Monday, August 17, 2020

Is Investing in Off-Site Construction Really Worth It?

There are four types of investment opportunities you can make in the off-site construction industry and each one comes with its own set of risks. Trying to make money as a major investor, angel investor or by simply putting a few thousand dollars into an investment syndicate is always risky but is off-site construction the best opportunity out there?

Off-site construction companies seem to be popping up faster than prairie dogs across not only the US but in just about every country in the world. A modular factory here, another one there. A panelization plant in the Western US, a shipping container conversion company in the East and even tiny house and ADU factories opening everywhere.

What you are also witnessing is something every emerging industry has tons of, people with ideas looking for investors and the off-site construction industry is no different.

The first type of investment opportunity, the “New Idea”. As a general rule, new ideas in off-site construction rarely come from people actually working inside the industry itself. The people with these ideas are mostly observers of the industry that see a weakness or niche that can be better served by their new idea. 

Maybe it stays just an idea or maybe it has actually been put into a prototype. Either way it looks and sounds reasonable and seems to fill a need. It could be a new type of exterior sheathing, a new way to heat homes or production line automation or software. Whatever it is, the person with the idea begins to peddle it to anyone that will listen. They go on webinars, podcasts, visit investor meetings and even have articles published, sometimes I have even published them.

Whatever they can do to attract the money to get their idea from conception to fruition they will do.

The downside to this is that historically, 90% of them fail within the first 5 years. They disappear along with your investment. But 10% do have some measure of success and that is better odds than you get in Vegas and investing in early-stage companies could also be highly profitable if done responsibly.

Next up is investing in a startup company. Startup investors are essentially buying a piece of the company with their investment. They are putting down capital, in exchange for equity: a portion of ownership in the startup and rights to its potential future profits.

The startup usually has a factory and has committed their own money to the project. When investors see that the startup is already in business and just needs extra investment money to grow, it is much easier to get in the front door with investors.

The investor’s money can most likely bring about the expected growth and return on investment they need. Startups are usually begun by people with a more intimate knowledge of off-site construction which will help make investors comfortable in their investment.

Startups looking for investment money should expect to see a lot of due diligence done by the investor but the success rate for startup investing is much higher.

The third investment opportunity is also one of the most risky. It happens when an investor is asked to help save a floundering factory or off-site construction business.

The business owner in most cases isn’t looking for investors to help grow the company, they are looking for someone to bail them out of insurmountable debt. In exchange for a flow of cash into the business, the owner needs to be prepared to give up a vast majority of ownership.

If the startup company thought they were under the microscope of due diligence, the floundering company will have everything looked at in great detail. Vendors, customers, accountants and even employees will be questioned. 

Owners in this situation may end up with little or no equity in the surviving company. If it can’t be saved after a few years, the investor will probably look for someone to either buy the business for pennies on the dollar or sell all the assets.

This is another 80-90% failure rate investment within 5 years. 

The last type of business that an investor could be asked to help is the bootstrapped success company. Bootstrapping is a process whereby an entrepreneur starts a self-sustaining business, markets it, and grows the business by using limited resources or money.

Most of the time bootstrappers are quite content with their growth. They usually operate within a regional presence and know their part of the industry better than just about anyone else. 

That is why it’s tough for an investor to give them money. They usually don’t want it or need it.

But once in a while, the bootstrapper will want to expand beyond their comfort zone and that’s where the solid, well heeled investor wants to step in. When a business is solid, the owner is the expert and works hard every day in it and customers and employees have faith in it, that’s a signal that any money given the bootstrapper will be used in the best possible way by the owner.

If a bootstrapper were to allow an investor into his company, investors will see a smaller equity position for their investment but it is worth it in almost every case.

This is not the get rich side of investing. This is the steady growth type that many conservative investors pray they will find some day.

The bottom line for investors is to decide how much risk they are comfortable with and then jump in. Off-site construction has been and will continue to be super strong and a major part of the nation’s growth. 

Gary Fleisher is a housing veteran, editor/writer of the, blogs and the ‘coming soon’, Construction Consultant’s Directory. 


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