Basics for investing

"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."

Robert G. Allen

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Competences addressed/ learning outcomes

After completing this Learning resource participants will be able to:
— To become aware of what is an investment, what is a risk, what are returns and the ways to

calculate rates of return.
— To better understand the influence of risk on investments.
— To identify the elements to consider when making an investment.
— To identify the key questions to answer as an entrepreneur when looking for investors and funding.
— To identify the different digital and AI related tools to calculate RoR and maximize fundraising.

Objectives

The objectives of this learning resource can be summarised as below:
— Understand the nature of investments and risks.
— Analyze the Types of investments and investors.
— Analyze the Simple rate of return and the Compound Annual Growth Rate.
— Find out if an investment is worth.
— Understand the importance of key indicators, financial ratios, and other considerations for investing.

Theoretical background

"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case."
Robert G. Allen

1. Definition of investment
The outlay of money usually for income or profit. A capital outlay. Although it might seem obvious, investors expect to get a return on the capital they put into a business.
The expected return depends on the risk of the investment.
2. Definition of risk
Possibility of loss or injury. The greater the probability of loss (risk), the higher the expected return.
Risk depends mainly on:

● Time: the longer the investment, the higher the uncertainty.
● The nature of the business: well-known profitable companies in a stable industry are less risky than unknown, new companies coming from an unstable industry.
● The investor’s tolerance to risk.
3. Risk and return
When defining where to invest, the higher the risk the higher return investors demand. There is no such thing as a totally risk-free investment. However, government debt in developed countries is generally considered risk free, since it is assumed, there won’t be a default.
4. Types of investments and investors
Investments:
● Ownership investments: Investing in your own startup or in a company’s equity to become an owner.
● Financial investments: Bank deposits, government debt, private debt and equity securities, currencies, funds, commodities, real estate, derivatives, art.
● Capital investments: The investments made by a company in assets in order to grow or become more profitable.
Investors:
● Personal investors: Family, friends, personal relationships.
● Banks: Are not investors, they don´t become owners, but are the most common source of funds for a company. It is a complicated source for a startup, but cheaper than other sources.
● Peer-to-peer lenders: Made of individuals groups of investors, offer loans to small businesses and startups mainly (an example).
● Business angels: Wealthy individuals or groups that invest in startups. Besides giving cash, offer advice or become active in the management (read article).
● Venture capital: Firms that manage individual investors’ money (more).
● Corporate investors: large companies may be inclined to invest idle cash in new companies, to improve return, diversify, find talent, or identify trends and opportunities.
● Incubators: Offer mainly space (facilities), training and mentoring and special conditions to startups. Check out some examples.
● Government investors: Governments have several programs that give loans or managerial advice to startups.
5. Finding if an investment is worth
The calculation of the future value of an investment is one of the most basic calculations in finance. It allows you to determine the value of an investment in the future. The future value calculation is based on the basic principle of time value of money that states a € in your hand today is worth more than a dollar to be received tomorrow.
The future value of a single sum of money is important to businesses because it allows for the calculation of the rate of return (RoR) on an investment.
If a case is made to invest money into a new project such as an acquisition, or an equipment purchase with a long holding period, it's important to have a way to calculate the potential return or profit you'll gain.
6. Simple rate of return (RoR)
If you want to start a business, you will have to make investments and will probably look for funding. Either way, first you need to know the basics about investing, including how to calculate the return on an investment (RoI) or Rate of Return (RoR).
Definition of RoR: The gain or loss on an investment over a specific period of time.
How to calculate it:
Example: You buy a house for 300,000€, you rent it for two years at a price of 12,000€ per year, and you sell it for 330,000€ three years later.
Your RoR is 18%

To know more, visit:
https://www.investopedia.com/terms/r/rateofreturn.asp

7. Compound Annual Growth Rate
When an investment lasts more than one year, it is better to find the return per year to compare it with other investments. A simplified way of finding the RoR would be to divide the gain by the number of years. However, this arithmetic average is not normally used when finding out the RoR for investments over one year. Instead, the Compound Annual Growth Rate (CAGR) is used, because normally gains on an investment would be reinvested.
The Compound Annual Growth Rate (CAGR) is the annual rate of return of an investment in which it is assumed that gains are reinvested.

To know more visit:
https://www.investopedia.com/ask/answers/070914/what-are-main-differences-between-compound-annual-growth-rate-cagr-and-internal-rate-return-irr.asp

8. Time value of money
A given amount of money today is worth more than the same amount in the future, because:
● We can invest the money and obtain a return.
● Inflation will make that in the future things cost more, therefore, money will lose value*.
9. Financial ratios
When analyzing a company, several financial ratios that have to do with return are commonly used, mainly:

10. Other considerations when investing
When deciding whether to invest on a certain project or asset, there are three important aspects to include in your calculations:
1. Transaction costs: for example, if you buy a house you should include in the cost taxes, registration procedures, improvements, etc.
2. Inflation: inflation makes money lose value in the future. The real return on an investment considers inflation, the nominal doesn’t. To properly calculate the effect of inflation on a given investment, use the following formula:

3. Foreign exchange rates: exchange rates increase the risk (are unpredictable). There are instruments to prevent the effect of exchange rates but will add an extra cost.
11. Making up a simple CAP table
A cap table, short for capitalization table, is a spreadsheet that breaks down who owns what in a startup. The cap table is a key due diligence item because it reveals how every stakeholder is impacted by a fundraise. With a quick glance, an investor can determine the percentage of equity owned by founders, investors, and employees (and in the case of a very early startup, the investor can also be assured that your team has had the difficult conversations and properly structured the business). These numbers answer to important question: Who, ultimately, has control over this startup?

