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How to Assess Whether or not a Company is Investable

By Rohan Saddy McLellan

August 17, 2018

Understanding the value and investability of a company is a crucial skill for business owners and VC’s alike. However, thanks to the complex web of factors that go into a valuation, making judgments of value is often a difficult and perplexing task for anyone. While determining investability may seem nearly impossible at first, there are some key elements that can point you in the right direction. These span from unsurprising metrics such as revenue and churn rate to subtler aspects like team cohesion and long-term strategy. So, whether you’re building your company or investing in others, these 3 aspects will help guide you to a more informed perspective on the value of any company.

 

Market Climate and Competition

 

One of the biggest red flags – or green lights for that matter – is the current market climate. Simply put, “Is it the right time for this product?” While it may seem like an amazing idea will succeed pretty much regardless of its timing, the climate in which the company is started almost entirely determines its fate. Although it may be impossible to tell exactly when a market is ripe for your idea, there are many strategies that can be used to gauge the window in which your company should take action. Most importantly, one must analyze the current social, economic and entrepreneurial climate to ensure that the timing is near perfect and most importantly, not too late. While companies can often get away with and even benefit by the first mover advantages brought with early timing, being late to market almost always ends in disaster for any business. Missing the goldilocks window often means there will be established competitors who are nearly impossible to compete with and users with needs that are no longer unmet. While these issues spell immense harm to investability, in order to avoid them intense market research and customer interviews are the only way to ensure that there are people out there who will actually buy the product. From an investor standpoint, beware of companies not paying maniacal attention to their target market and instead banking off of their assumed success without consistently proven needs.

 

Long-term strategy and vision + scalability

After you’ve ensured that the need exists, the next step is checking whether the company has done sufficient planning and strategy for the future. While a company may be a goldmine now, determine whether their cash flow is sustainable, and if pivots or adjustments will be needed to take advantage of trends and accommodate the prospective market. While there aren’t necessarily tangible metrics one can turn to for proof of strategy and vision, a good investor should always be cognizant of whether or not a company and its people are in it for the long haul. As a leader within the company, impress investors with not only current success but forward thinking and realistic plans to maintain that. Of course, VC’s want to see that a company is doing well presently but more importantly they want to see the strategy and vision for growth to justify an investment. Putting a million dollars into myspace at the peak of its success would have seemed intelligent but if looked at in terms of long-term strategy the company had no vision to compete with new companies in the ecosystem. These factors additionally tie into the overall scalability of the company.



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Scalability should be another key factor in judging investability because it separates the good investments from the great investments. An investment in a small but successful baking company with an extremely niche market and little future vision might not be a bad investment but for a VC trying to maximize their return, it will disappoint. Thus a company should ensure they understand types of investors to target and the strategy they should have prepared. On the other hand, an investor should understand the imperative components of scalability such as production cost, distribution channels, and infrastructure. No matter how you are involved in business understanding scalability, strategy and long-term vision will strengthen your knowledge and judgment regarding investability.

 

Exit Plan

Exit closely ties into long-term strategy however, it is specifically focused around the precise plan of the company’s fate . In most cases, the exit goals of an innovative company center around an acquisition giving all stakeholders a significant payout. This rapid growth is often what investors and business owners alike are looking for since it offers the highest return in the shortest amount of time. Thus if a company is following this business model it should have a strong exit strategy from the start in order to attract potential acquirers who are looking for substantial payouts. However, following a different model and not looking to cash out ASAP is also valid – the key regardless is understanding this plan down to the last detail. There are also investors who are looking for a steadier lower risk investment and aren’t determined to cash out right away. Regardless of which model you are following, the key to investability is being aware since all types of investors will be turned away if they do not see a reliable exit for their money.

 

Evidently, there are numerous quantitative metrics that encompass the investability of a company. However, especially in the business world, numbers are only one piece of the puzzle. Judgements should be made on a case by case basis and certain factors may be crucial in some analyses and irrelevant in others. Thus when either building a company to be investable or looking to put money into one, it is extremely important to trust your personal discretion. While it is always helpful to read articles like this and gain knowledge, the final step to your decision should be a gut one. Do you feel relentless passion and motivation in the company, does the elevator pitch excite you and leave you delighted to be involved? If not, it’s a company you shouldn’t be building or investing in regardless of its potential.

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Comments and responses

Jose Lujan on 15 Nov 2018 at 13:51:00

I have a question with regards to a start up that I’m working with. They have patented their design for the miniaturization for rocket engines. They are in the aerospace industry and want to achieve a light weight rocket of below a ton tu deliver nanasats to LEO. The major milestones thus far are the patents and having successully tested the engines. Since I am assisting them in raising series A capital I would like to know if these milestones are sufficient to seek out VCs specialized in the aerospace industry. Would you have any advise or contacts I could consult.
Thank You.
Jose A. Lujan