How to invest money in companies that plan to boost profits through growth and scaling? An investor and co-owner of a group of companies Ivan Kroshnyi is happy to sort out this matter.
Scaling vs growth: are they the same thing?
Many believe that growing and scaling a company is the same thing. On the one hand, these are certain measures that help you boost the company’s profits. On the other hand, these aren’t identical concepts at all.
Growing your business is all about linear expansion. The company increases its resources (staff, technology, etc.) to boost its income subsequently, e.g., by opening new bank outlets. Scaling is more of an in-house process. First and foremost, we’re talking about finding solutions to enable you to increase the client base and profit by strengthening existing resources or coming up with extraordinary ideas. Let’s say, we can create a new gift set in an online store by reimagining existing products. All in all, how to invest money in companies the right way
How to invest money in growing companies: risks and rules
Growing companies mean growing revenues. Recruiting new experts, opening new offices, and unlocking new markets are pricey. And if the company does so, it probably can afford it. It’s a positive signal.
But here are the risks:
- Wasting time recruiting qualified staff for new offices. There’s always a chance that a new team won’t handle its tasks right away. Also, recruiting and training the right people can take a long time.
- Spending more on keeping new staff going. A new team simply won’t meet the KPI targets, and that’s risky.
- Poorly researched markets. Inspired by the success, companies open new offices locally or abroad. But, over time, it turns out that their products aren’t in demand, or there was no point in opening so many offices.
There’s always a chance to face fraud: companies can simply inflate their importance and success using the news about the opening of new offices to catch the attention of new investors.
A person who seeks how to invest money in a growing company wants to:
- Weigh all the risks. After all, growing companies can initially bring losses due to more expenses.
- Analyse the scope of the business: its industry, growth relevance, and possible profits. For example: opening several expensive car dealerships in a small town can’t be the right option, but opening several e-car dealerships can be profitable.
- Review the company’s plans, papers, estimated costs of business growth, and expected profits, if possible.
How to invest money in scaling companies: risks and tips
Companies scale mainly thanks to existing resources without substantial costs: more optimal workflow, new marketing tricks, re-wrapped products, new products based on existing ones, and new markets (without expanding the company’s chain and significantly increasing the employee count).
Here we see the key advantage of scaling, namely negligible costs. But risks are out there, too.
- You want to find ways to optimise business processes to enhance performance and client portfolio at the same—or slightly higher—cost.
- Testing a new product and new marketing solutions takes time, while existing staff may not always have a fresh perspective. For that reason, new teammates are a must.
- Scaling without growth may overburden your employees, and they won’t handle new tasks efficiently and thereby let your customers leave.
How to invest money in scaling companies
- You want to analyse the company and its products in terms of perspective and scalability and find out whether this product works successfully in other locations (city, country, etc.) or for a wider audience.
- You want to analyse the market situation. Investing in scaling companies is the right thing if the market has a favorable investment climate and shows economic growth. If the market is stagnant, or the industry, where the company operates, is likely to shrink, you’d better invest in solidifying the company’s position.
How to invest money in companies: things investors must know
If you want to know how to invest money the right way, you must do the prep work: analyse the company of your interest.
- Analyse economic indicators: income, losses, etc. There’s a whole list of indicators to help you analyse the company.
- Review the company’s reports and news to learn about its plans: scaling, growth, merger, and reorganisation will have an impact on the revenues.
- Assess the markets where the company operates: industry, country, etc. Focus on the economic, geographical, and political components. Do a local competitor analysis.
- Analyse products: scalability, whether they can be integrated into different markets, be transformed into other products, or expand the existing line.
- Analyse the company’s spending policy: payroll expenses, office costs, and transportation, including business trips, etc. All of these indicators grow as the company grows.
- You want to come to grips with how companies scale and grow. We’re talking about comprehensive ideas rather than one-time solutions that only temporarily boost profits.
Sometimes ordinary investors can’t go through all these steps, since they have no chance to talk with top management or see the whole picture. In this case, you want to take the time to review the company’s reports and news. It’ll be the main source of information for you.
Keep in mind that it’s you who makes the decision to invest your money in a company. For that reason, skip no indicators to make sure money brings income, not problems.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.