The stock market has been an engine of wealth creation for the last 100 years. It has been a place where a company that has innovative products and a great business model can go to seek capital. This capital is used to fulfill the plans and return value to the customers.
This is a very efficient model of the capital markets that worked in the late 1990s and even 2000s. But in the last decade or so. The system of providing capital and helping innovation thrive has changed. There have been multiple unregulated markets that have emerged that have helped innovation reach the capital markets(Stock market) in a non-traditional manner. The company structures have changed hence bought in various layers of complexities in the investment world.
The stock market is no longer the only place to find top-quality innovation ideas to invest in. Sure there are certain exceptions but on a broader level, this innovation and growth are getting captured by the unregulated markets. The stock market today is a place to find good quality businesses but not necessarily the best businesses that have 1000x growth potential. The businesses in public markets are decent businesses with steady growth but not exponential returns.
So now we are stuck with the question of what are 1000x growth potential businesses and how do we find them? To understand this, We need to understand various types of businesses that exist and let's judge them according to their growth potential.
- Mom & Pop shops — These are regular everyday businesses that have very limited growth potential. The operations are usually limited to the capacity of the shop owner. For example a clothing shop or a small Dollar store. These businesses can be compared to the Hyundai, the Datsun, and the Renault of the business world.
- SME businesses — These are businesses that don’t deal with any innovative products, the products are already well known and their growth is usually limited to the geographics that they are serving. For example. Copper plating business. Water bottle manufacturing. Due to heavy competition, these businesses have a medium growth scale. Let’s call these the Audi A6, The BMW 5 Series, Mercedes E Class.
- Established Players — These are the businesses that have huge operations in the existing products. They have their edge due to the first movers’ advantage. They already have peaked their performances and are making marginal improvements for growth. For example. Banks, Big conglomerate businesses. Let’s call these the Lambos, Ferraris.
- Startups — These are the Businesses types that have the highest upside. These businesses operate at the highest level of autonomy and scale the fastest. These businesses have the best talent pool, best resources, and everything at their disposal. These businesses leverage technology to create the next breakthrough in innovation and growth. These are the top of the top. This is the Crème de la crème. For Examples, Airbnb, Zillow, Uber, Razorpay, and 100s of others. Let’s call these the Pagani, the Bugatti, and The Koenigsegg of the business world.
Now if you want to grow your money. You will have to decide the speed and that speed will define your path. For example, if you’re at $1 million right now and you want to reach $10 million
You’ll have to decide which path you choose. Let’s understand the same with our car example. If you want to reach from Mumbai to Goa. You’ll have first to take into account how much time you want to reach. Do you want to reach there in 5–6 hours or do you want to reach there in 8–10 hours or do you want to reach there in 12 hours? If 5–6 hours is the speed you want to reach there you take Buggati or the Koenigsegg. If 8–10 hours is your speed you take the Lambo and Ferrari if 12 hours is your speed you take the Audi. (of course, you don’t have all these cars in your parking so don’t take it literally, although you can dream it lol)
This is the same logic that applies to the growth of your finances as well. If you want to go from 1 million to 10 million these are the different businesses available to you. The fastest capital growth is available in the start-up routes also the most value creation is in the start-up routes.
How do I get to invest in start-ups if they aren’t on the stock market?
This is where you learn about the intricate world of VC/ angel investment. Modern-day startups come up with disruptive ideas and go on seeking capital to back these ideas. They don’t raise money from the public markets since startups have a very high rate of fatality rate. 95%of of the start-ups die in the first 4 years of inception. Hence to back startups requires very deep pockets and someone who understands what they are doing with the money. Enter VC/ Angel investor. These are the class accredited investors with deep pockets to invest in these sophisticated business start-ups.
Investor spectrum –
- Retail investor-
Least risk. Whenever a start-up comes to IPOs or Public markets, the hyper-growth of 100x 1000x is already exhausted. This is where you can expect to get 20% or 50% growth safely. The start-up has already solved the product-market fit, it has a clear growth path. This is when the start-up is at its safest hence the low returns. Retail is usually the tail end of the spectrum.
- Grey Market investor –
These are the investors that have slightly more advantage over the retail, they get to buy premiums of the stock of the company before it goes IPO. I don’t this is to be a meaningful investor class but in the interest of educating the reader, I mentioned it.
- Venture capital-
Venture capital is the sweet spot in my opinion. At this stage, the start-ups still have huge upside and are a long way from IPO. The venture capital investor stage tends to be most lucrative since the start-ups have freshly solved the Product-market fit and are ready for the next round of funding which will later make it IPO-ready.
- Angel investor —
Angels are the ones who are at the very nascent stage of a startup. Where the start-up is struggling to understand what to scale and where to scale. Angels help start not just with capital but with connections, insights, and other valuable resources that the start-up needs to figure out what they need to scale. This is the highest risk situation but also the highest reward since you get to invest in a start-up at a very early stage.
If you’re someone who wants to create exponential value and gain the highest returns in the shortest period of time then the stock market isn’t the right instrument for you. The VC route and the angel investment route will make more sense to you but then the barriers to entry are pretty high. Best angel deals are offered only to the known names as they signal strength in the venture. If you choose the stock market then use it for passive investment. If you want to have hyper-growth for your money choose the Angel/VC route. The point being if you’re at the retail end then you’re getting the last bite of the apple as the startup is already chewed by many before it gets to you.