3 Buffet-Inspired Tips For Startup Investing

Looking for sound advice on sniffing out promising startups? Pay attention to the Warren Buffet-inspired investment tips presented here!...


3 Buffet-Inspired Tips For Startup Investing

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1) Invest In Strong Teams
Putting your money behind strong management teams is one of Buffet's strongest pieces of investing advice. This might seem at first like a hard-to-quantify concept, but Buffet and other investing experts actually have the numbers to back it up.

Entrepreneurial success can be predicted surprisingly well when you have the right figures. John P. Reese discusses Buffet's judgement in his book The Guru Investor. The key figure for Buffet is return on equity (ROE) as averaged over 10 years. An ROE of 15 percent or more demonstrates that the management team is taking care of the company's finances in a responsible, sustainable way.

Stalking serial entrepreneurs is another effective strategy. Harvard Business Review examined the matter scientifically and published results on entrepreneurial performance. The study showed that entrepreneurs with experience (even those who failed in the past) have higher chances of succeeding in future ventures than first-timers.

Investing in a startup is all about finding a management team you can trust. The Buffet standard encourages you to seek out those companies with experienced and trustworthy leaders. This mindset will help you find the best UK investments in this area.

2) Put Your Investment Where Your Understanding Is
Warren Buffet's preferred investment portfolio includes a lot of companies with straightforward business models. Examples include Exxon Mobil, Wal-Mart, and Coca-Cola. These companies are all easy to understand.

To expand the idea slightly, consider angel investment data gathered in the Kauffman Report. This largest-ever report on angel investing concluded that return on investment is always higher - twice as much or more - when angels are investing in industries they understand thoroughly. Where expertise really matters is in helping investors see the difference between ordinary companies and the ones that are destined for real greatness.

This spirit is what inspired Peter Lynch, the famous former manager of the Magellan Fund at Fidelity, to push the mantra "invest in what you know" on those who asked him for investment advice. Lynch felt that in-depth expertise is the key to identifying undervalued stocks.
Whether you concentrate on easy-to-understand companies or companies in industries that are familiar to you, it boils down to the same thing: understanding how the companies will make money.

3) Look For Recurring Revenue
Buffet generally demands two key metrics in his investments: predictable earnings and recurring annual revenue. For many companies, recurring revenue comes from sales of products that meet robust demands in large markets. Razor blades are the canonical example. Berkshire Hathaway put $600 million into Gillette, a leading razor producer, in 1989. When the company was acquired by Procter & Gamble in 2005, the sale price was $57 billion. The value of the Berkshire Hathaway stake at that time? $4 billion.
In the current tech market, the latest word in recurring revenue is software as a service, or SaaS.

Companies selling SaaS products charge monthly subscription fees. That turns into monthly recurring revenue (MRR), and MRR is a strong signal that shows investors a company has found a reliable, consistent source of revenue. When you're seeking promising startups, concentrate on companies that have logical, straightforward business models and clear earnings predictability.


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