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.
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
- 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.
- It may not be able to manage rapid growth.
- 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.
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?