The volatility of the crypto markets this week has highlighted the fragility upon which this new sector has been built.
Being unregulated and led predominantly by irrational public sentiment, this week has shown just how quickly things can go pear-shaped in the crypto world.
But as values have tumbled over the past few days, they are just as likely to climb again in a week or so, such is the unpredictability and lack of fundamentals in the space.
And therein lies the current problem for the crypto world – no regulation, no fundamentals and consequently, illogical public sentiment.
No one is denying that there is money to be made in crypto, nor are we suggesting it doesn’t have a future – because it does! But currently there are huge risks involved – just as there are with unlisted companies.
However when you compare crypto with unlisted companies, there is a major difference. You can look at some key fundamentals and manage your risk when it comes to early-stage companies – and even mitigate some of it through regulation and tax incentives.
Even in the current climate, unlisted companies are and will continue to be the driving force behind the UK economy, with opportunities abounding for prudent investors to achieve tax-efficient, risk related returns.
But what should you look for to find the right ones? Five key fundamentals immediately spring to mind.
Firstly, is the opportunity solving a genuine problem? In other words, is there a true need for the product or service and can it really be commercialised?
This is a simple question to answer because you just need to put yourself in the shoes of the potential customer. Ask yourself if you would pay for the product or service, then extrapolate your answer to see if it has mainstream, or even significant niche appeal.
Related to this is whether or not the company in question owns and can protect the Intellectual Property. Licence agreements can be torn up on a whim. You only want to be investing into a company that owns the IP, not a company that has a right to distribute it.
Is it disruptive and scalable? A lot of people talk about disruption, but true disruption is not only something that changes the way we do things; it must be scalable as well. It must be something that appeals to many people or serves a unique niche in a market with very few competitors.
As investors, we are extremely fortunate to be in a period of mass-disruption. We are currently in a Technology Revolution, which will be documented in the history books of the future.
From crypto to Artificial Intelligence and deep machine learning, disruption is happening every day under our very noses.
Think ahead 30 years, in a time when it has been widely documented that our children’s vocations are going to be very different to our own – just like previous workplace revolutions.
We’re being told by futurists that there will be no lawyers or doctors in the future, our kids won’t need to drive cars etc. What does all this mean? It means “opportunity”! There is so much disruption happening right now and the opportunity to get involved is very real.
Disruption aside, does the business offer recurring revenue streams? It’s easy to get carried away with disruption, but it’s also important to get back to basics, and recurring revenue is a sign of a solid business model.
SaaS (Software as a Service) businesses are ideal as they provide a constant flow of regular revenue, which enables cashflows to be managed efficiently.
Look for companies that have a steady recurring revenue stream, as well as potential for large upside. Recurring revenue is a company’s bread and butter and keeps the lights on. It provides businesses with the opportunity to stay in the game, to play for the big wins.
Lastly and most importantly, is there a quality team involved? This is in fact the first thing you should look at. You could probably even disregard one of the above “musts”, so long as the team is strong and has an excellent track-record.
Have individuals in the team been successful in this sector before? Have they successfully exited businesses previously? Most importantly, have they grown businesses and provided investors with timely returns?
Even if the team is inexperienced, the proposition should not be ruled out immediately. To make up for their lack of experience, does the team have one or two seasoned and successful advisors behind it? If it does, then the combination of youthful enthusiasm, technical know-how, and quality business experience, could be an absolute winner.
Focusing on these five fundamentals will certainly help you to choose good companies in this time of opportunity and disruption. And hopefully soon, we will see a crypto world which concentrates more on fundamentals such as these, rather than irrational sentiment!