How To Invest In Great Startup Business

Although a difficult approach, applying the same philosophies used by Warren Buffet can be quite a challenge especially when assessing stocks. The same applies when evaluating potential startup investments. 

Many startups have very little or no income at all. This makes it quite hard to calculate futures using his philosophies. Nevertheless, relying on Buffet's qualitative parameters and intrigues can come in handy when assessing a business at its initial stages. Discussed below are some of Buffet's investment approaches and tips on how to identify prospective startup investments. 

1. Invest in a capable team According to Buffet's principles, investing in a good and capable management team can take the business places you never imagined. Buffet and other expert investors in the industry have also been able to formalize quantitative factors that can be used to measure a business' likelihood to succeed. 
According to John P. Reese (The Guru Investor Author), companies with an at least 10-year average return on equity (ROE) have at least a 15% chance of succeeding. This is mainly indicated by the company's capacity to manage finances properly.  Anything less than that means the company is doomed to fail at some point - Warren. 

You can also use/invest in serial entrepreneurs to identify potentially successful startups. 

A study conducted and published by the Harvard Business Review reveals that investing in experienced and failed entrepreneurs can help you determine or even predict a business success rate. The experience acquired comes in handy as compared to first-timers in the industry. 

Working with a capable management team improves your startup's chances of succeeding. Companies with experienced and responsible leaders also meet Buffet's qualification for a successful business. 

2. Invest in something you know about Warren's success was also attributed to investing in companies that ventured with simple business models.  The Wal-Mart Stores, Coca-Cola, And Exxon Mobil Corporation are good examples of businesses that ventured in simple business models, and part of Buffet's portfolio. 

Although pretty basic, this investment strategy has been put to the test and proven statistically by various investors. It is also known to help improve returns on investment (ROI) in startups.  According to the Kauffman Report on angel investing, investing in companies or ventures, you are familiar with doubles up profits and success rates. Experts in a specific niche, therefore, have a higher chance of prospering as compared to ordinary investors.  Investing in stocks you already know also improves chances of generating profits from the industry, and even enables one to identify and invest in undervalued stocks. 

Another advantage of investing in simple business models is that you can understand how the process works easily. Simple business models are easier to understand. They can make an ideal short term investment if they go well and if they grow can really make a huge difference into the long term.. 

3. Invest in companies with recurring revenue According to Warren, firms with clear recurring earnings and income have a higher chance of succeeding when compared to those with an unclear revenue stream. Selling a product/service to a market with continued demand for the same is one of the best, and sure way for a company to generate recurring revenue. Take shaving blades for example. Berkshire Hathaway invested bought Gillette razors at $600 million in 1989. Gillette was later acquired by Procter & Gamble Co for $57 billion later on in 2005.  This is an excellent example of companies with recurring revenue and customer base. 

The world today and almost everything running on software, the equivalent of Gillette would be SaaS (Software as a Service).  SaaS technologies sell their service for a subscription, where subscribers have to pay for the service each month.  This provides a monthly recurring revenue (MRR), an attribute; successful investors use to determine a business' success today. The best thing about subscriptions is that companies can calculate potential sources of income, and even quantify the same as opposed to relying on individual sales. 

This is a simple, yet robust way for a startup investor to determine what to invest particularly when formulating business plans. MRRs provide a steady source of income and market predictability.