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FINANCIALS, RISK, OPERATIONS, MANAGEMENT & SALES

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Like a business plan dissected, the due diligence process – whether for an investment through equity crowdfunding or the old-fashioned way – is about evaluating risk. You need to check that the entrepreneurs behind any start-up have done enough to minimise their own risk because, if they haven’t, then a proportion of that risk will automatically become yours.

This is hugely important because, as every schoolboy knows, the majority of new businesses end up in failure. My own personal approach to assessing risk can be encapsulated in the acronym FROMS – so-called because it derives from the five key elements in due diligence: Financials, Risk, Operations, Management and Sales.

Whilst it is true that the majority of crowdfunding platforms conduct their own due diligence before presenting any company’s proposal on their site, it would be my firm recommendation that anyone considering such an investment conduct their own research. It is always worth taking a little extra time and trouble to look carefully at the information being provided – whether in the company’s presentation video, business plan, cash flow forecast or cost projections.

The other ‘golden rule’, of course, is never to speculate in an equity start-up if you can’t afford to lose all the money.

Financials

Under-funding is one of the most common causes of business failure so you need to test the financial details to satisfy yourself that the proprietors of the business have properly considered funding for the future and not just for the here and now – where do they believe the money is going to come from and how are they going to manage that process?

If they expect to raise it from a bank, they may be disappointed given the scarcity of institutional money for start-ups or young businesses. If not a bank, where else – another equity round? If the latter, you need to appreciate that your shareholding could be diluted. This may not necessarily matter providing that the overall value of the company increases – you may simply own a smaller percentage of a much larger cake.

With that possibility in mind, make sure that you study the Shareholders’ Agreement carefully; all equity crowdfunding sites display their standard terms and conditions for investors and impose standard Shareholders’ Agreements on the companies they feature. Read it thoroughly and, if in doubt, ask your solicitor to take a look on your behalf – especially if you are considering investing a substantial sum. Don’t be afraid to raise the issues that concern you and, if needs be, enquire as to whether you can add a small clause to the Agreement to allay your fears. It is no use complaining later.

You can also try to find out a little more about the people behind the company. If you have access to a computer, it is what the internet is for – to provide information, allowing you to check, research, compare and to analyse.

However, the central issue is to satisfy yourself that the valuation of the company is realistic and based on sensible calculations and assumptions. As before, if you are unhappy, consult an experienced professional to gain a second, independent opinion.

Risk

No one has a crystal ball. The paramount consideration and one which I cannot over-emphasise is NEVER INVEST WHAT YOU CAN’T AFFORD TO LOSE.

Having considered your own capacity for risk, look very closely at the tolerance to risk of the company in which you are considering making an investment. Examine its competitive analysis – have they really got a grasp of what form their competition takes? For example, the competition for a pub is not necessarily confined to other local pubs, or even other hospitality businesses – it could include the local cinema, sports fixtures, live music events, even the church. You need to spread the search to include anything that presents an attractive alternative to the business in question.

Look, too, at the rules and regulations surrounding the industry or activity and any likely changes on the horizon. To use the pub analogy again, consider the impact of the 2007 smoking ban on the licensed trade. Even the subsequent boom in electronic cigarettes in now threatened by even newer regulations. So, the advice is to look beyond the sales pitch which is bound to concentrate on the positives and play down the negatives.

Tax can be another factor. As an individual you may be eligible for tax reliefs under the Government’s EIS or SEIS schemes, which may have a major bearing on your decisions.Tax reliefs can not be guaranteed, will depend on your personal circumstances and may even be subject to imminent change – but check it out with an independent tax expert.

Operations

By this I mean the product or service that the company offers, the supply chain, logistics and so on. Above all, you need to establish that the company’s claims stack up and that they can deliver whatever it is they are producing to their customers at a profit. So buy and test the product for yourself, or ask for a sample – better still, speak to some existing customers and ask them about their experience or for their opinion.

It is equally important to check that, in costing the product, the entrepreneur has built in the price of delivery. It is not unheard of for some companies to be making a loss on every sale because they have overlooked some of the associated delivery costs.

Management

This is where instinct or personal judgement really comes to the fore. In essence, by investing in a company you are really buying into the people who run it. Consider them in the same light as people you might be hiring to take on a key role in your own business.

So, who are these people? Where do they come from – where have they been before? What qualities do they bring to the company? Does the company have the required strength in all the key roles in the business (e.g., finance, sales and marketing)? It is not always easy to establish the full facts, but conduct your own research.