Example of CAP table:

Total capital invested by Founders to date:	€3000
	Common shares	Ownership
Share price	€1

Founders:
Ashanti Traore	€1500	50%
Nadjela Salama	€1500	50%

Outside investors	€20000

Totals	€23000	100%

Step-by-step implementation

The proposed steps can be translated into a PowerPoint or Google presentation divided into the steps.

1. Find out who your investors are using a stakeholder mapping.
We are proposing you to use stakeholder mapping to find out who your investors are. Not all of them have the same priorities. Collectively mapping them is a form of wider empathy and helps to identify possible compromises and trade-offs that you may have to make to satisfy all stakeholders.
Use the Design Thinking Tool STAKEHOLDER MAP: http://toolkit.designthinking-socialup.eu/en/stakeholder-map

a) First remember the learners the kind of investors they can find:
● Personal investors: Family, friends, personal relationships.
● Banks: Are not investors, they don´t become owners, but are the most common source of funds for a company. It is a complicated source for a startup, but cheaper than other sources.
● Peer-to-peer lenders: Made of individuals groups of investors, offer loans to small businesses and startups mainly (an example).
● Business angels: Wealthy individuals or groups that invest in startups. Besides giving cash, offer advice or become active in the management (read article).
● Venture capital: Firms that manage individual investors’ money (more).
● Corporate investors: large companies may be inclined to invest idle cash in new companies, to improve return, diversify, find talent, or identify trends and opportunities.
● Incubators: Offer mainly space (facilities), training and mentoring and special conditions to startups. Check out some examples.
● Government investors: Governments have several programs that give loans or managerial advice to startups.
b) Build teams (or if the group is small just keep it in 1)
c) Use the Stakeholder Map tool and post-it notes for each of the team.

d) Individually, and silently, ask each team member to silently brainstorm the investors they would place in the center and so on, using a marker pen on sticky notes, one investor per sticky note. Use only enough words for other team members to understand.
e) When each team member has completed their individual list, place the sticky notes on the Stakeholder Map, starting with the most important stakeholder/investor in the center and positioning the others in the outer circles. The more important the stakeholder, the closer to the centre they should be positioned. As each sticky note is positioned explain why it is felt that they should be positioned where they are on the map
f) When all team members have completed task e) group together the sticky notes of the same stakeholders and remove duplicates.
g) As the map develops write down key insights and notes about the stakeholders on post-its, one insight per note, and position them in a separate area of the map for later reference.
h) The completed map is a collective and shared visual reference that clarifies who is at the heart of your main investment challenge.

2. Your checklist to investments
The fundamental conditions that an investor will be looking for when evaluating your business. Ideally, you will score well on all these verticals and, as a result, will be able to raise capital. Your top prerogative right now should be to be ready! Go through the list and determine these 8 indicators we are proposing you with key questions to pose. Divide the group in 3 and leave 15 minutes to answer these questions:

Key Indicator	Question
3. You are giving away enough time	Am I working Full-Time on my Startup?
4. Have developed a business that has the potential to expand	Is my business model scalable?
5. Your organization is legally uncomplicated	Do I have a Properly Incorporated Entity?
6. You have done your finances homework	Do you have a Cap Table?
7. Do you have a Cap Table?	Do you have a Strong Pitch Presentation? (See 1.3 Self-presentation)
8. You know where you’re going and can prove it.	Can you prove that somebody wants your product?

Then, once they are over, gather them all together and have a debate for 15 minutes: What is the strongest key indicator per group? And the weakest? Why?

3. Digital tools for investment
There are several programs and digital tools that will help us with calculating RoR and to manage investments, but most are for stock portfolio investment.
Microsoft Excel (and other similar spreadsheets) can help you a lot with investments, since it features most financial equations.
Here an example:
Video about how to How to Calculate Internal Rate of Return (IRR) in Excel: https://www.investopedia.com/articles/investing/102715/calculating-internal-rate-return-using-excel.asp

Moreover, Artificial Intelligence (AI) is making its headway into every field, including the world of fundraising. Here we are naming some tools: can you find more?
● Crunchbase: https://www.crunchbase.com/ . All-encompassing database that provides comprehensive information on startups, investors, and funding rounds. The best part about Crunchbase is that it utilizes AI to help users identify relevant investors that meet their investment criteria.
● Dealroom: https://dealroom.net . An AI-powered platform that provides data and insights on startups, investors, and funding rounds. The platform uses advanced machine learning algorithms to track market trends and identify emerging investment opportunities.
● Spinverse: https://spinverse.com/ . AI-powered platform that offers valuable insights and resources to startups seeking investors and funding. Spinbase's machine learning algorithms gather and analyze data on startups, investors, and funding rounds, providing entrepreneurs with a comprehensive overview of the market landscape.

While all these tools are useful to find fundraising opportunities and to match with like-minded investors, it is important that you look at the latest news from the field of A.I. and how it is transforming our world right before our eyes and it will be shaping how entrepreneurship works soon.

FINAL REMINDER:
Make sure you look at the related contents to this material, that are:
Self-presentation
Financial literacy
Basic accounting
Business management for social entrepreneurs
Forecasting for investing.
Marketing and Advertising

Time needed and group size

TIME: 2 hours (30 minutes for exercise about investors/stakeholder mapping divided in Groups)
GROUP SIZE: 15-20 learners that can be separated into groups of 4-5 (to make sure different investors/stakeholder mappings are made)

Materials needed for implementation

Computer to show links and videos.
1 print of stakeholder map (if possible A4 or A3) OR use the map and put the feedback in a board and ask the groups to copy it and write their inputs:

Post it notes of different colors.