Investment: Is it possible to find the next Amazon?

It’s always tempting to imagine that one can transform one’s investment fortunes through a single, wildly successful bet on an up-and-coming company that turns out to be the next Amazon, Google or Tesla. But identifying an investment fund manager with a track record of success in selecting early-stage businesses might be a better strategy.

For an investor, the idea of finding the next Amazon when it is just a twinkle in its founder’s eye is seductive. Those who invested in the company’s shares during its IPO in May 1997, trusting in the then largely-theoretical concept of selling books and CDs online, have seen their money grow by more than 100,000 per cent. Just one lucky stock pick delivered a transformational return to fortunate investors.

However, it is also worth remembering Friends Reunited, Palm, Gateway and AltaVista. At one time, all these companies appeared to have a rosy future ahead of them. It is clear that a good idea does not necessarily equal a good investment and that while investors can win big, they can also lose all the money they staked. The difference between the two is often vanishingly small. If identifying the next Google was easy, everyone would be doing it.

If identifying the next Google was easy, everyone would be doing it.

For those who still want to find future business leaders, there are a number of routes available. First is simply trying to pick an upcoming big winner. You do your research with the aim of unearthing a technology giant of the future while it is still in its infancy.

When you read about it, it’s too late

The problem is that you need to identify the company before anyone else has, which requires a rare depth of knowledge and insight. If you work in a particular industry such as IT, it is possible you may be able to spot nascent trends earlier than most and find suitable investment opportunities, but this is unusual.

In general, if you are reading about a company in the media, its growth potential is likely already to be reflected in its share price, or in demand for investment if it has not yet gone public.

If you take this type of approach, it is worth thinking about it the way you would a bet on a horse. You can equip yourself with knowledge about the trainers, the form, the history and the conditions, but ultimately, it is little more than a coin toss on whether it will win. Still interested? Then only gamble with a very small part of your portfolio and with money you can afford to lose.

Investment funds

Another option for as a well-informed investor is to look at collective investment – for instance, a venture capital fund whose manager will aim to back a number of high-potential companies in the hope that one or two will deliver the outsized gains of an Amazon, Tesla or Meta.

Investors should have the reassurance that the fund manager is a specialist with the skill and experience to analyse the companies in detail and understand whether the management team is likely to be able to deliver on its promises and the company’s business or technological potential.

There are plenty of investment firms that follow such strategies, and some have a good track record of backing early-stage companies that deliver impressive returns in the long term. Nevertheless, returns may well be volatile.

Over the past decade, Tesla’s share price has fallen by 30% on more than 10 separate occasions.

There are times when even the best companies fall out of favour. Over the past decade, Tesla’s share price has fallen by 30% on more than 10 separate occasions. Amazon did not move into profit until 2003, nearly seven years after its IPO, and its value dropped significantly when it launched Amazon Prime in 2007, which was immediately followed by the global financial crisis. But, ultimately, both companies proved to be good choices for patient investors who have held on through thick and thin.

Different types of fund invest in up-and-coming companies. Some managers back companies only once they have been publicly listed, but venture capital firms invest in businesses while they are still private and provide financing across a company’s lifecycle – from early-stage financing to the public offering and beyond. Each type of investment comes with different levels of risk and potential return.

Tax incentives for early-stage investment*

Governments are keen for investors to direct capital to smaller businesses that need financial backing to grow; they are often the main engine of economic growth and sources of new employment. Therefore, in many countries significant tax incentives are available to encourage investment in start-up and early-stage companies, which can encourage to take the risk of investing in businesses whose ultimate success is by no means assured.

In Luxembourg, the SICAR (Société d’investissement en capital à risque) structure introduced in 2004 offers a regulated venture capital or private equity vehicle. The SICAR is designed to fill the gap between funds subject to the European Union’s UCITS rules for retail investment and unregulated companies investing in shares or financing – Soparfis – that are often used for private equity investment.

Wealthier individuals – those who can afford to place €100,000 or more in a single fund, and that qualify under Luxembourg law as a well-informed investor – also may have access to alternative investment fund structures such as Luxembourg Reserved Alternative Investment Funds.

Targeting SMEs

Other countries such as France and the UK offer tax incentives for investment in small and medium-sized companies. Britain’s venture capital trusts, which are open to retail investors, offer an income tax credits of 30% for investments held for a period exceeding five years. This can mitigate the risk of investing in smaller and, by definition, more unpredictable companies, and provides a potential cushion against volatility in investment performance.

The prospect of finding the next Amazon or Google is alluring – and you might strike lucky. However, there are many great ideas competing for investors’ attention and few will become the trillion-dollar technology giants of tomorrow. Instead of going all out for the rare pearl, it may be worthwhile also to consider the available tax incentives and to identify professional managers who have already demonstrated their ability to find future winners on numerous occasions.

In many countries significant tax incentives are available to encourage investment in start-up and early-stage companies, which can encourage to take the risk of investing in businesses whose success is by no means assured.

* ”Never forget that the delivered information should always be considered based on your personal situation and may change with the legislation.”