The downstream investment is a financing option, which allows a company to make an investment in another company that is not a subsidiary.
In this article, we will discuss the benefits and challenges of making an investment via a downstream investment.
What is a downstream investment?
A downstream investment is an investment made by a company in another company that is further down the supply chain. The benefits of downstream investments include increased control over the quality of inputs and greater vertical integration.
This type of investment can take the form of equity investment, loans, or purchases of assets. The purpose of a downstream investment is usually to secure a supply of raw materials, ensure product quality, or expand the market for the product.
Benefits of a Downstream Investment
A downstream investment is made in a company that is already established. This means that the risks are lower than to invest in a start-up company.
Established companies have a proven track record and are more likely to be successful. This also means that they are more likely to generate a return on investment.
There are several benefits to making a downstream investment.
- It can create a more secure and stable supply chain for the investing company.
- It can help the investing company to expand its market share and increase its profits.
- It can give the investing company more control over the production process and product quality.
- It can allow the investing company to vertically integrate its operations and become more efficient.
- It can provide stability during times of economic turmoil. When consumers cut back on spending, they typically don’t stop buying altogether – they just switch to cheaper alternatives. This means that companies lower down the supply chain are less likely to be affected by economic downturns than those higher up.
- Downstream investment can also offer higher returns than upstream investments. This is because companies lower down the supply chain tend to be more profitable than those higher up. They also tend to have lower capital requirements, which means company can reinvest more of their profits into growth.
- Finally, downstream investments can create a competitive advantage for the investing company. If the investing company is able to negotiate better terms with its supplier, or if it receives exclusive access to new products or services, it can gain a competitive edge over its rivals.
Challenges of a Downstream Investment
As seen above there are multiple benefits of Downstream Investment. However, there are a few potential cons of making a downstream investment.
- The biggest potential problem of downstream investment is that investing company do not gain any real control over the company that they are investing in.
- Failure to grow fast enough or to target the right market segment. A business can fail to grow fast enough or it can take the wrong direction and go after a market segment that is too small for it to be profitable.
- Additionally, the invested company may be in a different industry and therefore have different risk factors. This could lead to a higher level of risk for the investment.
- Finally, the invested company may get acquired by a larger company and therefore, investment could disappear overnight.
Examples of Downstream Investment
There are many examples of downstream investment, but some of the most common include:
- Acquiring or investing in suppliers company: This can provide the opportunity to reduce costs and improve the quality of products or services.
- Investing company may invest in another company that provides products or services to their target market: This type of investment can help a company tap into new markets or expand your existing ones.
- Acquiring or investing in competitors company: This can help the investing company consolidate their position in the market and eliminate a key source of competition.
Downstream investments can be an effective way to grow business and gain a competitive edge in the marketplace.
Downstream investments are a great way to diversify companies portfolio and earn higher returns. While there are some risks involved, the potential rewards make it worth considering.
Downstream investment helps to build long-term relationships between companies. When companies have a financial interest in each other’s success, they are more likely to cooperate and collaborate, which can lead to greater trust and cooperation over time.