What would be reasons NOT to invest in a small company that has great leadership, talented workers and an amazing product?
For example Apple, Amazon, Microsoft all fulfilled these checkmarks when they were small companies. People who had invested in them during the phase where they were no longer obscure, (but still smallish companies) would still have made anywhere from 200-1000+% returns off of their initial investments.
I believe Tesla is also in that same stage. No longer obscure, but they're still a pretty small company that's not listed in the S&P 500. So far they have achieved one of their primary business goals, which is to double in size every 18 months.
They went from one small factory - to one small one and one Gigafactory in Nevada…
They added a second Gigafactory in China - doubling to two Gigafactories in 18 months.
They’re building one more in Germany and another in the USA - so they’ll soon go from two Gigafactories to FOUR.
Each Gigafactory can be doubled or even tripled in size…they’re designed to make that possible…
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What would be a reason not to invest in Tesla, or any similar small sized companies that have these same attributes?
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Everybody thinks they're investing in Apple, until it turns out they've invested in Enron.
We have the benefit of hindsight to be able to say that Apple, Amazon and Microsoft were all good investments today - back then, it wouldn't have been so obvious with their small company size and lack of foothold in the market.
That's not even mentioning that, for awhile, Apple would not have been considered a 'good investment' to be stuck with - given they were near bankruptcy at one point.
Tesla might be a good investment, if growth continues and the market holds stable for their products. Or it might collapse as cheaper electric cars become available and their major market share dwindles.
You won't know until it happens.
The reason "not to", is that success doesn't necessarily happen because a company has all those qualities.
Remember "crappy" companies make money too. Where "crappy" means they don't have all the features you describe.
The main questions are things like "Is there a market demand?" If the market demand is big enough, then it's easier to ship crap (make undue profit). Witness early days of Microsoft.
If you need an A+ execution for profit, you're more likely to fail. For example, only so many people get gold medals at the Olympics. Lots of people though, can run a marathon.
Now, you may like betting on someone who's going to grow potatoes on Mars. But the harder the goal, the more risk. Risk is what makes it hard.
Since you mention Apple concretely, let me mention my relation with it. I do remember the numbers, not the exact dates. Around 20 years ago I bought a few (luckily) shares at each. I held them for a while, I don't remember how long, but enough to receive ballots for some board elections; maybe a couple years. I sold those few shares at each.
Someone who bought those shares at in 2002, kept them for 18 years, and sold at the right time (mid February 2020), could have made a 3200% profit. I can assure you that was not obvious in 2002 (even if it was more or less predictable that the market would go up). And that profit would have been two months ago, but not today!
As it is repeated time and again on this site, "timing the market" is a recipe for failure: you'll never know in advance when it is the "right time" to buy or sell.
In addition to the other answers here (e.g. already overvalued, liabilities, survivorship bias in perception, ecosystem factors favoring competitor):
What would be reasons NOT to invest in a small company that has great leadership, talented workers and an amazing product?
One reason would be because the market doesn't value that product. There are plenty of amazing products that have been produced by small companies with great leadership and talented workers, but the part of the world with sufficient exposure to the company just wasn't ready for those amazing products until after the small company ran out of cash. Investors in those companies lost money. Product-market fit or lack thereof is a key determinant of a company's future success.
Low barriers to entry could also dissuade an investment. Suppose the startup had a great product-market fit in addition to all the other plusses you mentioned. What would stop a much more well-resourced giant competitor from making the same thing? With larger volume and an existing sales/distribution network, what's to stop a larger competitor from selling the same thing for just a bit lower price and drive the startup out of business? There are some good answers to this question (e.g. patents) but if the startup doesn't have a good answer, it may not be a great investment.
Alternatively, high barriers to entry that the company has not overcome could dissuade an investment, unless you have reason to believe those barriers are not too high for the company. For example, if the company's product clearly infringes on a competitor's patent and the competitor has refused or not been asked for a license, that would be a red flag for investment.
Another good reason would be if you can't afford to lose that money. Investing in startups is highly risky. You should plan on not having access to that money for years, probably forever. Would not having those funds prevent you from being able to put food on the table and a roof over your head? Would it stop you from being able to pursue other goals that you hold as a higher priority (e.g. returning to school or having a kid)? Would it prevent you from having the resilience to weather stormy economic conditions for several months, during which time you may not have income? If the answer to any of those or similar questions is yes, then no matter how amazing the product (or even product-market fit), how great the leadership, or how talented the workers, you should not invest.
