Inventing the Wheel vs Investing in It

Inventing the Wheel vs Investing in It

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Tom Monaghan, the founder of Domino’s had borrowed R2 000 for his first outlet. Dan and Frank Carney borrowed R2 400 from their mother for the first Pizza Hut outlet. While most microenterprises may not have a Tom or Dan and Frank at helm, it is not unusual for such businesses to grow multifold rapidly. How do you spot one for investing?

Say you have R40 000 to invest. What if your R40 000 could grow to say R200 000 in seven years or so?

If you seek such growth, investing in an established and or a large business will not serve your goal. Why? One, large businesses do not grow as rapidly. Second, a stake in an established business comes at a huge premium. So it does not leave much room for large gains.

What you seek can come from investing in small businesses poised for stupendous growth. You may ask if such an opportunity is an exception (rather than a rule).

No. Most large businesses started as microenterprises or small businesses. Walmart started as a single store. Pizza Hut with one outlet. At that stage their founders too were desperately trying to raise funds. Sure, you need to be incredibly blessed to spot an early stage Walmart, Pizza Hut, Domino’s or Thawte.

However the point is that it is not unusual for microenterprises to grow multifold rapidly. Thawte was founded in Mark Shuttleworth’s parent’s garage, Dropifi in a campus in Ghana and Facebook in a Harvard dormitory.

Spotting a promising small business

Watch out for small businesses that have customers excited about their offerings and are able to sustain such customer response. It is a credible evidence of (or at least a proxy) for superior planning, processes, customer responsiveness, commitment to quality etc.

 

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It may seem like using examination scores as a proxy for predicting success. However at this stage, all you need is to separate the wheat from the chaff.

Related: The Deadly Sins of Investing

Be aware of potential issues

  1. A business may not be able to sustain the level of customer excitement (usage of this term is deliberate as opposed to customer engagement or intimacy) as it grows.
  2. It may not be able to manage rapid growth.
  3. It may not grow profitably.

Remember that no business can grow without resolving the first two issues. Thereafter as economies of scale substantially lower the cost structure, the third gets resolved as a consequence.

Time to talk to the promoters

Imagine yourself talking to a young Tom Monaghan of Domino’s. Tom had borrowed R2 000 for first outlet. He is likely to be interested. So would Dan and Frank Carney who borrowed R2 400 from their mother for the first Pizza Hut.

There is a lot more to a business than a product. So, at this stage it is critical to understand the vision of promoters and seek evidence of their leadership, innovation and problem solving skills. These are fundamental to growth.

Thereafter a well drafted legal agreement will seal the deal.

Never place all your eggs in one basket

Something could go wrong. Should you pick up smaller stakes in multiple businesses instead? The answer is yes. It is likely that as you gain experience over time, you may spot a young Shuttleworth or a Tom Monaghan.

Related: What You Need to Know About Precious Metal Investments

Finally, the skills to organise capital

In this business you need to be skillful in organising and coordinating. Assume the mantle of a leader and form a consortium (inviting the public is not permitted in many countries) of investors.

Think again, do you need to invent the wheel? Or just invest in it?

Arun Sangwan
Professor Arun Sangwan teaches strategy and entrepreneurship for the MBA programme at the School of Business, Alliance University, Bangalore. He is a consultant to leading companies in the financial markets for the development of newer trading strategies and algorithmic trading. His last corporate assignment was as the country manager - India & SAARC for Sanrad. Previously he managed strategic alliances for companies as Hewlett-Packard and Silicon Graphics in India. He has also worked for the Tata group and HCL. Connect with him on LinkedIn or email to arunsanguine@gmail.com for more information.
  • Aswathi Nair

    A great insight for SME’S across the world.Article is relevant,clear ,address the issues of start ups and written without beating around the bush.A good read of course.Dr.Aswathi Nair.

  • uday

    good one sir..

  • monami mandal

    intriguing insight, well written….

  • Pooja Patil

    To become successful we may not start something, a proper investment in something could also lead us to succeed, thank you sir

    • Arun Sangwan

      Perfect. Starting a venture may not be for everyone. we may have different priorities at that point in life or may not have those entrepreneurial competencies, but to make your money grow what is important is to spot a talent (like Tom, Dan and Frank etc) and invest in their ventures. There are so many passionate people who are extremely good in what they do, but need capital. However you should participate only after (remember this) the entrepreneur is in a position to show you an evidence of success, howsoever small it may be.

  • Akash Gupta

    truly said we should never put all the eggs in one basket, we should always try to diversify our portfolio, and should try to buy those stocks which are not correlated with each other.
    Thanks,Prof. Arun Sangwan for such a valuable insight..

  • Sayan

    Perfect Sir… Price is what we pay, value is what we get…

  • Sipra

    Very well written Sir… If we can’t go great things then we should do small things in a great way.

