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Review our track record and get to know the principles and working methods behind Avid’s approach to investment.
This section explains Avid’s most fundamental principle, which underpins every contract, and the types of risk involved.
Our core rule for any financing or investment is this:
“An investor is entitled to a profit only if they accept at least some of the economic risk of the venture.”
In other words, an investor cannot receive a guarantee on their principal and also claim a profit from the business. If the business guarantees the principal outright, in our view the contract has become a loan, and the investor is then entitled to the principal only — nothing more.
Broadly, every investment or financing arrangement faces two kinds of risk. They differ in nature, and in how each can be covered.
This concerns the creditworthiness of the person or entity receiving the funds: whether they can honour their cheques and obligations on the due date. It exists in every type of contract, and is usually covered by taking guarantees, valid documents and several layers of cheques.
This concerns economic swings and changes in the price of the goods under contract. For example, if an investor pre-buys goods and by the due date their market price has halved, an economic loss has occurred.
As noted above, the risk that the business must not guarantee is economic risk. Taking any form of guarantee to cover default risk, however, is perfectly acceptable.
The guarantee documents may be called upon in two situations:
Key point
The risk that must not be guaranteed by the business is economic risk. A loss to the principal or to the profit that results from the business activity itself cannot be guaranteed — the investor cannot recover such a loss from the collateral.
Most capital-raising platforms, including crowdfunding platforms, promise a profit while guaranteeing both principal and return. At the other end of the spectrum, real business activity always carries foreseen and unforeseen risks, which can lead to high profits in some periods — or even to losses.
Avid does not promise a profit and does not guarantee principal or return. Given its roots in financing, however, it has taken only a small step towards real business activity. Despite all the risks described, investing through Avid does not mean entering the turbulent world of running a business. Rather than investing directly in risky operations, we place capital in the part of a project that serves as its safety margin, so that the main operating risk does not fall on the investor. Risk is not zero, but it is very different from the risk of running a business directly.
For example, under a forward-purchase contract the investor buys goods at a discount, and the seller must deliver them a few months later. If the price of the goods has fallen at delivery, the loss falls on the investor — though in an inflationary economy the risk of a price fall is small. In short: at Avid neither principal nor profit is guaranteed, but this does not mean taking on high risk.