Screen Shot

Bitauto is trying to corner the growing market for car buyers in China. Image source: Bitauto.

Investing in small Chinese start-ups can be a risky proposition, especially with the Chinese stock market -- and economy -- showing a lot of uncertainty lately. But that kind of riskiness is exactly what I'm looking for. And so, next week I'll be buying shares of Bitauto (NYSE:BITA) for my own portfolio.

An unorthodox approach to my cash stash
Earlier this year, I talked about taking an unusual approach  to my family's cash stash. This includes our emergency savings, as well as potential cash to use for a down payment should we choose to buy a house in the future.

Knowing that we shouldn't be investing any money in the stock market that we'll need over the next three years, this cash has been sitting in the bank earning virtually nothing for over five years. After reading some of what risk expert Nassim Taleb has written about investing, my wife and I agreed to test out a two-tiered approach: leaving 85% of this allotment as cash while splitting the remaining 15% among 10 different high-risk investments.

In the end, this limits our downside -- we would be disappointed, but just fine if we lost all 15% -- while exposing ourselves to unlimited upside so long as we hold the investments long enough. Bitauto is a good fit for the characteristics we're looking for in high-risk, high-reward investments.

But first, a primer on the company
William Bin Li founded the predecessor to Bitauto in 2000, and the 41-year-old still functions as the company's CEO and chairman of the board. Bitauto has three primary revenue streams.

  1. Advertising: The company operates Bitauto.com for new-car buyers and Taoche.com for used-car buyers, extracting revenue from the listings and advertisements on these pages.
  2. EP platform: This division has the most potential for future growth, allowing dealers to create virtual showrooms, manage customer relations, and providing financing and transaction services for dealers.
  3. Digital marketing: Bitauto has also developed tools to separately help dealers create and manage their own websites, as well as planning and executing larger online advertising campaigns.

Over the past 18 months, all three divisions have shown remarkable progress -- growing at an annualized rate of over 70% per year.

Screen Shot

The traits I look for in these high-risk investments
There are a few key traits that I consider to be must-haves for these high-risk, high-reward bets. The first is a company that's got long-term tailwinds pushing it forward.

As China's middle class continues to grow, the used- and new-car markets hold great potential. A study by McKinsey & Company pointed out that the Chinese car market grew by 24% between 2005 and 2011, and it is expected to grow by a more modest -- but still impressive -- 8% per year until 2020.

The second trait I look for is multiple futures, or the ability of the company to morph over time -- given potential opportunities. I think Bitauto has shown an ability to do this primarily through its EP platform.

What was at one point a small part of its revenue -- which focused on creating online showrooms for dealers -- has expanded into a service that could be huge. If Bitauto is able to capitalize on the opportunity to provide CRM services for dealers, as well as financing and transaction for potential buyers, it could truly be a coup.

Finally, I want to be investing in companies where management has significant skin in the game. Bitauto is run by its founder, which is something I love to see in the companies I'm invested in. A founder is often so invested in the long-term success of his/her company that they usually view the company as an existential extension of themselves.

As it stands today, major Chinese Internet players JD.com and Tencent see potential in Bitauto, too -- as they own 26% and 3.3% of shares outstanding, respectively. The deal with JD.com is also important in that the company gives exclusive access to its new- and used-car channels to be listed on Bitauto.

American outfit AutoTrader.com also purchased a large tranche of shares, as it realizes the potential for Bitauto in China and doesn't want to miss out. As of April of this year, AutoTrader owned 15% of shares outstanding.

Not to be forgotten, Bin Li owns roughly 15% of shares outstanding through direct ownership and his interest in several investment funds.

The takeaway is that management has significant skin in the game, and it has the support of some of the largest players within the Middle Kingdom.

What I'll be doing
Add all of these pieces together -- the tailwinds, the skin in the game, and the stock with booming potential that's trading for just 16 times trailing earnings -- and you can see why I don't mind allocating a small portion of my family's cash position to Bitauto.

When Motley Fool trading rules allow, it will be my family's newest holding.

Brian Stoffel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.