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Investment Evaluation Guidelines
I have been asked many times for a guideline when it comes to evaluating investments that we (or our Clients) make. People ask why we invested in Company X and not in Company Y, Why are we interested in industry A more than industry B etc.
Well, the simple truth is that we invest to win.
We tend to strip out a lot of soft factors and focus on results.
Did management deliver?
Can they do it again?
A lot of investment decision making is based on an understanding of industry trends, a trusted relationship with players that perform consistently above industry average and some form of defensible proprietary technology that is in demand because it solves a specific pain for a given market segment.
If a company has a specific target market segment in their crosshairs, we know that they have done their homework – when management states that they serve all industries, our alarm bells start ringing.
Following is my personal guideline for what really counts when considering investment in a startup or early stage company.
1) Market potential
2) The Team
3) Results
4) USP
Investment Process
- The success of investment in an early stage company depends on people and their ability to execute on a detailed business plan, therefore a lot of emphasis is placed on the team.
- The structure of the investment is vital and requires creative and often complex terms.
- Pricing is a key factor which needs to be carefully analyzed and negotiated.
- An interesting exit strategy is required in order to maximize a timely return.
Investment Selection
- Management Team: Experienced, in-depth knowledge of business, results oriented.
- Innovative Products/ Proprietory Technology: Highly differentiable, superior, specialized expertise, meets market needs.
- Business Plan/ Milestones: Well thought out business plan including milestones and contingency plans.
- Substantial Investment Position: Ability to obtain a substantial investment position, influence the selection of executive management and the strategic direction of the company.
- Valuation: Negotiate and obtain a fair pricing structure.
Initial Investment Valuation
- Underlying industry assumptions
- Realistic income statement over 3-5 years
- Competition
- Major criteria:
- Technology value
- Capital requirements
- Market potential
- Capital structure
- Operational cash flow
Determination of NAV for privately held startup companies
- The original cost: An approximation of the fair market value at the time of the transaction.
- Write off: NAV calculation at cost, less any write-off deeemed necessary if subsequent performance fails to meet business plan forecast.
- Capital increase: NAV calculation in principle based on the capital increase price, less 10% to 29% discount if deemed necessary based on valuation factors.
- Write up: A write up is recognized when a significant event occurs such as increased profitability and achievement of milestones.