  • uday

    As i read again & again…lots of thoughts are ruling my mind.
    Becoming restless in search of new businesses/opportunities
    Thank you for this.

    • Arun Sangwan

      If it can inspire you to start thinking and act differently … !!

      • Arijit ghosh

        Congratulations sir, its is an extremely unique and interesting concept!
        – Pritha ghosh

  • Tanaya

    Awesome article…

  • Ruparna Saikia

    Your point about spotting a promising small business has really intrigued me. Although its not going to be easy to assess the potential success of a business in its initial days, after reading this article I am definitely going to be more alert and open minded towards the business opportunities that comes my way.

  • Hema

    A very insightful article sir, though it’s a tough call to make for many –Inventing the wheel or Investing in it. I’d rather keep my opinion embracing the investment part. You have clearly educated us by incorporating the elements of how to play it safe (not ignoring the inevitable concept of Risk Aversion) given the strength of capital, willingness to invest and aspiring an enhanced quantifiable return with the knowledge the investor should acquire regarding the Business type, Stage,Industry, Geography and Capital needs before he starts his venture with that particular business.

  • vikranth

    provides lots of new ideas and new ways…lucky to come across..waitin for few more like this to come..

  • Mohit Singal

    Sir, the article is very thought provoking.Firstly,it highlights how people who want to make it big in life can do so not just by starting something but actually by investing in start ups. Secondly, since it is difficult to spot the potential of start ups , it brings into light the importance of investing smaller amount of capital in businesses of different kinds or from multiple industries .Thirdly, it explains growth potential of small companies. Since most radical innovations come from small companies while large companies mostly provide incremental innovations, smaller companies are more likely to develop products and services that progresses human lives by solving some real life problems and fulfilling customers latent demands and hence more likely to experience supernormal growth or get acquired by a large company. And finally , since starting something new requires lots of painstaking work , time and effort , learning to understand businesses better and becoming able to spot and invest in start ups with stupendous growth potential will actually help us achieve greater things in life at much smaller time frame by enabling us to think more strategically and work less clerically… Thank u so much sir , for such a wonderful article !

  • Lal Bahadur Singh Rajput

    Very well written Sir…provides a lot of insights on value investing rather
    than growth investing. Identification of core competencies of an individual or
    a company would greatly drive investment decision…

  • Arvin

    Sir, your thoughts of finding a small enterprise which has a greater growth potential and investing in it for higher returns instead of investing in a bigger enterprise who has already reached its peak so gains might not be good enough is a great insight indeed. Thinking in such a different manner is really a learning for us..

  • Riyas

    Having customers excited about your offerings through a start up is the result of
    innovative thinking and hard working nature which motivates him to perform
    better, Even then it is difficult for many to get financial aid at this point
    in time, Without resolving this issue no business can grow. Whereas this
    article has given a road map to move ahead and provided me many more
    diversified ways of thinking about business opportunities around.

  • Lal Bahadur Singh Rajput

    Very well written Sir…provides a lot of insights on value investing rather
    than growth investing. Identification of core competencies of an individual or
    a company would greatly drive investment decision…

  • Upasana D Chugani

    Beautifully written!!

    For success it is really important for an individual to be an active manager rather than an passive one. He should be open to every visible and hidden opportunity have an holistic approach to Explore and Expand his business methodologically and achieve success.

  • Sanjay Chugani

    A very well written and thought provoking article, there is
    no investment strategy – be it active, passive, value, growth, long-short,
    arbitrage, mean reversion, trend-following, stock picking etc – that will always
    work in all environments.

    But in this competitive and fears environment the ideas
    suggested in this article might be the key blueprints one must follow to make
    the right choices.

  • Rohit Jaju

    Hi sir, article is wonderfully written and I totally agree with you on value investing and diversification of portfolio.

    Stock investing is very risky as we see the volatility and break down off good companies stock. One of the most important issue in stock investing is investments of retail investors are totally based on recommendations by friends, family members, research report and some tips given in news channel or newspaper this can be taken into account but investors should do some basic analysis before investing in stocks or any security. Investor must choose those stocks which are underpriced in market and has good fundamentals. Every investor is not financially savvy to do all kind of analysis it need lot of effort, knowledge and skills which a common man may not have so, before investing investor must see companies debt, EPS, Dividend paid, Sales growth, future prospect and its brand.

  • Pramit

    Beautifully constructed pieces of information that inspires you…

  • Sunil Bhougal

    This article is an eye-opener for all employees to truly grow their wealth exponentially. Also, they would be contributing to nation building by encouraging entrepreneurship and hence providing employment at a large scale.

  • Jagan Gaur

    Nice article sir…crisp and effective….thanks for inspiring again….:)