery at the same time by partnering up with trade firms in Ghana and Ivory Coast to purchase cocoa beans at a fair price directly from farmers. These organizations are making an effort to spread a positive message while growing their revenues and returns.

Investors usually look for such businesses that offer a combination of both. It is quite likely that angel investors would invest in visionary ideas and would try to improve the business side of these social startups, whereas, investment funds tend to focus on the business side in order to assist them in aligning their social goals. Investors normally expect social entrepreneurs to have a deep understanding of their financial as well as social goals along with having an integrated approach and clear vision. It is important to optimize your plan through discussion with your investor.

 

A Well-Balanced and Strong Management Team

It is important to have a well-balanced team of professionals.

Investors always stress the importance of having a solid team that has its goals aligned with the goals of a business. Having a group of professionals who are motivated to invest their time and expertise in a social enterprise is considered quite healthy for a business as it is an indicator of good future prospects. Financial institutions and venture capital firms specifically look for companies with strong teams while taking investment decisions. Therefore, it is recommended to add a diverse group of people in your team at an early stage, because having more than one person behind an idea shows its strength and persuasiveness.

 

Measure Your Impact

It is not easy for social firms to measure their impact or quantify its outcome and they blame the lack of resources for not being able to do so. Investors, however, consider the impact measurement a strong requirement before they invest in a business. Although, they understand that it is difficult to measure the social impact, yet, they emphasize that it can prove to be very helpful for social entrepreneurs to maintain focus on their operations and identify clearly what their goals are.

The question remains how to get it done. The key is to start small, for example, measure the number of people employed by a social enterprise and the positive feedback it receives. There is no doubt that every method comes with its limitations, but one cannot deny that you can, at least, measure your progress with it. Taking the question “why” is it you want to measure the impact can play a vital role in integrating your financial and social goals.

 

Avoid Deviation from Your Core Mission

It is very important to stick to your key mission. The deviation can cost a business a lot in terms of losing their financial wealth and losing their core values. It usually occurs after two to three years into the business, especially when new employees, leaders or investors start showing interest.

For venture capitalists, the shift from a mission is one of the major issues that arises in social enterprises. It happens when they start deviating from their balanced view of pursuing financial and social goals together, and instead, move toward financial returns at the cost of their social mission. If such deviation occurs, it detracts the social entrepreneurs from the original mission they discussed with investors.

It is to be noted that moving away from the original mission is not a bad thing as long as the expectations of the enterprise and investors are aligned. Keeping the investors on the same page, and having their agreement is crucial for the success of any social enterprise.

Emotions and Smart Investments Decisions

Sep
22

How Emotions Keep You from Taking Smart Investment Decisions

Being an investor in a financial market, a person must be able to control his or her emotions, because buying low and selling high may not be possible if emotions get in the way and adversely affect the investment decision. Most people tend to underrate the effects of emotions, whereas, market downturn is one of the factors that increase hospitalization rates when emotions run high.

Getting emotional in a financial world distorts even the best planned strategies. This is the reason why investors are advised to use reason and not emotions when making a financial decision. According to 2013 Dalbar Quantitative Analysis of Investor Behavior, emotions and the behaviors triggered by those emotions were partly the cause why investors underperformed the S&P 500 by almost 4 points over the last 20 years. This was because the element of desire to grab a hot investment and to sell losers for the avoidance of further losses tends to create a pattern of buying high and selling low.

Investors are most vulnerable when there is high volatility in the markets. That’s where emotions trigger panic, depression, capitulation and fear. However, by taking control, investors can prevent their emotions from affecting their decisions.

  • How many times you regretted the investment decision that you made? If you come to think of it, there would probably be quite a few that come to mind.
  • What caused it?
  • Was it lack of knowledge about the market, bad timings, or did your emotions play the part?

Following are some of the behavioral finance concepts that reflect how emotions can have a real impact on an investor’s ability to a sound financial decision:

 

Having a Short-term Thinking Process

People tend to disregard and ignore future benefits as compared to the more immediate ones. So, oftentimes, it becomes harder to make long term financial plans a priority in everyday life decisions. For example, everyone understands the value of saving for retirement or college education of a child, yet, find it difficult not to spend lavishly on buying a new car or a vacation.

