Normally, early stage investment opportunities have been the domain of Venture Capitalists and Investment Banks and those in the know. The wider investing public has largely been left on the sidelines.
Early stage investment capital is obviously more risky than buying into blue chip stocks and there is no established market for the trading of these securities, however the upside can be enormous if you select the right opportunity.
5 reasons why you should seriously consider investing in early stage emerging growth companies
In the past, the public has had nowhere to go to access genuine early stage equity offerings because those opportunities have previously been made available only to people connected to the founders or to Venture Capitalists and Investment Bankers with their finger on the pulse. Now you can get exposure to some of Australia's most exciting investment opportunities before they become 'general knowledge'. By getting in early, before the masses you have the potential for significant gains if the company does list on a Stock Exchange.
We always encourage our investors to ask lots of questions and where possible, meet the people who will be spending your money. With unlisted securities, you're not at the mercy of market sentiment so much - you're looking at the fundamentals, the potential for the opportunity and the experience of the management.
One of the important aspects you should consider when looking at any emerging company is what is known in industry speak as a "sustainable competitive advantage", the thing that makes the idea or business model unique and sustainable. Remarkably, a lot of investors simply don't pay any mind to this question and get caught up in the enthusiasm and passion of the founder. This can potentially be a big mistake.
Before you invest, have a good hard look at what the company claims to be their 'sustainable competitive advantage' and ask yourself, "What would it take for someone else to compete effectively in that space?" Barriers to entry and a truly unique concept should be considered in your research. What is it about the product or service that will make people want to buy, when compared to the myriad of other competing products.
You probably already know that most companies on the ASX trade at a multiple of 15 to 20 times earnings - the P/E ratio. Most of these early stage equity offerings are priced at much lower earnings multiples, often around 5 times earnings which means if the company does list, there should be a 3 to 4 times gain on the original investment. Quite often, the gain is significantly greater than that even!
If the company does list, even at 5 cents a share you would be making huge gains. Imagine a listing at 20 cents, or $1 which is not uncommon these days.
With an Equity Offering however, the value of the company is not determined by the fluctuations in the stock market, until it is ready to list, so you are largely insulated from the overall market volatility.
This means you can exert influence on your investment, or at least have some say in how the business moves forward. Not all investors want to be operationally involved, but the possibility exists to do so which does not appear in listed companies.
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