There is a chasm between the ways wealth was created in the 20th versus the 21st Century. In the 20th, it was essentially invention of devices followed by well managed traditional assets, (real estate, plants, machinery, equipment etc.) leveraging large labor forces. In the 21st, it is development and management of intellectual property leveraged through electronic mediums.
With the exception of a few high tech centers such as Boston, Silicon Valley and their surrounding area, the old paradigm of real estate as a safe form of collateral died shortly after the turn of the century. We all watched residential real estate across the entire country lose a third to half or more of its value in little more than a heartbeat.
The internet has so changed the method of consumer shopping that commercial retail real estate has lost a significant percent of its prior value and continues under strong suppressive pressures as more and more retail establishments close forever.
Office buildings see continuing increasing vacancy factors as more people use technology to work from home. Some cities have seen the total devastation of property values across the full range of commercial and residential property.
Even the trend toward higher levels of artificial intelligence (AI) and automation in both manufacturing and office work, compress the need for commercial space for business operations. Workers replaced by AI require an infinitesimal fraction of the space. Automated plants and warehouse facilities need significantly less space for much higher output.
The ups and downs of the stock market have been with us forever, but the notion that you were safe with stock ownership in large companies producing basic consumer needs died with the bankruptcy of General Motors whose common stockholders were wiped out along with their counterparts in other large public companies across a great swath of industries. Even secured debt holders in GM lost most of their collateral value to the GM labor unions.
The general consensus of investment professionals, not hawking the sale of stock, is that the market is substantially overvalued from 8 years of Federal monetary stimulus policy and subject to a major downward correction. The only place money is supposedly safe is a T-bill or FDIC insured bank account at 1% or less interest (substantially less after taxes than the inflation rate guaranteeing substantial lost buying power over time).
Any investment strategy rooted in the 20th Century investment paradigm is very unlikely to succeed today.
The 21st Century investment paradigm relative to consumer products is intellectual property well managed and leveraged through electronic mediums. The tools are smart branding of products, modern marketing techniques plied through social media and other internet sources, further leveraged through eCommerce platforms supported by automation and smart logistics handling and delivery platforms.
But guess what? To invest in the winners of today and tomorrow, there are little if any traditional assets to invest in. Instead the currency of today and the future is track record, relatively short proof of concept, for a high enough return that the profit overcomes the risk.
Yes there is risk in any investment. Yes there are losses inherent in any investment strategy. But to continue the old paradigm today means significant risk of asset devaluation against low or moderate margins for gain. The new strategy is buy smartly into fast rising high profit ventures with strong upward trends, mitigate risk as best you can, diversify and let the wins far outpace any loses.
So how do you mitigate risk?
No one should invest an inordinate percent of their investment dollars in any one venture. Each venture should be structured to capture all incoming revenue into a lock box with the investor having the right to veto any disbursement not consistent with covenants in the funding agreement. Covenants in the funding agreement should also provide for the maintaining of minimum margins and financial ratios that if violated trigger an assumption of control of the entity by the funding source.
If the investment is significant enough, the funding source might require as a condition of the financing that it have the right to name the entities CFO who reports to them as well as the entities CEO and Board. This simple structuring mitigates risk to a level making great profits possible if not probable.
There is no greater financial security than a company with continual month-over-month significant sales growth, with a low refund rate, in a growing marketplace, with high profit margins. Just for fun check out the projected ROI of investing in a shopping mall or office building with all their collateral value. Then ask yourself, dollar-for-dollar, which would you rather own… a no or low asset, high profit, high margin, high growth rate company or a high asset low or no growth rate company?
Welcome to the 21st Century where intellectual property with no traditional collateral value is the coin of the realm. But, a word of caution to today’s entrepreneurs, the investment and lending communities haven’t caught up yet. Most still operate using 20th Century paradigms, with eyes in the rear view mirror which means hard-to-get funding for your 21st Century enterprise.
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