 

Fearing Losses more than Valuing Rewards

Considering the aspect of behavioral finance, i.e., fearing losses more than valuing rewards, which is mainly triggered by short term thinking, it can become very problematic for an investor to take the right decision. This phenomenon is normally called loss aversion, as it leads to a risk averse behavior that eventually exposes the investment to a greater risk. For example, although, investors rationally understand that the markets will bounce back from a downturn, yet, the emotions instigate them to overreact.

As the behavioral economist, Richard Thaler, said, “We think we will be smart enough to take the long view, but when markets actually drop we lose our courage and sell at the bottom.

 

Being Overconfident

Studies have shown that a large majority of investors consider themselves above average despite the fact that not everyone can be above average. According to the findings of a study conducted by Glaser and Weber (2007), investors overestimated their investment performance by 11.5 percent per year. Thaler said that people think they are better than everyone else, regardless of the evidence that most people fail to beat the market.

For example, in a rising market, investors might believe that it is their own performance that is causing them to succeed, which might cause them to ignore warning signals or the need to caution, eventually leading to unavoidable losses.

There are so many other emotional factors that can jeopardize the investing behavior and a well devised long-term financial plan of an investor, and these are as follows:

 

Hyperactivity

If an investor gets overwhelmed by a heavy stream of real-time information, he or she would start reacting to every twist and turn in the market, which might expose them to risky situations.

 

Greed

In any market, the greed to make more may tempt an investor to seek more growth in the value of his investment, but what they do not realize is that higher returns also mean higher risk.

 

Euphoria

The enchantment to see the stock going up day by day makes an investor falls into a trap of believing that success is self-perpetuating. He can easily get caught up in a bubble mentality.

So, even if we think we are being rational and analytical while making a move, deep down under the surface, emotions are always working in ways we cannot escape and may never entirely understand, which can keep us from taking smart investment decisions.

No undefeated fighter (like Floyd Mayweather Jr.) in Investments

Sep
15

Floyd Mayweather Jr. is not only considered the best boxer of all times, but also one of the highest paid athletes of 2012 and 2013 in the Forbes list. Known to be an invincible boxer, Mayweather won 12 world titles and was six-time winner of the Best Fighter ESPY Award, two-time winner of The Ring Magazine’s Fighter of the year, and three-time winner of the BWAA. This year, he has been ranked by ESPN as the greatest pound-to-pound boxer of the last twenty-five years.

But can there be a Mayweather among Venture Capitalists or Investments in general? When it comes to Venture Capital investments, there is no undefeated Fighter; nothing like Floyd Mayweather Jr. in boxing. A venture capitalist has to face the risk of losing his investment at some point in time. Just because they think they have taken all the right decisions, doesn’t mean they will always generate higher profits. There are a number of external factors that play a vital part in making a venture capital (VC) investment successful or unsuccessful, and none of these are avoidable.

Every investment has its ups and down, and venture capital investments are no exception. Being an investor, it is very important to have a realistic mindset; one cannot simply rule out the risk associated with that investment. However, what he can do is manage the risk. Same is the case with venture capital investment; a venture capitalist can always minimize the risk and increase the chances of success by working hard and continuously analyzing the market. If not all, it will allow him to succeed in most of them. Like Mayweather said, “To be the best, you have to work overtime.” And that is the key; a key to success.

In every sport, an athlete can improve the likelihood of success if only he trains hard for it. The loss is unavoidable, yet, it can be managed and minimized so as to reduce its overall impact. So, how can a venture capitalist minimize the risk of loss? What attributes must he possess to make a venture capital investment a success?

Understand the Market – One of the crucial elements of VC investment is to have a good understanding of the market. The markets are continually evolving and venture capitalists must have a good understanding of rapidly changing market trends in order to make the best out of their investment.

Be Optimistic about the Change – A key factor to adapt to a change is to stay positive. A co-founder of the Polaris Ventures and Emeritus Chairman of National Venture Capital Association, Terry McGuire, said, “You have to believe that the world can change; be optimistic and at the same time, be realistic and guarded, not romantic”.

Situational Awareness – A founder of Accel Partners, James R. Swartz said that a good venture capitalist possesses a trait of situational awareness, meaning he can walk into any meeting and identify the issues in just a few minutes; he can sort of cut through it and figure out what’s going on.

The CEO and fund manager of Renaissance Venture Fund, Christopher L. Rizik, has identified three qualities of a good venture capitalist. According to him, a good VC has a good sense of the world around him, and how it changes. Another quality is patience – a smart venture capitalist would never lose control or panic when the going gets tough, in fact, they make profits and eventually succeed as opposed to those who freak out and give up at an early stage. Lastly, a VC has to be fair to everyone as individuals want to work with those venture capitalists who are fair, smart and treat everyone well, and not with the ones who just think about themselves.

