What Is a Concept Company?
In finance, the term “concept company” refers to an early-stage business that is developing a product or service that investors believe may be of substantial value in the future.
Typically, concept companies have not yet proven their business models and are therefore relatively speculative. By contrast, mature companies are those whose prospects for growth and profitability have already been demonstrated.
- A concept company is a business that is known to investors mainly for its association with a popular or promising industry sector.
- Concept companies typically have vague or unproven business models and are therefore viewed as highly speculative investments.
- Historically, concept companies have tended to fall in and out of favor as different industries capture the imagination of investors.
Understanding Concept Companies
Concept companies are commonly associated with emerging technology sectors, where new products and services are continuously invented and improved. Some investors, such as venture capitalists (VCs), closely monitor such emerging technology companies in search of investment opportunities.
At any given time, investors will typically be particularly enthusiastic about specific “hot” sectors. During the dot-com bubble, for instance, companies selling products online reached staggering valuations which often far outstripped their fundamental strengths as businesses. In those instances, investors seemed more concerned with the theoretical concept of the company as compared to its investment fundamentals.
Today, similar “concept companies” might be found in today’s hot sectors, such as artificial intelligence (AI), social media applications, and virtual reality. Although some of these companies might grow to become the next Facebook (FB) or Alphabet (GOOGL), this outcome is exceedingly rare. Nevertheless, patient investors with a large capacity and willingness to bear risk might nonetheless succeed in profiting from a diversified portfolio of such companies.
Real-World Example of a Concept Company
Because of their unique risks, concept companies and other development-stage businesses will generally have a much higher cost of capital than more established businesses. The early investors in these companies often stand to lose 100% of their investment if the concept company’s business model fails to take hold. On the other hand, if the concept company does begin to gain traction, its valuation will likely rise substantially throughout subsequent rounds of financing. In these circumstances, the early investors can stand to enjoy dramatic gains.
Some entrepreneurs may deliberately design their company’s branding and marketing presentations so as to align themselves as neatly as possible within a hot industry sector. One such example occurred in 2017 when Long Island Iced Tea Corporation—a manufacturer of iced tea and lemonade drinks—changed its name to “Long Blockchain Corporation” in an apparent attempt to capitalize on the market interest in Bitcoin and other blockchain-based cryptocurrencies that was widespread at that time.
Although some concept companies are sincere in their efforts and may well develop profitable business models, investors must be cautious to avoid overpaying for popular business concepts which may have dubious fundamental value as investments.