In the last 30 years, the world has changed dramatically and I can’t think of anything that has stayed as it was for 30 years (30 because I am not older than that). If we dig deep in the roots of this change, we are likely to find that it is human beings who impulse this change, nothing is a consequence of a continuous luck. We, as a community, strive to constantly evolve, and that ambition has lead us to where we are now.
Today’s world is shaped by multiple generations, such as Baby Boomers, Generation X, Millennial and so on. All of these have different characteristics, that make them a group, paradigmas which create automatic communities. However, all of them share one variable, Technology.
Regardless of the level of technology, all generations “click” and “switch” to different paradigmas due to advances in technology. Technology has led us to where we are, changing everything around us. Yet, what makes the difference (in my opinion) is the access to information.
Technology has brought transparency and democracy (still a lot room for improvement) to different areas lacking information used to generate opportunities of arbitrage. In other words, technology has balanced some of the information asymmetry. The investment industry is not an exception, technology has created investment opportunities itself, as well as provided access to alternative investments, that were offered exclusively to UHNWIs.
Yet in a context with excessive amount of information, options and opportunities, how can you be sure that you make the right decision? How do you pick the one that will be the next $1 Billion company? Well, bad news, you can’t be sure, yet you develop your own process to reduce the risk and find the value proposition that better suits your investment portfolio.
Investing in entrepreneurs or startups is one step further than investing in “classic” assets, that being said, there are many lessons coming from those that were highly success doing so. Knowledge from a traditional investments is transferable and applicable to investing in alternative assets. Value Investing is one of those disciplines, that under my point of view, can be helpful while investing your money in new technologies or new business models, although not all the lessons can be applicable many of them help to shape an investment framework.
Warren Buffett has been one of the most successful investors, and I have used some of his milestones to build my research before investing. Just a kind reminder, this post is intended for investors or for people looking to invest, and although in an ideal world, investors’ and entrepreneurs’ interests and priorities should be aligned, this is not always the case.
- Value Proposition & Product
Before considering any analysis, value proposition should be something that you love, are interested in, familiar or passionate about. In that case, any further steps will be easy to understand or take. Just remember, you will most likely be in that journey for a long time.
Once you understand what the value proposition is (not necessarily true), then it is time to kick off and start the product analysis.
It is important to find a killer product, although the team, culture and strategy are crucial, having a great product is paramount. What features do you look in a killer product?
- Competitive Advantage → Creates entry barriers or reinforces customer loyalty
- Customer Centric → Products that make life easier, providing solutions that some else do not
- Inspire Innovation → Those products that decide to go to a price game, end up in a commodity business model (Start with Why, Simon Sinek, Chap. 2, Carrots and Sticks )
- Easy to scale up → Make sure your business can be replicated under different circumstances
Bear in mind that we are dealing with technology, so unless you own patents or any other IP (Intellectual Property), your technology will be copied if you discover a market that generates enough profits. As soon as a market is big enough to generate economic benefits, different players will start operations to change the market structure, unless one or some of the initial players have turned that market to monopoly or oligopoly.
- Competitive Landscape
While analyzing a competitive landscape, there are several aspects to pay attention to. Market size, market structure, number of players, need of unique technology, exit opportunities, regulation, scalability are only some of the examples. It will be difficult to find extensive information for all of those aspects, but again it will help you to understand some of the challenges of your future investment as well as the needs that are intended to be solved.
Some of the aspects are pretty straight forward, although they will vary and should be explored on a case by case basis. Let me point out two, that in my opinion, are crucial and nobody mentions, at least in early stages :
- Exit Opportunities → At any early stage, entrepreneurs have, and must have, the idea of building the next billion dollar company. Yet as an investor, you look for return on your investment. Yes, you do care about the way of making money but your investment horizon might be different than a company life. (Define an investment for your positions)
- Regulation → Regulation could potentially differentiate, for good or bad, your investment. It is always controversial, where the lack of information could generate opportunities, but this is gambling, not under the scope of this post.
The main goal is trying to understand under what conditions the value proposition, that you are interested in, is operating, what its challenges and opportunities are, and lastly assess whether your investment is at the right position to make it worthwhile.
- Company Culture & Leadership Team
Company culture and leadership team are likely the most important factors to consider, and they are not necessarily aligned.
Culture is a company asset, most often costly in monetary and timing terms although crucial in the long run. Loyalty, engagement, and collaboration are drivers to success that leadership can’t buy for a long time because someone else will always have more resources, reputation or connections. Therefore, as an investor, you should evaluate whether the leadership team is the one protecting its key assets.
Regarding the leadership team, there are different considerations for assessing whether they will be able to push the needle and achieve remarkable results.
- How many founders are making business decisions?
The more stakeholders involved, the slower the decision making progress is (how to compute a number of relationships in a group), as you can see the relationships grow in exponential number as you include one more member. Though this could be understood as a drawback, it might be an advantage if you think ahead, the more members are in the decision making process the longer last those business guidelines. As an investor, you don’t want your investment changing its strategy every week, neither do the company employees. Therefore, companies with 2/3 decision makers are the target, whether they are founders, advisor or board members looking for a qualified, talented and passionate team.
- Does the leadership team have any other experience? How much?
This is a personal issue and will depend on many different factors, but it is preferably to trust your investments to leaders with a previous professional experiences. There is no ideal number of years, and will vary from sector to sector.
- Are any other stakeholders involved in making business decisions?
If you are in a position where you ready to join one adventure as such, it is a must knowing the cap table. It will show you an accurate perspective who you are joining and what your role would be.
If you plan to run an active investor role, ask yourself before if this exactly what the company needs, and whether you are the best to provide it in a “part-time” role. If you just doubted, stay as passive investor, at the end of the day, what you look for is ROI (return on your investment).
- Is the leadership team relevant owner? If so, is the leadership aligned with the rest of the stakeholders?
Facing an opportunity where one single member of the leadership team owns more than 50.01% of the company voting rights, assess in depth, whether you want to allocate your assets under one stakeholder mind. It would not necessarily be the wrong option, Apple, Tesla, Facebook or Amazon are examples of this kind management style, yet as investor you should assess and price that risk.
- Strategy & Execution
Strategy and Execution are becoming filling words, at least in the early stages where startups usually pivot, specially in the early stages, when they face the need to move from a PoC (proof of concept) to scaled business.
Strategy or business plans are crucial but believing that they are written down in stone is a chimera or great way of fooling yourself. Business plans rarely go as planned. Future forecasting is an open question, where human beings excel on linear growth and fail when it comes to exponential growth.
When execution is the factor subject to analysis, data and track record is what matter. There is nothing better than data to assess and back up any value proposition. Data analysis is a must nowadays, companies have to be data driven rather than intuition driven. Any startup that uses data to lead business decisions is one step ahead of those leading business strategies by IDD (Intuition Driven Development).
Assessing execution, is to assess data, whether it is the deals closed, customer satisfaction rates or number of products delivered. Execution should be monitored in a daily basis in order to validate what was intended by the company strategy.
Metrics are always tricky to read, even more to get conclusions or action points, especially when there is not enough data or it is not applicable to different business cases or timing. LCV (Lifetime Customer Value), CAC (Customer Acquisition Cost), and different ratios are needed but carefully comparing previous successful stories, timing, context and luck are great catalyst.
By now, you have realized that there is no secret sauce to be always be right. However, the points above will help to minimize the risk and feel more comfortable.