Indicators of a Viable Investment Opportunity
Indicators of a Viable Investment Opportunity
Author : Rajiv P. Kapahi
1 min. Read

There are several young investors seeking viable investment opportunities, but amongst the flood of startups and unpredictable economies, it gets hard to distinguish the right area and market to invest into.

But at the same time, it is imperative to invest. Investment shows itself in manifolds and is not just a linear path everyone follows to earn extra money. The likelihood of success and degree of risk is what separates a good investment opportunity from a bad one – there is a significant distinction between probability and possibility. Purchasing investments with the expectation that their value will increase is speculating, regardless of the likelihood of a profit. A good investment concept has a high chance of succeeding.

Investing requires research to understand a company’s finances, market position, industry developments, and available debt financing. Hence, an investor must examine many variables and demographics before entering the investment game.

It may seem overwhelming, but we’ve collated some crucial points that will help you navigate the investment landscape. We at JPIN ensure that investments are pushed into the right arenas to give our investors the best possible returns. Read on to know some secret tips from our network of investors.

Determining the ‘Good Investment’

When the investment is good it expedites qualities like:

       1 . Market leadership and long-term competitive advantages

One of the most basic yet very crucial points to highlight is a sustainable competitive advantage. A group of resources, traits, or skills that enable a firm to outperform its rivals in satisfying the needs of its customers are known as sustainable competitive advantages.

The phrase ‘sustainably’ refers to one’s capacity to carry out certain actions over an extended period of time. Competitive advantages that last over time are challenging to imitate or recreate.

An individual needs to determine that the investment that they are aiming for outperforms all other investment opportunities, if not exponentially, then at least by a considerable amount.

     2. Multiple growth avenues

An investor needs to diversify their portfolio. The first investment should have analysed and researched the number of returns from that investment so that the company doesn’t fall into a rut of a dead investment.

Growth is facilitated through, among other things, the introduction of new products, an increase in the number of sites, new clients, deeper penetration of existing clients (upselling products), exploration of related businesses, and expansion into other regions.

     3.  Stable and recurring cash flow

There is a lot of reliance on high leverage (more debt than equity), hence investors must find companies with stable and recurring cash flows. Along with sales, profits, and other metrics, a strong, constant cash flow is one of the most effective methods to demonstrate the management and effectiveness of a company. An increase in a company’s liquid assets is indicated by positive cash flow; this makes it possible for it to pay off debts, reinvest in its company, return money to shareholders, cover expenses, and act as a safety net against upcoming financial difficulties.

For this to practically take place, the company must have relatively low sensitivity to cyclical changes (i.e., largely resistant to economic downturns and/or rising commodity prices), and minimal exposure to seasonal variations in cash flows.

     4. Low capital expenditure requirements

The cost of capital helps businesses and financial analysts assess how well money is being invested. An investment will result in a net benefit to the company’s balance sheets if the return is higher than the cost of capital. Companies with low maintenance and capital expenditure requirements provide the management with more options on how to allocate the company’s funds and manage operations. If a company maintains a low capital expenditure it can offer a dividend to its stockholders as a way of returning capital. Since there is less capital available (after interest expenses) and more financial risk in the sale, capital-intensive enterprises often receive lower valuations from private equity firms.

      5. Favourable industry trends

Conducting market trend analysis has several benefits, including improving customer interactions and boosting revenue for a company. Companies that are well-positioned to benefit from favourable industry trends are constantly in demand because they provide above-market growth and offer investors both greater upside potential and downside protection. There are various ways in which the company increases its favourability: growing automation, shifting consumer behaviour, implementing disruptive technology, digitalisation, shifting demography, growing regulation, etc.

      6. Strong management team

A good management team is especially important for a company to expand and prosper. A management team is crucial for distributing leadership responsibilities on an organisation scale, especially those with multiple locations. It is important for success because private equity firms, although they provide strategic guidance, depend on their management to operate their own strategies.

If a company does not possess a strong management team, then the investor must consider replacing the investment.

     7. Creating value dynamically

In addition to all the aforementioned qualities of a good and viable investment opportunity, a good target candidate must have multiple areas where an investment firm can create additional value.

 

Examples of a ‘Good Investment’

  1. 2AM VC: this company makes investments in start-ups in a variety of industries, like media & entertainment, consumer services, edtech, fintech, healthtech, and e-commerce. Fintech company Karbon Card and digital health and fitness platform BurnCal are among the companies in its portfolio. The founders of 2am VC stated that they seek out founders with in-depth knowledge in AI, ML, and model creation. They believe that a business entering the web development industry needs to have a balanced approach to technology, wherein it is easily adopted by the market. They said that “users have told us that after registering for a website, they were unable to produce what they had envisioned since the website was too complex.” Hence it is empirical to fit the right market fit for a product or service. Rogers, a general partner at 2am VC, favours projects with character over analytical ones.
  2.  While making an investment, remember that it takes time to see a percentage growth. Bill Ackman, of Perishing Square Capital Management, for example has a track record of generating significant returns. Ackman produced a 17.1% annualised return between 2003 and 2021, which was much higher than the 10.2% annualised return of the S&P 500. His investment philosophy is:
    1. Avoid controlled companies
    2. Own profitable, high-quality enterprises
    3. Make few exceptions unless they are really cheap

 

The primary goal of JPIN is to establish a transparent ecosystem for bold entrepreneurs to encourage economic growth through creating jobs and social impact. Creating opportunities for new and upcoming investors to grow in the business world is what we aim for. Hence, it becomes crucial for our team to keep these points in mind when talking about investing and help you find the right investments at the right place at the right time.

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