A bad capitalization table can also be a major turn-off. Even if everything else about the company is fantastic, if the existing ownership structure is sufficiently messed up (e.g. giving all sorts of conversion to control rights to early investors who do not fall into the category of "great leadership") then getting involved is a disaster waiting to happen. When these situations occur (and they do!), if the new investment is large enough to make a material difference in the company's prospects and there aren't other suckers willing to substitute with a similar investment, sometimes existing investors might be willing to renegotiate their terms, especially if they think the alternative (e.g. no investment and bankruptcy) would be worse for them. A small individual investor is unlikely to carry enough weight to incentivize this.
Some possible detractors:
Patent issues which cause an injunction,
Cloneability which causes another local/foreign company to make a more successful copy so that suppliers to change contracts after the factory is built,
Brand attraction,
Robustness,
Reality of cost/benefit and supply/demand,
Competition ecosystem: advent of a superior company/product/technology. A lot of people invested in Acorn computers, they were brilliant, but others were more pragmatic.
Betamax was a brilliant home recorder, but VHS was even better.
Be careful about survivorship bias. For every Apple, Amazon or Microsoft which grew from a garage company to an international megacorporation there are thousands of cases of companies which stayed small or went bankrupt.
How can you from the outside judge how great the leadership, how talented the workers and how amazing the product of a company really is? Public perception is one thing, but you often don't know what really goes on within a company. The hipster CEO might actually be an angry despote who doesn't know what he is doing, the talented engineers might be interviewing at other companies and the product might have no chance against an unpublished product from a competing company with far more resources.
Regarding Tesla: They enjoyed the prestige of being the first company to mass-produce electric cars which looked and felt like real cars. But they are no longer alone on that market. More and more well-established car companies want a piece of that cake and brought their own electric cars to market. Will Tesla be able to maintain their market leadership? Will they get relegated to one among many? Or perhaps will they even get crushed by the competition? Only the future will tell.
One important consideration I didn't notice anyone mentioning with any company but especially smaller companies is cash. A company can have a positive top on their balance sheet but if they can't access cash in order to fund payroll or pay their suppliers, it can fail rapidly.
The general term here is a liquidity crisis. Usually a company can turn to debt to resolve short-term issues with cash-flow. Long-term cash-flow issues are generally fatal, however. There are other factors too. If there's a macro-economic credit crunch, for example, the company may not be able to cover their current liabilities through debt. Credit crunches are unfortunately a real risk these days and be rooted in events such as pandemics, terrorism, and bubbles.
Just a small note here, I have heard an analyst say that the current value of Tesla makes it much higher than other auto makers who sell far more cars. Tesla's current market cap is valuing it on the basis that it is going to grab a very lot of market share away from the big auto makers. It could happen sure, but when it does, Tesla will be correctly priced already and unlikely that their price is much higher
One more reason might be portfolio management. I would not put ALL my retirement money into one stock. The risk would be to high for a disastreous downturn.
Why would you not invest in a small up-and-coming company, because half of businesses fail in the first three years. There is a reason startups try to give developers equity for compensation, it is virtually worthless?
It is also worth noting that the type of stock exchange the company is listed with has more to do with age than profit. In business terms tech companies come and go so quickly, they rarely last long enough to become fortune 500 companies.
Whether a company gets a main or secondary listing has more to do with how established it is. Tesla seems a bit young.
What would be a reason not to invest in Tesla, or any similar small sized companies that have these same attributes?
A big, big, big reason not to invest in such a company is that its stock may be overvalued already.
I think a lot of people have the misconception that a stock's price reflects the company's net assets, and so if a company doubles in size, its stock price will double, too.
That's not true at all. A stock's price reflects what investors think the stock is worth. This means that if, say, investors are expecting a company to double in size, and it does double in size, then on average, the stock price will go up by 0%. It'll just stay flat. If investors are expecting it to triple in size and it merely doubles in size, the stock price should go down by 33%.
So, if you're trying to beat the market by picking stocks, you absolutely have to look at the stock price and compare that to how much the stock is actually worth.
In the case of Tesla, two reasons. 1) Its stock price has already been driven to unrealistic levels by fans; and 2) The corporate leadership.
Point #1 seems fairly obvious. #2 requires some comment. The problem here is that Elon Musk seems to have a compulsion to balance every great idea with a really stupid one. Make good electric cars? Great idea! Mess them up by trying to make them self-driving, thus increasing the cost, exposing the company to massive liability lawsuits, and ensuring that a segment of potential buyers wouldn't take one if it was free? Not so great :-(
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