Value.able:

The four stages of a start-up’s life cycle provide rewarding possibilities

Roger Montgomery

Investing in smaller companies is a well-trodden path to long-term wealth. Capturing growth as a company emerges from a start-up with an entrepreneurial approach to governance through to an established business with a board of experienced and independent directors can be richly rewarding.

We believe there are four stages to a small company’s life cycle. Beginning with the “early” stage, the product or service being offered is classed as disruptive and the governance entrepreneurial. Less than 1% of our portfolio is dedicated to these opportunities. Following the early stage is the “emerging” stage with the product or service being commercialised. We would invest between 1% and 3% of our small companies portfolio in these candidates.

As a company’s product or service is proven we describe the business as “developed” and can invest between 2% and 5% of the portfolio. And once the proven product or service is sustainable, we describe the company as

“core” and up to 7% can be invested. All the while the governance of the company is moving from entrepreneurial through to established, and not only do its earnings grow but the market’s confidence in its prospects does as well.

“Ten baggers” (shares that grow tenfold in a given time frame) are not uncommon and all that is required is patience, provided of course the right candidate has been selected. In this month’s column, we examine three companies held in our small companies fund, acknowledging there is generally higher volatility among small companies and therefore an element of risk.