It is all about practicing, bringing precision and polishing your skills in order to learn and grow. Like Mayweather once said,

Everybody is blessed with a certain talent, you have to know what your talent is; you have to maximize it and push it to the limit.

Value Investment Strategy in Venture Capital

Sep
08

Why succeed in every investment (or the majority of them) is more important than depending on the statistical model of “Spray and Pray”.

Starting a business is not easy. One has to invest a lot of effort, time, and brain in order to introduce an idea that can stand out and is of value to others. Every individual is naturally inclined toward investing in a startup with better prospects than a start-up that would not generate any value and likely to fail in the future. Every investor would want to see his investment a complete success, whether it be an investment in a single stock or a bucket full of stocks. Same is the case with Venture Capitalists; they wish every investment to be successful, and for the same reason, prefer to use value investment strategy over the statistical model of spray and pray.

Although, spray and pray has got a lot of media attention in the past few years, and the face behind it is none other than Dave McClure, the founder of 500 startups, yet, you cannot deny the fact that it is important to reasonably manage your risk.

Nurturing the Idea is as Important as Making Money Out of it

Nurturing the idea is as important as making money out of it and this is exactly what value investors believe in, because you won’t be able to make money out of it if it doesn’t grow well. Manu Kumar, the founder of K9 Ventures, said that most companies do not turn out to be a failure because of their investors, but despite their investors. This is why he doesn’t want the startups, he has invested in, to fail, and wants a reasonable success rate in his investments. He keeps an average of four or five companies in his portfolio and he wants each one of them to be a success. This is why he is very selective and prefer to go for the one with good prospects. He keeps his investment between $100k and $200k and screen companies down while expecting a much higher rate of success. He looks for appropriately priced deals and doesn’t touch anything that is five or higher.

Value Investing Strategy – Bridging the Gap between Investors’ Mindset and Founders’ Perception

Another famous name among the Venture Capitalists, Thomas Korte, said that they do everything in a scaled way, because the majority of the founders tend to take the funds they are offered in the seed stage. There are very few in the market who believe that their investors would take them through Series B and Series C, and their apprehensions are true to a certain extent. At one point, McClure said, “it is not that their portfolio has a high death rate, it’s just that there is a higher death rate out there.” Instead of aligning himself with the founder and an acquirer, he prefers to align with an investor and acquirer. So, if a company has a scalable impact, he makes a deal as soon as possible. It is not easy to bridge the gap between investors’ mindset and this commonly held belief of startups. However, Value investing strategy can contribute towards changing this mindset and bringing harmonization to achieve common goals.

Benefits of Value Investing

Potential to Make High Profits – As opposed to spray and pray strategy, value investing has a potential to make high profits, because value investors tend to invest in companies that are being offered at a discount price and sell them well above their intrinsic value by bringing their true value to light through solid research on a value stock, its peers, and the sector.

Avoid Exposure to High Risk – Investing in a few companies with good future prospects will not only enable the investor to focus on materializing the potential value, but also keep the overall cost to a minimum. The investor will not be dependent to succeed on that only company that make the revenue beside all the others have already failed.

 

Yes, there might be a lot of effort and hard work involved the value investment strategy to be implemented while choosing the startups for investments, but it is important to note that short term price fluctuations are not always a true depiction of the true value of an asset.

As Benjamin Graham, the founder of value investing and mentor of Warren Buffet, once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

Value Investing or Spray and Pray

Sep
01

In my last article I wrote about the value investment strategy, now I will compare it with the “Spray and Pray” method.

Value investing and Spray and Pray are two of the widely talked about strategies in the world of venture capital. Some of them view value investing as a reasonable approach, because it is concentrated toward investing in companies that are undervalued and have a strong business model with good future prospects. While others consider spray and pray method to be a wise approach as they believe it gives rise to diversification and enables investors to generate maximum return out of a few startups that reach a unicorn status. Before going into detail about which strategy is better, let’s take a look at what value investing and spray and pray strategies actually are.

Value Investing

It is a commonly used venture capital strategy, where investors seek the companies that have a potential to produce large profits for an extended period of time. It is a concentrated investment approach that allows VCs to identify good startups after keeping in mind certain factors, including the cash flow position of a company, profit generation from its key operations, and its potential to grow in future.

