For most people the word investing means stocks, or bonds or possibly real estate and maybe gold. It usually stops with those asset classes for most people. However, the world of investments is not limited to the Big 4. There are loads of ways you can invest, things you can invest in, and grow your money. I’ve written about Contemporary Art as an investment class before and do believe, if you’re pushing for diversification, that you should consider it. But what should you do if you want to branch out and invest in something more tangible, like someone else’s business? What should you look out for investing in real-world ventures?
Recently I invested in a restaurant. If you know the world of restaurants, then you might be sitting up straight and thinking I’m crazy. Why would The CFO, Chief Money Man, invest in a restaurant? Don’t they fold super quickly and don’t most investors lose all their money?
In general, I think that is pretty to the point.
The National Restaurant Association says that around 60% of new restaurants fail within the first 12 months. That is clearly not a great track record for an asset class! Also, on average in the US about 50,000 restaurants close every year.
Then again about 60% of new businesses fail every year, so I don’t believe a restaurant is any different to any real-world venture.
Investing in an “unproven” venture, or even investing into a “proven” venture, that is expanding, is little different to investing in public company stocks. However, the little bit that is different needs a lot of attention, otherwise you might lose all of your money within the first year.
Before we look at the things you need to pay close attention to, let’s first discuss:
Why investing in a real-world venture can be both satisfying and good for your portfolio?
I believe it comes down to 3 key things.
1. Nothing beats seeing things first hand
Investing in public company stocks or even index funds is usually a paper game. Sometimes it might be that you are a user of the company’s product, but that isn’t always the case.
A lot of companies are B2B or operate in industries that might have little to do with our day to day lives. When we invest in them, we might peruse analyst reports, read annual reports, seek out other people’s opinion and read articles about them.
We don’t usually get to meet the people who are running the company and upon whom, ultimately, our money and future wealth depends. We don’t usually get to see how they actually promote and sell their products and speak to the users of their products to see exactly what people think of them and the company.
Investing in public company stocks is now days a paper and reading exercise. We rely on our interpretation of the things we are reading and what other people, who may be closer to the company, think.
One of the most skillful investors of our time, Warren Buffet pays special attention to the management teams of the companies he invests in. He wants to know if he can trust them with his money.
Unless you have the fire power of Warren Buffet, then I doubt you have the same access and you are thus handing over your hard-earned savings to strangers. No doubt, strangers who have been vetted by 30 minute calls with analysts, but strangers nevertheless.
When we put out kids (arguably our most precious assets) into school, we take the time to visit the school, meet the teachers, understand their process, inspect them from head to toe.
When we hand over our savings to fund managers, we hardly know the people managing the money and even less so the people managing the companies that our money is being invested in.
Nothing beats first hand experience. Nothing beats looking a manager in the eye and seeing him or her explain how they intend to make money.
Nothing beats speaking to current or future clients and understanding from them why they buy products from the company.
First hand experience tops everything we can find in analyst reports or read in newspapers or on the internet.
First hand experience is not everything, but it counts for a lot more than everything else.
2. Being able to influence the company and its operations
I think this one goes without saying.
Index funds, public companies: as an investor you aren’t able to influence their management or their strategy. You hand over your money and hope for the best.
With real-world ventures, you are able to get involved.
You don’t need to be an operational partner and been involved on a day to day basis but if you’re putting your money up, you at least have a voice at the table, and what’s good is that you are often listened to!
Of course influencing can be a good and a bad thing. If you have a particular skill, like say, being a public company CFO, then maybe your skill set can be helpful in some ways. However, often just being a consumer can be helpful as we tend to see things that business owners might not see.
But, having a seat at the table doesn’t mean we should be disruptive, but it gives us the ability to ensure our money is being taken care of. Use it wisely!
3. A greater sense of ownership and satisfaction
When the stocks I am invested in go up, I feel good. Would I say that feeling extends to pride and satisfaction? Probably not, I’m just happy I am making money.
