Craig Peterson looks at the investor’s perspective in finding the most attractive businesses.
There are a number of things to consider when assessing investment opportunities. The question is, which are the most important? And how can you remember them?
Try the five M’s of investing: Management, Market, Model (business), Money, and Momentum.
Management: An ‘A-grade’ team with a ‘B-grade’ idea can make a good idea great through the right combination of skill sets, knowledge, drive, passion, and plain old-fashioned hard work.
But a ‘B-grade’ team with an ‘A-grade’ idea just won’t work. Without the right people behind it, a great idea could be wasted.
Investors wants to know their investment will be put towards building an ‘A-grade’ team to ensure the business has the best chance of achieving success.
As a potential investor in a business, when you look at their team ask yourself how strong a sense of entrepreneurial spirit you can see. If the creative spark is missing, it could be an indication of the team’s inability to make the business a success. Pick investment opportunities that give you confidence in a business’ whole team and most importantly their ability to execute the plan.
Market: Before making an investment decision, you need to look at the sector the business operates in and their competition. This should give a good indication of how the business could perform in current climates, as well as market demand. Large demand equals higher growth potential.
Model: The business model is vital. As an investor, there are some questions you need to be asking:
- What does the business actually do?
- What resources does it need in order to produce products and services?
- What are the revenue streams?
- What is the cost structure?
- Does the business have value-adding key partners and supplies?
- Is the target market clear?
- What sales and marketing channels will be utilised?
You also need to consider the company’s value proposition – how the business solves a customer’s problem and why customers will turn to this business over a competitor?
Perhaps the most important question you need to ask though is, is the company innovative and disruptive? This needs to be shown in the business model, along with their differentiator which sets them apart from existing competition.
Money: How the investee company plans to monetise their business is something you need to find out. Businesses with recurring revenues are often the most attractive prospects because they show more potential for a steady turnover.
Momentum: Closely linked to market research, momentum is where you check out the customer interest surrounding the company, product, services and sector. Does the business solve a genuine problem in the market place? If the answer is yes, that’s a good start. Look at how many people need that problem solving; this will indicate either actual or potential customer interest. Look at the investee company’s traction in the marketplace – does the business idea resonate with a lot of people? Does it resonate with you? Do you believe in the business model, the revenue model, the sector, the potential to succeed, and the team?
…that’s right, we’re back to the beginning: the team. Are they the ‘A-grade’ team with the momentum to take their business to the top of their sector? If all evidence points towards the answer being yes (including due diligence and gut instinct), then you may just have found the investment opportunity for you.