Spray and Pray Method

Spray and pray method is a more diversified approach and is considered aggressive by some investors. A well-known name in the world of venture capital, Dave McClure, founder of 500 start-ups, is usually known as a spray and pray venture capitalist. However, he detests the idea of being characterized as such. A few years ago, he participated in a panel discussion of angel investors, where he said that he puts a lot of thought into his investment strategies, so it is not fair to call it spray and pray method; it is diversification with a thorough working behind it.

More Concentrated Approach or Diversified Approach – Which is Better?

When it comes to choosing between value investing and spray-and-pray strategies, mixed reviews are received from the market. For example, in an interview with McClure, he argued that a high volume and diversified investment strategies, like spray and pray, provide consistently stronger cash on cash returns than in the case of more concentrated scenario. He supported the idea by explaining his portfolio of 500 startups that around 60 to 80 percent of his investments do not reach any return less than 1x invested, whereas, 15 to 20 percent do provide 3 to 5 times the original investment. Moreover, 5 to 10 percent reach exceed the value of $100 million, but the actual return is generated from 1 to 2 percent of the startups that reach a unicorn status and provide 50 times or more of the originally invested funds.

When we talk about multi-party seed round, investors are compelled to earn their right to participate in the next phase due to the increased level of competition. It not only provides greater value to venture capitalists, but also turns out to be beneficial for entrepreneurs. According to McClure, using spray and pray at the seed level, collecting insight and optionality on early stage startups, and then doubling the bet on the successful investments, can actually break the perception of considering the concentrated portfolio strategy as industry best practice.

Flagship ventures, on the other hand, carefully select later stage value investments. They actively evaluate and fund the companies that are at an advanced stage in a product development, yet, these firms require additional funds and strategic involvement to reach their full potential. In a panel discussion of angel investors, Jed Katz from Javelin Ventures said that they invest as little as a few hundred grands to $2.5 million in the companies and dedicatedly invest the time and energy to expand their scalability. Another venture capitalist, Manu Kumar from K9 Ventures, said that he prefers all his companies to be a success, and this is the reason why he is very cautious about where he should invest. He further said that there are various strategies at a seed level, however, it doesn’t mean that one strategy is right and the other is wrong; they are just suitable at different levels.

Value Investment

Aug
25

Value investment strategy is one of the strategies used in the stock market, where investors look for the companies that have the ability to generate returns at a reasonable level during a sustained holding period. In other words, a value investor tries to find a company that is undervalued by the market, but it has a potential to show an increase in its share value once the market rectifies the error of valuing that firm. So, it allows an investor to buy a well performing share at a cheaper price.

How to Screen for a Value Stock?

Value investors are not concerned with the factors that usually cause price fluctuation in the market. For them, the factors that would impact a stock price are oil prices, inflation reports, wars, and hikes in the Federal rates. This is the reason why they look for stocks with strong dividends, earnings, cash flow, and book value, because value investing is not just about purchasing an undervalued stock, it is about purchasing a good stock that is undervalued. However, just having the strong fundamentals doesn’t necessarily mean it will be a value stock investment opportunity, because a company with strong and consistent earnings growth, attractive cash-flows, decent dividends, and a minimal amount of debt might represent a growth investment, and so, value investors won’t be interested in it.

An investor must keep three questions in mind when he seeks a high value stock:

  • How is the cash-flow position of a company?
  • If the company is generating profit from its key operations?
  • What are the future prospects in terms of growth potential?

Quantitative Aspects

How to assess a good value stock? (Just some RATIOS)

  • High Dividend Yield – The stock with an ability to generate high dividend yield, is considered a good value stock. However, a comparison should be made in the same industry.
  • Low P/E Ratio – It is a comparison between a share price and the earnings generated by each share. Paying less for more profit will be a good indication of a good value stock.
  • Low Price to Book Ratio – The lower this ratio is, the better it would be, as it shows how much will be left after the liquidation.
  • PEG Ratio – Value investing doesn’t simply means investing in low Price to earning stocks. Another largely accepted metric for finding out the intrinsic value of a company is PEG ratio, which is calculated by dividing the P/E ratio of a stock with its projected earnings growth rate over the years. It measures how cheap a stock can be while keeping in mind the growth of its earnings. Therefore, a PEG ratio of less than 1 means a company is undervalued.
  • Net-Net Method – According to this method, if a company trades at 67 percent of its current assets, an investor doesn’t have to adopt any other measure of worth, because it depicts that a buyer is getting all the non-current and intangible assets free of cost. But, there are only a few companies that are trading this low.