When you invest in a real-world venture and it does well, you feel a certain amount of pride and satisfaction. Seeing people being employed by the company you invested in and seeing it add to a local community is immensely satisfying.
I don’t often tell people I am the owner of this or that stock, yet for the real-world venture which I have invested in, I am always proud to say I am an owner and strike up a conversation about it. And it turns out that people are way more interested to talk about these kinds of investments than the index fund I am invested in.
These investments are often approached in a fairly similar way to other investments and I’m going to go quickly through a 5-point checklist I use for standard investments , before going further into the things that are different.
Standard investment checklist
- Do your research
- Understand the business model
- Understand the risks involved
- Review the recent track record and outlook
- Ensure you are properly diversified
The above is fairly standard, and each step can be more or less detailed, depending on the investment you are looking at.
When investing in new or expanding real world ventures the above definitely applies, but so does the following 5 points:
This is my real-world investment checklist:
1. Get to know the business owner and understand their history, their passion/dedication to the business
Your investment gets you access to the person who will be caring for your money and helping it grow. Get to know how they’ve done in the past, where they come from, where they are going.
Understand how they feel about the current venture. How will they be if things turn bad? Will they run away or dig in and make it a success. In the real-world, you need to be hungry to succeed.
Things aren’t easy, and you need to know your business owner is a fighter and wants to succeed.
2. Get clear on where the business operates and understand the local factors influencing success
Real-world ventures usually operate in a finite space. It could be a neighborhood, a city or a country. Know where they sell, where they buy their products and how they hire their people.
The supply chain is key to success and your business needs to have access to labor and clients.
Get to know the local restrictions and difficulties to doing business. Knowing these are essential and will help you understand if your business owner is prepared for everything. At the least, if he or she isn’t you can bring that knowledge to the table and help them prepare.
3. Understand the cash financing model and how much money they would have is business goes bad and how much they would make if business goes better than expected
Cash flow is king in any business and even more so the real-world venture who usually only relies on their local bank for working capital financing.
Know where they will be getting their day to day cash is important. Is everything sold at month end plus 30 days or is it a cash upfront business. The access to cash, once the product or service is provided, is critical. The longer it takes to get the cash in the door, the higher the risk to doing business long term, and your money growing.
Has the business owner thought of what to do if things go bad? Does their business plan have a down side scenario? In the real-world things can and do turn bad. Knowing how to weather the storms is a key part of surviving long term.
4. Get to know the other investors and what everyone can bring to the table to generate future success
In the public stock markets, we never know who our fellow investors are, but in the real world, we can grab a coffee with them. Do they have faith in the business, why are they investing and what skills can they bring to the table?
All the above are key things that can help you understand the business and also who the business can count on if they need to.
Having a solid team of long-term investors, who believe in the business, is a great asset to any business owner and investor.
5. Test the product first-hand and see how clients feel about it
Of course, this is something we can do with public company stocks, but the angle, “I am an investor in apple and I’d like to know what you think of your iPhone?” might not have the same effect as “I am an investor in this restaurant, what do you think of the food and service?”
Real-world investments afford us the opportunity to get a better feel for what clients think of the products or services of the business we are buying into.
This can provide great information and also great feedback for the business owner.
Real-world investing is not for everyone, but it can be a great alternative to public company investments. It can also be a great source of diversification and can provide pride and a level of satisfaction that you won’t find investing in the stock market.
I recently bought into a restaurant. It is strategically situated across from a well frequented park and run by two ladies who did wonders with a restaurant that was hidden at the end of an alley. The food is amazing, and it always has a long queue outside of people waiting to get a table. The owners are motivated to succeed and worked like hell to get it open. The other investors are passionate about small businesses and most have had great success in their careers.
I helped them build the downside scenario and so I know they can weather the storm.
I went with my two boys and we ate there today. Both of them loved the food and just that makes me know it will be a success!
Of course, a lot can go wrong, but I’m staying close the owners and the upside seems a lot stronger than the downside.
And that’s just how I like my investments!