Also, having established that they are vital to the business, are these people covered by key man insurance? It would be a cruel twist of fate if, for whatever reason, the driving force of the business was to disappear immediately the ink was dry on your signature. You must ensure that commercial life can carry on in such unfortunate circumstances. After all, it’s your money that’s at stake.

Sales

Last, but by no means least, comes Sales and Marketing. Many companies fail because it is quite possible to be too product-orientated. Entrepreneurs can sometimes be so enamoured with their product or service that they are blind to the possibility that there may not actually be a market for it. Even more likely, they have totally failed to develop an effective marketing strategy to make their creation viable.

Look at the marketing plan – and look who’s in charge of delivering it; is it in-house or is it contracted out? Either way, it is a vital ingredient in the mix. And bear in mind, it is not unheard of for marketing to account for 90 per cent of the retail price. Ignore it at your peril.

So, there you have it. Get your FROMS analysis right and you can commit your start-up investment with a little more confidence. Even so, investing in early stage businesses, bonds, loans, debentures and other investments through crowd platforms remains high risk and should only be considered as part of a diversified portfolio. This is just an overview of the key topics I believe prospective investors should consider when conducting due diligence on potential investments. And don’t forget: never invest more than you can afford to lose.

Sacha Bright

CEO, Business Agent

Investing

Is It The Right Time To Invest In Gold?

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Is It The Right Time To Invest In Gold? 1

By Zoe Lyons, Hatton Garden Metals

The current climate is one of uncertainty, so it can be difficult to know what to do with your money, particularly investments. When faced with the decision on what to do with your savings, there are a number of options, but one investment which many have opted for over the years is gold buying.

Purchasing gold can be a great investment. Although the price of which can fluctuate just like anything else, the value of gold has generally tended to increase at a good rate and many prefer it over other saving options. With bank interest rates currently at a low and discussions of negative interest rates, many are opting to purchase gold as a way to earn money on their savings.

So is gold buying right for you? We take a look at some commonly asked questions when it comes to purchasing gold.

Why Should I Buy Gold?

Buying gold is often seen as a good investment due to value increases, so you may be able to make a profit from selling it on if the price of gold increases after you have purchased. The price can fluctuate, so profit is not guaranteed and is based on a number of factors. Looking back over previous years since the 1970s, the value of gold has prospered compared to other investment types, albeit with some dips in value at certain points over the past 50 years.

Buying gold also allows you full control as you are the owner. So you can choose if and when you want to sell.

Buying Gold Vs ETFs

When looking at investment opportunities, you may consider ETFs. An ETF is an Exchange Rated Fund, which when purchased is similar to buying stocks and shares. They can be a good investment, but is it more beneficial than purchasing gold?

When purchasing physical gold you will need to consider where to store it. This can incur charges, whereas with an ETF there is no need for storage, but an ETF can come with admin charges and investment management costs. When you choose to sell an ETF, you may also be required to pay a commission, which are often small amounts, but can add up if you are an active trader. There is also less control with an ETF as the price of which can change and is based on the company’s actions.

Gold Bars Vs Gold Coins

If you do choose to purchase gold, you will be faced with the option of whether to buy gold coins or gold bars. Although similar, they have varying benefits.

  • Gold Coins

The purchase of gold coins are often favoured by those who appreciate the historic value of the coin. Many people collect coins, so an investor may be inclined to pay more if they are a keen collector of such. Many may also pay more for gold coins based on their rarity. These factors can affect the price you pay or sell at, meaning the value of gold coins is not solely deemed by the live price of gold, so you may receive a higher price, dependent on the investor. This allows the price of gold coins to be more fluid than gold bars.

  • Gold Bars
Zoe Lyons

Zoe Lyons

Gold bars are not seen as a collectors item and don’t tend to have historical attachments. Because of this, the price is not influenced by these factors and is based on the weight, purity and the live price of gold at the time of selling or purchasing. This allows for a more accurate estimate of the price of your gold bars.

Where Should I Store Gold?

One of the most frequently asked questions when it comes to gold buying is storage. If you do choose to purchase gold, you will need to consider storage. Just like anything else of a high value, it needs to be stored securely. Simply keeping gold stored at home could be risky. When kept in your property, if not stored in the correct conditions, it is more susceptible to damp and corroding. There is also the possibility that your home insurance does not cover your gold, so if you are burgled, you could lose your investment. Because of this, it is wise to protect your gold with proper secure storage. Look for companies that offer storage abilities that are covered by insurance and be sure to do your research on pricing and look for cost effective storage as the fees incurred can soon add up. You may also want to look for a company that allows you quick and easy access to your gold to ensure you can buy and sell with ease.

