Understanding Tomorrow for Investments

So how is it that some angel investors just know where to invest? Do they have a great sixth sense? Or is it pure luck….I don’t think we can answer that! However, for all the young starry eyed investors, here are a few resources that can help understand where to invest for maximum ROI. The first one (and my favorite!) is called
The Institute for the Future: http://www.iftf.org. This is an excellent website for various scenarios for the next decade. They have scenarios from a generic 10 year forecast to targeted industry scenarios for energy, healthcare, water, carbon etc.
World Economic Forum: Another institute that generates a lot of high quality reports including the ‘Global Risk Report’ is the World Economic Forum in Geneva: http://www.wefoum.org .
Sometimes Consulting firms like PriceWaterHouseCoopers release industry specific reports where they try to anticipate the Pharma industry trends for the next 10 years : http://www.pwc.com/gx/en/pharma-life-sciences/pharma-2020/pharma-2020-vision-path.jhtml
At the same time taking a look at the big giant company websites in any industry can give a fair indication of the future to come. For e.g. in the energy industry Shell has excellent scenarios available for reference.
http://www.shell.com/home/content/aboutshell/our_strategy/shell_global_scenarios/shell_energy_scenarios_2050/

The bottom line is, do your homework before investing. A detailed analysis of economic indicators together with consideration of scenarios for the future and risk analysis should lead you to a good understanding of what the people of the world will need tomorrow.

Investing in the baby boomers

This recession has led to some very predictable results: unemployment increase and spending cuts by the government, corporations and people themselves. What is alarming as we recover from the recession is the reality that many people have dropped out permanently from the labor force. One such group that needs special attention is the baby boomer generation. Cash strapped companies having laid off people left and right. For younger people, finding a second job is not easy but it happens eventually. The population of 55+ however has suffered the most. Once laid off, this group is at a disadvantage due to the following reasons:

a. Due to many years of experience and knowledge, this age group needs to be paid much higher salaries than newcomers.

b. Most companies look at this age group as a liability as they would probably retire in the coming 2-5 years and hence they do not want to give them higher responsibilities. Companies shy from giving them management responsibilities and other benefits.

What managers and companies do not realize is that in doing so they are creating a multitude of problems for themselves in the medium to long term by looking at only short term solutions. The baby boomer population if employed in proper jobs and given fair opportunities will relieve the economic problems in many ways:

a. The longer this group earns, the more they contribute to the social security system and boost their own pension.

b. This means more spending capacity for this group for a longer period of time.

c. This also means that the younger generation has less of a burden and hence will spend and concentrate more on medium to long term investments.

So which companies should be worried most if the baby boomer generation has fewer options for earning? Ideally healthcare, consumer products, travel and vacation operators and lifestyle solution providers. So if any of these companies are laying off 50+ employees at the drop of a hat: well they are probably laying off a big part of their future as well!

Investing for the long term (in industries that matter)

By long term here I mean a horizon of around 15-20 years. Take a look carefully into what will be immensely important after 15-20 years on this planet. Ya ya, energy we all know! Besides that there are a few sectors that will surely pay off in the long run is we don’t destroy the planet before that.

The growing population of this world and specifically the emerging markets will need to be fed. As globalization keeps advancing (and yes, Africa is already being included in this globalization advancement) people will simply need more food. Medical advancements will help people live longer and they will need to be fed longer too. I strongly believe that in 20 years from now, the big food grain companies will be a happy lot (not to say that they aren’t already). The debate for GMO’s is on and will continue for a while longer until it becomes clear to one side that a hungry population can revolt and lawlessness will result in various parts of the world if people are not fed : GMO or no GMO!!

Healthcare will be immensely important, but more important is to understand which aspects of healthcare will be important. One area that will definitely be needed and will pay off is medical data management services for large patient databases. The population of the world is increasing and people are living longer and they will need more healthcare services in old age. Another aspect of healthcare that will matter a lot is non-invasive home monitoring systems for common ailments. With demographic changes and shifts, health economics will be a hot field for the next 20 years.

Connectivity will not be the next hot thing after 15 years. Connectivity will be a given at that time. Be it home, work, mobile or on-demand connectivity during vacations. On a lighter note perhaps creating vacations that allow complete isolation will be essential for maintaining human balance in life!

Charity versus sustainability in angel investments

Often I hear angel investors mention an investment they have made in a company that they feel may not be the best but is either local, or from an acquaintance or friend or you know has the ‘right cause’. Talk about the ROI from these investments and the answer is typically either ‘You know I needed to do this’ or ‘Could not say no to such a close friend’. On the other hand I also have come across angel investors who take very close look at the product, technology and viability of the business plan presented and leave no stone unturned. They want to know what would sell 5 years from now, as those are the companies they want to invest in.

