Three Intriguing Asset Classes

At Reparo, we spend a lot of time gauging the value of businesses and assets, so as a team we’re fascinated by investing. In this piece, we’re going to look at three niche asset classes — small tech startups, affiliate websites, and racehorses — and explore some of the pros and cons of each one.

Investing in Small Tech Companies

When people think about investing in tech companies, they think of Silicon Valley venture capitalists throwing buckets of money at kids straight out of university in the hope they can build an idea and take it public (Facebook, Uber, Airbnb).

These venture capitalists accept that many of their investments will fail, but they know that a pay-out from a single IPO or acquisition could more than make up for any losses.

This represents a risk profile that the average investor is probably unwilling to take – although some angel investors do invest in high-potential tech startups.

The good news is that there are ways regular people can invest in tech startups. Over the past few years, platforms that simplify invest have become more popular.

These organisations usually use a crowdfunding model to bring tech investing to a broader audience. Instead of joining as an angel investor or a venture capitalist, investors either join a syndicate alongside other investors and a lead, or they buy micro-equity in a company.

Syndicates: Providing Funds to Back a Lead Investor

In syndicate investments, a lead investor puts up a significant amount of the total funds. Smaller investors, known as backers, put up the rest of the money.

There are several benefits to investing in this way.

First, the main investor is usually someone with startup experience. They will have performed due diligence on the deal so backers can see reports detailing the investment hypothesis. This means they aren’t going into the investment blind. They also know the lead investor has their own money riding on the success of the company.

Another benefit is that syndicates enable those without large amounts of money to invest in early-round deals that would otherwise be out of reach. Investing earlier is, in theory, when the price of investment is lowest, and the potential for substantial returns is higher.

It’s the difference between getting in on Facebook when Mark Zuckerberg was still working in his dorm room, and getting in on the company after it made its IPO. Sure, you’d still have made money with the latter, but the ROI on the early investment can be life changing.

Another benefit is that the lead investor will usually take on most of the work. They are the ones in contact with the company and other players in the deal. Smaller investors don’t have to be as hands-on.

Platforms like Syndicate Room provide opportunities for backers to get involved in a syndicated investment. The platform has raised over £215 million from thousands of investors.

Syndicate Alternative: Micro-equity

An alternative to syndicates is sites that allow investors to buy micro-equity in companies. Seedrs.com is one such platform. The website offers users the opportunity to invest in equity in one of the companies on the site. Investments start at just £10, meaning the barrier to entry is incredibly low.

Additionally, Seedrs takes some of the risk out of investing by vetting all the campaigns that go on its site.  

While many of the companies on Seedrs are startups in tech, there are also opportunities to invest in more established companies looking to use funding to help them grow.

You can also find investment opportunities outside of platforms. Craft brewer Brewdog, for example, has raised over £74 million from more than 100,000 different backers over multiple rounds of equity investment on its website. The company has used this money to fund an expansion into the US, amongst other things.

Downsides to Investing in Startups

While these platforms make it possible for the general public to get involved with investing in startups, there are things to consider.

First, while the platforms take out some of the risk by performing due diligence, investors will still have to make their own assessments of the risk of a particular investment. There is no guarantee with any of these investments that the investor will receive any of their money back.

Additionally, reports from earlier this decade suggested that out of 367 businesses that raised funds on crowdfunding platforms between 2011 and 2013, about one in five had either gone bust or was experiencing difficulty by 2015. At this time, only one of the 367 had provided a return for investors, although others had raised funds at a higher price than the initial round.

Others studies have called into question the quality of the companies that use these platforms. They suggest that startups trying to raise funds via crowdfunding platforms were less profitable and have more debt than companies using traditional methods.

Purchase an Affiliate Website

The second investment opportunity we’ll look at is buying and running a profitable affiliate site.

How Affiliate Sites Work

Affiliate websites are those monetised by affiliate links. Whenever a visitor lands on a website, clicks on an affiliate link to a product the site is promoting and then buys the product, the site owner gets a share of the sale.