Should I Invest In Silver Too?

Although gold is often a more popular investment option, many choose to purchase silver alongside it. The price of silver tends to be much more volatile than the price of gold, for this reason, many see gold as a safer choice. The price of silver will still have an intrinsic value but may be more worthwhile for those looking into long term investment options due to its VAT charges.

Negative Interest Rates

Although it is not a current practice, there has been recent talk of banks in the UK potentially introducing negative interest rates. If a savings account has a negative interest rate, this could mean you are charged for keeping money in the bank. If introduced, this could mean savers lose out. Instead of receiving interest on your savings, you may be charged a rate for keeping your money in the bank.

Could purchasing gold be a better option for your savings? Possibly, but this will depend on how much you have saved and the rates of the negative interest (if they are introduced). They may be minimal, but if you have a large amount in a savings account, this could add up to an expensive charge. If you choose to use your savings to buy gold, you may make a profit upon selling, but you will need to consider costs of storage as well as the chances of the price decreasing in the future.

So, is it the right time to invest in gold? It’s a very popular question. Hopefully the above will give you a bit more insight into gold investing and how it may work for you, but with any investment, there is never a guarantee that it will generate profit, so take careful considerations when diversifying your portfolio.

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Private public investment is more inter-dependant than ever

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Private public investment is more inter-dependant than ever 2

By Konstantin Sidorov, CEO and Founder of London Technology Club

Today, one thing unites the majority of governments around the world: their fiscal position is destitute. COVID 19 has seen an extraordinary, forced expansion in public sector expenditure, which has come just as the world was getting back on its feet following the Global Financial Crisis. The financial strains are already showing and will become more apparent as we move through the pandemic into social and economic recovery.

If you want to understand the impact that the re-focusing of public sector spending is having, then there is no better example than the space economy. In the US and Europe, we are becoming increasingly reliant on the space rockets and space launch companies pioneered by private investors and entrepreneurs.

NASA, that powerhouse and flag bearer for American national pride, is having to partner with the private sector in order to fulfil their missions. Private investors, the likes of Elon Musk, and Jeff Bezos alongside smart use of new technologies have brought the economics of space down and the excitement around what’s possible up. With it comes a whole satellite manufacturing, launch and servicing industry growing to $271bn in revenues in 2019. Of the total revenues in the space economy ($366bn in 2019), government space budgets made up $95bn of that.

Commercial entities, being patiently built and backed by private capital willing to dig deep and progress their own missions has helped fuel the space economy. Many are realising now just how crucial space is for the future of a country’s protection, position in the world and prosperity. In China, India and Russia we still see significant public sector expenditure in space projects as an agent for military and economic expansion. The role of private investors in plugging major gaps in public sector funds and national pride in Western economies is therefore increasingly important.

Private and public investment must be seen as a partnership. We should not forget that Elon Musk’s SpaceX survived from the brink of collapse only because of a ten-figure NASA contract awarded at the last minute. Musk, since then, has looked for public infrastructure contracts to fuel his companies, the likes of The Boring Company winning the contract to build a downtown-to-airport loop, a  government program for high-speed transport in Chicago. Musk proves his products and services work and then secures lucrative government contracts in order to quickly scale which in turn leads to transforming whole industries.

It’s not just space infrastructure where we see this redefinition of the role of public and private finance. The Chinese have invested at least US$160 billion in infrastructure projects as part of the Belt and Road Initiative, creating roads, ports, energy infrastructure and providing aid to foreign governments to create the most ambitious infrastructure project the world has yet seen.

Konstantin Sidorov

Konstantin Sidorov

For Western countries, access to that scale of public finance is not fiscally-possible, a new solution is needed and just as the space race has been redefined by private capital, so will the development of new industries, infrastructure and the reinvigorating of economies facing structural change that has been accelerated by COVID.

Private capital has the huge advantage of being driven by conviction and competence. It can cost-effectively be deployed, fast and targeted with a laser-like focus by entrepreneurs who know exactly what they want to achieve. Private capital, currently, is also in abundance.

In a world which is providing slim returns across multiple traditional asset classes, private capital is being stockpiled and is waiting for the opportunity to be invested for growth. We need private investors to have the confidence to deploy their capital to fuel the system once again.

This new world, post COVID, won’t see public capital replaced. Its role is likely to focus more heavily on health, welfare and critical infrastructure. However private investors will step in where gaps appear. Ten years ago, the scale and ambition of private space companies would have been greeted with snorts of derision and looks of disbelief. Today governments embrace the private capital, and regard the companies that have deployed it as systemically important national assets.