This I call the difference between charity and sustainability in angel investments. The latter kind of angel investor might seem ruthless but in reality, he is doing micro and macro economics a whole lot of good compared to the first kind of friendly investor. By financing the healthiest and well placed businesses he is making sure that the company survives in the long term and generates more sustainable jobs than perhaps a half baked business idea. For what is the value of $100,000 that has been invested in a business that has 5 employees today and 5% chance of survival? On the other hand, consider the value of $100,000 invested in a business that has 3 employees but has a 50% chance of growing into a sustainable business with about 100 employees in the next 5 years. Should I invest in the first business that is owned by my friends or family to become the fool myself?

Investing in Geography

There are certain regions around the world where entrepreneurs dream of launching their startups. Silicon Valley, Bangalore, Boston, London and a few other regions enjoy this reputation. What is it that makes these regions really attractive for entrepreneurs and investors? Is it the availability of finance, the availability of talent, the right incentives from the government or the X factor. To be honest it is a combination of all these. At the same time, even though some regions that have a great combination of finance and talent, they can never become the right region for entrepreneurship.

Regions like Silicon Valley and Bangalore were actually small and financially insignificant areas before they developed into the power houses of innovation that they are today. Somehow, one success followed the other and before long these regions developed the reputation of “the place to be” for entrepreneurs. The early successes in these regions led to the formation of a business cluster that attracted both investments and talent. One experiment after the other led to development of clear structures and services that foster and support startups. Before long, these places started attracting talent and investment from across the globe.

Sustainable innovation and entrepreneurial activity needs creativity. It is a known fact that diversity fuels innovation. Nothing like a fresh new perspective for the next best idea! For a geographic location to sustain innovation, it needs to be open to diversity of cultures. Most innovative regions have a real cosmopolitan feel to them.

All the above factors attract investors to these regions and Venture Capital firms start pitching their tents as well. Due to this fact, the chances of a startup getting investments in these regions become higher. Over time, a lot of support services start mushrooming like incubation units for startups, part time administrative and legal services and flexible consultancies for the startups.

Want your startup to have better chances: choose the right region!

Investing in Founders

Taking up the topic from last time, this blog covers the first aspect of startup i.e. “The Founders”: The daring, go getters who dream beyond boundaries and create a new technology, product or service to capture the world. These founders are risk takers and yet risk averse people at the same time. What is it that investors are looking for in the founders of a startup? Is it the technical know-how, the ability to sell their product or the perseverance to keep working day in and day out without a decent compensation in the beginning? Well, it’s a combination of all that + much more. Some of the less obvious characteristics that matter to investors are:
a). The ability to adapt: Co-founders of any startup begin with a dream. Then they make a business plan to fit that dream and pitch it to the VC’s. The idea or concept is usually so new that no knows for sure how successful the initial business plan will be. Hence, it is crucial for the survival and success of the startup to adapt the business plan to the needs of the market.
b). The ability to let go: When a startup goes from early stage to growth stage, sometimes the co-founders are not the best people to remain as CXO’s of the company. Very often the investors bring in a new CEO for growth stage of the company. A founder needs to be comfortable with this.
c). Team-player: The founder (co-founders) need to be good team players. A startup is like a very close knit family. People need to work long hours together in a high stress environment. At the same time you need to manage the expectations of the VC’s and other stakeholders. In such cases, being only the guru in technology is not enough.
d). Reputation: The startup and investor circle in any geographic cluster is a very small world. News travels fast and reputation travels faster. A young entrepreneur needs to focus on relationships as well!
Next time, the focus will be on how geography affects the success of startups…..

Investing for Returns

This blog is for young investors looking for the right technology or product to invest in. This blog is also for entrepreneurs who are getting ready to face the tough world of Venture Capital. One question that both these groups need to understand and answer is: “Why should someone invest in a particular technology or product?”. I will take you through the various aspects of a product, its founders, the environment and other factors that are important in answering this question. For e.g. a technology or product may be great, but if the founders of the technology have a bad reputation then the chances of funding for the technology are slim. On the other hand if we have two similar technologies evolving in different geographic locations, one may get funding easily while the other with the same value proposition may not get funding at all. So the question is: ‘What are the criteria that VC’s use in making funding decisions?’.
In my subsequent blogs I will go through these criteria one by one. Keep watching this space……