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Investing in Big Ideas

Financial Planning

May 2016

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Investing in Big Ideas

In the traditional sense of financial markets, they are cyclical. Sectors get hot, industries bank on trends, and companies ebb and flow on the whims of consumerism. But at the micro level, innovation always persists. Even during a decline across nearly every asset class, some cool concept is created and developed.

For example, Airbnb was founded in 2007 as a way for two roommates to make a quick buck. They came up with the idea of renting sleeping quarters specifically during a weekend designer’s conference in San Francisco. Given the city’s expensive hotel accommodations, they were able to rent out three air mattresses in their apartment, along with free wireless internet access and breakfast each morning. From that, the “air bed and breakfast” was born; now a $25 billion company.

Uber had much the same beginnings. There was demand: Fast, cheap, private transportation service in big cities. In 2010, the company started as a map on a smartphone that instantly found a driver in the area via GPS. Uber hosts two main types of services. Premium offers luxury cars with a private driver-permit, which costs about the same as a taxi ride. Economy provides driver-owned cars in new, excellent condition that operate without a permit and cost about half that of a taxi. There are also handicap and carpool options. Many people report feeling safer with an Uber driver than a taxi – particularly women. This probably is due to the ratings system in which drivers can rate customers on a scale of 1 to 5, and customers can do the same for drivers and the state of their personal vehicle – which helps ensure everyone is respectful and minds their Ps and Qs. This new model of doing business is similar to Yelp’s review website, but the impact is more direct. Drivers with low scores are let go and drivers have the option to pass on picking up customers with low scores. Today, privately owned Uber is valued at more than $50 billion.

There will always be big ideas because economic events do nothing to deter the human brain from creating. In fact, the more downtrodden a situation, the more likely people will seek out solutions. The important thing to remember is that not every good idea becomes a successful company. Before you invest in the thingamajig your neighbor invented in his basement, work with a professional financial advisor to vet the idea. After all, it takes more than ingenuity to generate a return on investment.

With that said, you might have your own big idea that could make millions, or at least some supplementary cash. The question becomes: How much of your own money should you allocate to seeing an idea to fruition? That’s a great question, and there are a lot of considerations to ponder. First of all, you don’t want to put your long-term security at risk, so you do need to put guardrails around your core finances. Second, don’t rule out external financing options, such as a small business loan or even crowdfunding.

The point is, it’s a good idea to seek professional advice before you make financial decisions. You might want to speak to other entrepreneurs or inventors to learn about their pitfalls and successes; legal counsel to ensure your idea is unique and protected; and a financial advisor to ensure you have a sound plan to develop your idea without risking your future.

So before you pour money into the next big thing, consider how it would work for your long-term plan and how you can offset any risk involved.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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