As we look to the future, huge macro trends emerge that demand significant investment: the aging population, the threat of pandemic, the drive to create a sustainable economy and lifestyle, the need to decarbonise, the digital revolution. The list goes on.

Public finance cannot hope to provide the finance and pioneer the bold thinking and accept the risks required to find new solutions that drive us forward in a world of change. That role goes to the private investor and private capital.

For the investors themselves the opportunities are immense, and for society as a whole they are just as big. As we look forward public and private sector needs to embrace private capital. Rather than fearing private investors as locusts who strip organisations and opportunities of profit then fly away, a narrative that gained traction after the last great economic crash. This time we need to see private capital as agents for positive transformation. Private-public partnerships fuelling each other.

Private money is already building rockets that send people and payloads into space, but that isn’t the final frontier for entrepreneurial investors or the societies and economies that benefit from their boldness.

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What should I invest and How do I invest

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What should I invest and How do I invest 3

By Imogen Clarke, The Fry Group

With all the uncertainty that has arisen from 2020, with lockdown threatening businesses and the warning of a second wave, the topic of investments has taken on new meaning. Nowadays, more people are concerned with what makes for a good investment, or, if you’re a novice, how to best invest.

For instance, you might be unsure about the reliability of the company you’re looking to invest in, as well as the long-term prospects of your investment.

If you are unsure of your investments, then it is best to seek advice from financial experts like The Fry Group, who deal with tax, wealth and estate planning. They will see that you have a strong financial plan in place to help meet your objectives. They will develop a strategy that is built around your needs and asses any risks that could hinder your plans.

There are some things you’ll need to consider for your strategy; for instance, are you looking to make investments that are more of a risk and will take longer to come to fruition? Or, alternatively, are you wanting a faster approach that will result in a steady income? Whether or not you decide to play it safe all depends on your current financial situation and whether you have the means to take more of a risk. Do you have any other debts that take precedence over your future plans? Is your investment strategy realistic?

With the aid of a specialist – or investment manager – you can design an investment concept that works for you and your goals, and start to build a regular income from your investments. There are four main areas when it comes to assets (groups of investments) that you can consider:

  • Equities
  • Bonds
  • Alternatives
  • Cash

Your investment manager will test the risks associated with your investment, and if it proves to be a positive investment choice, then you will be able to invest more over time.

So, how do you decide where to invest?

According to The Fry Group, ESG investing (Environmental, Social and Governance) is a good option for investors looking to support businesses that meet their similar ethics.

The main areas of ESG investing include:

  • Environmental challenges (climate change, pollution, etc)
  • Social issues (human rights, labour standards, child labour, etc)
  • Governance considerations relating to company management

According to The Fry Group, “Many investors choose to consider ESG investing in order to ensure any investment decisions reflect personal beliefs and values. As a result, they choose to support companies who are making informed, responsible decisions which take into account their wider societal and global impact. In this way investors can achieve peace of mind that their investments are creating a positive effect.”

ESG investing is also more relevant now than ever, as more businesses are looking to present themselves as an environmentally conscious corporation that recognises the values of their consumers.

As The Fry Group puts it, “In the past, ESG investing has been seen as a niche investment approach, for a relatively small number of people with specific requirements. This has changed significantly in recent years, with a growing awareness of environmental issues such as climate change and an increasing understanding of social issues and human rights. As a result, many people are increasingly interested in reflecting their opinions and lifestyle choices through the way they invest.”

So, if you want your investments to pave the way for your personal values and reflect your own morals, then this is the route to go down. But how does it all work?

There are four areas of ESG investing:

  • Responsible ownership and engagement: when companies are encouraged to make necessary improvements.
  • Avoidance or negative screening: whereby businesses are ‘graded’ based on how ethical their business practices are and are avoided altogether if their methods are not approved.
  • Positive screening strategies:when companies meet the ESG goals and are approved for investments.
  • Impact investment strategies: the purpose of this is to use investment capital for positive social results such as renewable energy.

You will need to take into account your own personal objectives as well as the objectives that meet the ESG investment criteria. And, in terms of financial performance, ESG investing can be hugely beneficial. Those who opt for ESG investing perform a more in-depth analysis into long-term and future trends that affect industries, meaning that they are better prepared for changes in consumer values when they arise. And, with all the unpredictability that this year has offered us so far, isn’t it better to do the research and have all angles covered?

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