You know investors are a shrewd bunch. They have to be, to amass a sizable war-chest.
Typically, it takes effort to save up a pile and become an investor in the first place (unless you happen to have rich parents, marry rich, win the lottery, etc). We forgo the Starbucks Latte, expensive cars (and even taxi rides), bring lunch to work, etc… just to squirrel money away for our war-chest. It is even sometime ‘painful’ reading the posts from Mr Money Mustache (read here). Or to quote from the recent Tacomob blog post – “Trading has been and always will be, a hard way to make an easy living.”
It is not easy making money out from investors. It is like squeezing water out from a rock or selling a fridge to an Eskimo or selling a Tesla to an Arab… you get the drift.
However, there is one loophole, and as human beings, we all have that weakness (some more than others) – Greed. Ah yes, I smell money.
“A good friend of mine, who has been a venture capitalist for over fifty years, always says, ‘The rich don’t buy stocks; they sell stocks.’ The rich create companies and then sell the company’s shares to investors. That is legally printing money.” Robert Kiyosaki
You make money from investor by promising them more money. However, you just ‘accidentally’ forgot to tell them how much you are making out of it. Not that it matters.. right?
Venture Capital and Startups
Chris Sacca on The Power of Incentives (read here)
This was Sacca’s very honest assessment of the risk-reward trade-off for both investors and those running the funds (emphasis mine):
This is a rigged game, right? And I’m just looking to make it even more rigged. For those who don’t know, venture capital is totally unfair. I mean, people give me their money; I draw a management fee off it, so they pay me to take their money and invest it for them. If I make money, then I pay them back the management fee and then after that we split the profits and I get a really big chunk of the profits.
And if I lose money, that’s fine. It doesn’t come out of my pocket. I keep my fee and my investors lose money. That’s how this industry works. That’s bananas. And at some point, it’s gonna break. It’s just an unforgivably unfair, rigged game that’s in favor of the venture capitalist. You’re cash flow positive from day one when you start a venture fund and your downside is incredibly limited by the structure of the fund.
It is interesting reading Chris Sacca’s view on the 2&20 fee structure that so many VC funds employ (2% management fee and 20% of profits). Interestingly, Chris Sacca is the founder of Lowercase Capital and is made his billions by investing in startups (read here).
You know if I was a billionaire, I wouldn’t even bother taking my chances with investing in Startups (sorry Ratan Tata).
Why bother? When I could just start a Venture Capital firm or invest directly into a VC? With a 2&20 fee structure, heads I win, tails I win… Just let me open the door for you to the world of startup investing, and oh yes, wire your money to this account.
China’s Next Bubble: Tech Start Ups? (read here)
P2P Lending Platforms
When I first heard about P2P lending platforms, I was blown over.
Well prior to this I was scratching my head and thinking if I can generate more passive income in this low yield environment. Being a shady money lender doesn’t sound like my cup of tea – too much risk (too large an amount on just one company), and I don’t like hiring money collectors (or getting called up by the MAS or the Police).
Come to think of it, I will be the type of Ah Long that will be hammered by the borrowers (or their wives with broom sticks).
So yes, 10% to 15% simple interest P.A. (24% to 26% effective interest P.A.) sounds really cool. What’s more we can invest with as low as $100, and the P2P platforms do all the necessary checks for us (and we can spread our risks).
Now being, the over zealous investor that I am, I don’t just want to invest in the loans, I want to invest in the platforms! After all, it is a great concept. I can sense the smiles forming on the faces of those investors who invested in SGX shares.
Unfortunately, it is not that simple (I am not some savvy VC with tonnes of smart money).
“Since the banks can print money, why can’t you?” Robert Kiyosaki
Ok, nevertheless, during this time I did my due diligence and even contacted a few Fintech startup founders (whose platforms never did launch).
And most importantly, I asked the question that few asked.What is the interest rate the P2P platform charge the borrowers? Or put simply, how much these SMEs need to pay the P2P lending platform (which include the interest the lenders are getting).
What they offered lenders is well publicized. As a lender, you will be informed of what monthly and yearly interest you will be getting (and if you reinvest, what is your effective interest rate), the fee the platforms are charging you, and for some how much fee they will charge you if your withdrawal is below a certain amount.
You read it in the news, you hear it in the radio (was in a taxi one morning, and the radio station host was chatting with Kelvin Teo from Funding Societies about his company. Incidentally Kelvin was in Bali for holidays, while doing the interview via the phone), you read about them in the blogsphere and internet.
Getting a business loan in two hours (read here)
However, does anyone ask what they are earning from the borrowers?
Of course this figure would differ from each platform and from different borrowers (base on their financial standings, DP credit rating, loan amount, loan duration, etc). Frankly, I know very little about the ‘market rates’ for loans, being not in the financial industry.
For one such company (SME looking for loan), I understand that one of the platform is offering a simple interest of 13% P.A. for a $200,000.00 loan. That works out to 1.083% per month for investors (if one lend to the borrower).
Upon inquiring the SME, I was told that the borrower was quoted 2.1% per month by the P2P platform for a 12 month loan (and 2.6% by another platform – some of the SMEs are like us, trying out different platforms). So technically the platform is earning (2.1-1.083) 1.02% per month, just by being a service provider (ok, must minus overheads, taxes, operating cost etc – but for simplicity, let’s just use this figure). And that is if there are no other fees involved (from both borrowers & lenders) for their services.
Let’s see, 1.02% of 200,000.00 is $2040.00 per month. Of course this amount will decrease every month as the principal loan amount is slowly reduced (as the borrower pay up). Nevertheless, the average interest per month (for a 12 month loan) still works out to be about $1105.00.
Now if the service provider has just 10 active loans (of such amount) per month….. you can do the maths. Oh, I think most of the platforms here do have more than 10 active loans. And that is just the ‘simple interest’. If the management reinvest the monthly profits in say bonds or loans elsewhere (or even in loans from other P2P lending platforms), the ‘effective interest’ would be much higher. The ultimate ‘lender’ :p
Frankly, I have lost count of how many layers of ‘compounding’ there are.
Not bad, with technically no money injection into any of the loans (from the P2P platform side)…
Note: technically lenders bear the risk if the borrower defaults (well of course the P2P lending platform’s reputation might be tarnish, but legally, they are not obligated to refund your investment).
Earning money by using other’s money.
“The moment a person know how to make money out of nothing or with other people’s money or a bank’s money, they enter a different world. It’s a world almost an exactly opposite the world of those in the E [Employee] and S [Self-employed] quadrants where they experience hard work, high taxes, and low returns on investment.” Robert Kiyosaki
Well how about the other platform that proclaim that your loan is backed by collateral? Well, try reading these forum posts (read here).
Well, having said that, I will still invest in P2P loans. I don’t mind making others rich as long as I profit as well. Life is unfair. When was it ever fair?
Aren’t most of us are in a way making others rich? Eg. by being an employee, making our boss rich.
Look in theory, the mathematics of a VC or P2P Lending platform is very tantalizing, but in implementation, only the founders / management can tell you.
Oh yeah, I am still the over-zealous investor… Shall leave you with this song.