Big data, cloud technologies, photo sharing, social networking, fashion-tech, food delivery and a number of other hot sectors may perk your investment interest, and they might be worth including in your portfolio. But there are some very appealing reasons for investing in less appealing markets.
As Warren Buffett said, ‘Price is what you pay, value is what you get.’ The sooner we investors appreciate that the market can price investments wrongly, the closer we will be to maximising returns. In this context, ‘sexy’ industries, such as those mentioned above, are subject to exponentially increasing funding sources, with competition for VCs and angels coming from government funds and crowdfunding. Undoubtedly, this results in a massive price distortion as the valuation soars due to the intense competition to fund companies within this hot industry. Therefore, when investing in the ‘unsexy’, given that there are fewer funds chasing after them, valuations are likely to be far more stable and reasonable.
This is very important; no one wants to invest in VCR players when the introduction of DVD players is looming. So, when investing in these ‘unsexy’ industries, it is key to find a product or service that has a long shelf life and that will be difficult to disrupt. These industries are fundamental necessities for society. By investing in these industries, the security of your investment would not be subject to the latest product release by major players or incremental advances in technology, and could only be destabilised by large macro-economic and societal shifts.
3) ARR: Annual recurring revenue
The majority of these ‘unsexy’ businesses are inherently cash flow positive from the start. This is fundamentally due to the majority of them being SaaS based products targeted at the B2B market. Once you’ve spent the initial cost building it, the cost of customer acquisition effectively drops with each new customer signed up. Not to mention, if you’re in the B2B space, one large client could hit your annual sales target.
4) The future
Malcolm X once said, ‘Education is our passport to the future, for tomorrow belongs to the people who prepare for it today.’ So prepare. Cycles occur and what is hot today may be outdated tomorrow. Who remembers when yahoo was unstoppable. Nobody had seen traction like them, until google took it all and then some. Don’t always buy into the hype and look for industries that look like they’ve not been updated in ages. Take Zenefits as a case in point. In 2013 employee benefits was most certainly not the booming sector of tech that it is now. However, Zenefits’ solid product and strong team has revitalized an industry that was previously the brunt of many jokes. Now, it’s the Zenefits’ investors who are laughing.
While others are looking for fires, look for the wood that’s yet to burn.