Why Do I Deserve this Generosity? ISO Investable Businesses
When evaluating investment opportunities you always need to ask yourself “What did I do to deserve this generosity?” Despite the grandiose claims and the beautiful geometric growth projections contained in every startup business plan, the simple fact is that most of the companies out there looking for capital are not Investable Businesses.
By Investable Businesses I mean a business where a third party investor has a colorable opportunity to get a significant return on their investment in 3 to 5 years. This does not mean they are not good businesses but it does mean there is not a compelling case for an outside investor to invest in the business. Many startups are creating efficiencies for users but not capturing inefficiency effectively for themselves. Many startups are aiming to capture too small of a market. Others are seeking to position themselves in a way to never be profitable. Some have viable business models that should be able to operate from cash flow rather than needing outside capital.
In evaluating whether a company is an Investable Business I look at:
- The Innovation Area
- Size of the Opportunity
- Inefficiency Capture
The Innovation area needs to be supported by favorable macroeconomic trends. 21st Century Innovation areas include food, water, energy, big data, transportation, healthcare and millennial consumers. We don’t want to be investing in a company that is in a maturing industry. We want a company and industry that is just entering the Innovation Cycle.
The Size of the Opportunity should be sufficient for you to get a 10 to 100 times return on your investment valuation. If everything goes right and you are unlikely to achieve 10X return on your investment, you have tied up your capital in an unproductive asset.
The Inefficiency Capture that the business is capitalizing on is based on the Business Godfather Cost-Benefit Analysis where we look at where the costs are incurred and where the benefits flow. We do not want a business that creates efficiencies for others and does not capture enough inefficiency for itself to be profitable and growing. Profitable and growing businesses capitalize on inefficiencies.
Over the next few blog posts I will be applying this analysis to several companies that I saw present at a Tech2000 Connectpreneur event in March.