Qualitative Aspects

Value stocks can be found in any industry, including finance, energy, and even TECHNOLOGY. Yet, they are mostly commonly located in industries that have recently been hit by a difficult time, for example, the cyclical nature of auto industry give rise to a period of undervaluation of companies like General Motors and Ford.

Warren Buffett, one of the most astute investors of all time, learned the art of trading from Benjamin Graham, who was the father of value investing. Buffett has always emphasized that buying a good company at a fair price is far better than buying a fair company at a good price, which is true. Value investing is not about purchasing stocks at a bargain price and hoping for the best, nor is it about making quick money on a market trend. The main idea behind it is to invest in companies with strong business models.

It is important to have a long term strategy with value investing. The investors shouldn’t get faltered by short term market features, such as volatility or daily price fluctuations, because a good firm will not lose its worth even on a bad day. Although, value investment strategy is dependent on a stern screening process, yet, it has a potential to generate reasonable returns in the long run.

Basic Investment Strategies

Aug
19

Deciding on a suitable strategy to fuel your investment plan is based on various factors, including the risk appetite, the time span of an investment, and financial goals. Some investors stick to one particular strategy, while others use several strategies over a period of time. Although, investors usually have their own style that forms the basis of their decisions, yet, there are some basic investment strategies that can be employed to achieve your financial objectives.

Define Your Goals – Defining a goal is the first thing every investor should do. You cannot go about investing in the market haphazardly without having any plan in mind, or else you would end up losing all your money. Always devise a sound trading plan and define your financial goals. It allows you to identify which financial instrument is most suitable for you and enables you to take timely decisions.

Diversify – Investing is a broad term that can be intimidating for newbies as it involves a wide variety of investment vehicles and hundreds of strategies. However, it can be managed if you devise a flexible and effective plan. Today, investors have more investment options than were available to an average investor ten years ago. Having a few stocks in your portfolio might cost you more in the beginning, but it will be beneficial in the long run, because one of your investments might only generate 5 percent profit, while the other one gives you a 100 percent return five years later.

Monitor Your Investments – Investing in the same stock forever is never a wise option. Even the blue chip companies can turn out to be a failure, because the old perception of buying and holding the stock forever doesn’t work in today’s world with such an effervescent economy. Therefore, monitor your investments and take timely decisions to avoid losses.

Start Investing Early – The sooner you start, the better. This is certainly true when it comes to investing in the financial market. If you keep your money invested for a longer period of time, it will have more potential to grow. Patience is the key! If only you learn to practice patience and adhere to a long term investing strategy, you would definitely experience financial success and secure reasonable returns.

Turn Discretionary Income into Your Investment – It is important for you to not confuse your needs with wants. The president of the U.S. Retirement Strategy for Transamerica Retirement Solutions, Stig Nybo, once said that phone bills, cable TV packages, and other automatic services eventually become necessities, which doesn’t let the would-be investor jump out of it. He further said that you should question the things that have become the norm, but they might not be necessities.

Adhere to a Cash-flow Plan – It is an essential element that should become a part of your investment plan. Reinvest your money every month during your employment years and stick to a strict cash-flow plan, while making reevaluations as life progresses. This will definitely help you go a long way and enable you to achieve your financial goals.

Separate Emotions from Financial Decisions – Emotions play a major role in your investment decisions. But, it is very important to separate emotions from your short as well as long term financial objectives. Emotional involvement tampers with your judgment and performance. Just because everyone is talking about hot stocks, doesn’t necessarily mean it is going to be a good investment. Always analyze the trends and pay close attention to market news and events, as it allows you to take rational decisions in the long run.

Assess Your Tolerance for Risk – Whenever you invest in the market, ask yourself one simple question, “How much can I take and sleep at night if the value of my investment drops by 10 percent or 50 percent?” If a huge decline is going to hit you hard, you should consider investing the major portion of your funds in safe investments, such as, bonds or utilities.

However, bear in mind that it takes some time to be able to understand the gist of these strategies. Being a newbie, you might initially experience a high risk of loss if you follow one of these strategies. Therefore, observe patience and perseverance, because you will eventually get there.