The depressing and high-anxiety inducing combination of punchless public equity markets, historically low interest rates, and significant inflation risk has fueled desperate pleas for new, workable, and performing investment ideas and strategies.
Any reader of these pages know the author's enthusiasm for private equity investing, both for the entrepreneurial spirit it represents and demands and because as an investment class it has outperformed all others by a wide margin.
But unfortunately poor public market performance has adversely affected its return profile substantially.
Quite simply, 14 years of flat public markets has just cast a big pall of “blah” over the entire equity investing landscape - private and public.
Entrepreneurs have responded well to this “contagion” - via innovations such as electronic secondary marketplaces like SharesPost and Second Market, and via the coming new world of investment-based crowdfunding.
These innovations in turn have made one of the most overlooked yet best returning forms of private company investing more viable and attractive for investors of all sizes than ever before.
It is commonly described as project financing, but a more accurate description of where the real smart money is being deployed these days are in Discrete, Opportunity- Based Investments, or “DOBIs.”
DOBIs differ from traditional private equity investments in that - like project financings – they are not based in investing in a company as a whole.
Rather, like a real estate project or an investment in a movie or a television show, DOBIs involves financially backing a discrete – in kind and scope - business initiative where a) the payoff timeline is measured in months, not years and b) the investment return flows not from a third party purchase of the underlying investment security but rather from the generated cash of the project itself.
The concept is not new. But the types of opportunities being funded and the speed and their level of performance certainly are.
DOBI examples include social media “harvesting” - where investors fund pay-per-click and other forms of marketing that drive “freemium" giveaways, with investment return then being generated through high margin residual sales within a few months or even weeks of the initial campaign.
Or, as has been increasingly seen on crowdfunding sites like Kickstarter, rapid product prototyping and development driven projects that offer both in-kind return consideration, and an effective level of coupon return most typically associated with accounts receivables financings through factoring.
While DOBIs have the technology, market, and execution risk factors of any investment, they also offer many mitigating, "walk before you run" features usually unavailable in the traditional “you are in or you are out” private equity investment form.
And, nicely because the time horizon of DOBIs are so naturally short, the ability to gather multiple points of performance data is naturally much easier.
How to find them?
My favorite places to look are sights like the aforementioned Kickstarter, along with peer to peer lending sites like Prosper.com and Lending Club.
While the “on the board” opportunities there are often good enough, smart and hard-working investors will go deeper and invest not just at the “rack rate” but rather connect directly with the entrepreneur or project team to see if a “one off” deal can be made.
Quick and easy to do? Of course not.
But for those investors tired of the variously weak choices offered through traditional channels, the out-sized and often-times pretty quick returns offered by DOBIs are often well worth the risk and more.