Affiliate websites take advantage of traffic from search engines and can gain large volumes of traffic with good content. Once an article ranks on Google, there is no need to spend money on advertising as all the traffic comes from the search engine.

Many affiliate sites target keywords that the site owner thinks suggest the searcher has buyer intent. For example, a person searching for ‘best lawnmower’ or ‘coffee machine review’ is likely to be considering buying one of these products.

The good news for affiliate marketers is that there are affiliate schemes in almost every niche imaginable. Search Google for a type of product you’re interested in and ‘affiliate program’, and you’re likely to get a whole host of results. If you don’t, there is always Amazon, which has a program that covers most of the products it sells.

Affiliate pay-outs generally range from the low single figures for physical products to significantly higher percentages for high-competition subscription products like web hosting or VPNs. 

How Does This Relate to Investing?

While creating an affiliate site from scratch can take a lot of time and requires expertise in how to choose a niche, build a website, and get it ranking on Google, it is possible to buy a site that is already making money and requires relatively little upkeep.

Once the site makes back what the owner paid plus expenses, any extra income is profit.

Owners will have to be in it for the long-haul, however. Websites are generally listed at between two and three times the site’s yearly profit although there may be room for negotiation on these initial values.

Several online marketplaces cater to people looking to buy and sell websites at various price points.

Flippa lists websites ranging from those earning hundreds of dollars per month that are valued at a few thousand dollars, to those making thousands of dollars per month selling for significantly more. If you choose to buy a site on Flippa, be sure to spend some time learning how to avoid scam listings.

For more significant investments, FEInternational and Empire Flippers frequently list websites earning tens of thousands a month with asking prices hitting over a million dollars.

FEInternational.com

As with all Investments, there are Downsides.

If the owner doesn’t have any experience of running a website, digital marketing or creating content, they may struggle.

Additionally, a strong performance in the past doesn’t mean a site will continue to earn in the future. A Google algorithm change has the potential to damage how a site ranks for key search terms, which can influence how much traffic the site receives. Also, competitors may start to create better content and outrank the site.

Another risk factor is if the site relies on a single or small number of affiliate programs for revenue. A change to the program, such as a reduction in the percentage of a sale the company receives, could negatively affect how profitable it is.

Overall, if you want a passive investment, this probably isn’t it, but if you’re willing to learn about the space and become active, affiliate websites can be a great business.

A Long Shot? Racehorses

Investing in racehorses has the potential for big returns.

However, the chance of realising these returns makes the other options on this list seem like sure-fire bets. The Racehorse Owners Association said in 2013 that for every £100 of annual outlay on a horse (this doesn’t include the price of the horse in the first place) an owner will see just £21.

While you could buy an entire horse yourself, there are easier and cheaper ways to invest. For example, many racing stables give investors the chance to purchase a stake in a horse.

Pimlicoracing.co.uk has investment opportunities starting at just over £1,000. Alongside the initial investment, investors also have to pay a monthly fee to help with upkeep. This comes in at between one and four hundred pounds a month, depending on the stake. The good news is that all the horses advertised appear to have at least some form of racing experience or potential.

If the horse wins prize money, it is split amongst those who own it. Many syndicates will also receive a cut of a sale should the horse be sold.

However, while there is a chance of seeing returns, most in the business suggest that purchasing a stake in a racehorse should not be looked at as a form of investing. Instead, it is a way to experience horse racing at a price far less than actually owning and running a stable.

Because of this, many places that offer investments in racehorses provide extra benefits such as stable visits and owners badges on race days. When looked at from this perspective, if you are interested in horseracing, investing in a horse is the only option on this list with a guaranteed return – in fun, not cash.

About Reparo Finance

Reparo Finance provides short-term asset-backed loans to businesses. Our team always works fast to get deals done, and companies that need funds can in some cases have it in their bank accounts in only a few days.

To discuss a loan for your company, get in touch with one of the team on sales@reparofinance.co.uk  or 0161 451 5714.