Young Yet Profound

Every large company that exists starts somewhere. Most are ideas in peoples head driven by demand and innovation to become industry leaders. While there are those that benefit from government involvement- regulation, subsidies, quota systems etc.; all in one way or another have the following characteristics that shall be listed below. A case for Safaricom stemming off from Kenya post & telecommunication or Equity bank from a farmers Sacco, they identify niches in the market that they exploited and the resultant growth inevitable.

Life Cycle of a young company

Various Stages of funding for a company

To properly understand young companies, we must internalize their growth. The figure above shows a company through its early stages of the cycle. At the ideas stage, most investors shun away from investments, as they companies look very good on paper and referring to the earlier post- The ABC of investing in a young business, numbers are key. Investors want to see steady revenue; they want to see how a company values and prices its product or service and how the industry receives the product.  This company is young and depending on the actual position in the life cycle, it might be spending money and not having revenues. They are different investment strategies among investors and few opt for this segment in their portfolio due to the high risk of failure. In the example of restaurants, 75% close down or change ownership in the first one year, yet the ones that make it become great. Twitter and LinkedIn have gone through several rounds of funding to be where they are. This industry sees the highest expected return in any investment short of a Ponzi scheme; 50%-60% aren’t unreasonable targets for IRR, though they may be on the higher side.

So what defines these young companies?

Innovation

The ability to integrate and incorporate new approaches and methodologies in solving problems make these companies stand out. Radical innovation- that which disrupts traditional economic mechanisms as the established firms find it costly to implement change. You will get the tee shirts not from a large scale manufacturer but from your neighbor who can customize your ideal print on the tee shirts.

Employment

The don’t usually offer the most paying jobs in the market but young companies provide  the largest supply of new jobs to an industry. Any government that seeks to reduce unemployment should facilitate creation of business as they have a larger ripple effect in the economy than say EABL adding more staff to its payroll

Economic Growth

Since most young companies are high growth companies, they tend to outperform the economy in growth, contributing to the GDP of the economy. A case in Kenya the banks performance has been boosted by the lending to SME, a case of Equity for example.

One thing that its clear to grow a company one needs money, period