How do investors value your business before investing?
As an accountant we have an idea how to value the business. But when it comes to investment purposals the rules change.
Other than common methods such as DCF, assets valuation, revenue multiplications, what are the things that investors see and value the business?
Investor will be interested only in future earnings. If you can satisfy them that investing in your Business proposal is benifiary then surely they come forward to invest.
Great question that requires great answer. Here is my opinion based on the little practical exposure I have on this subject.
Instead of answering it from an angel or investors view let us try to analyze and answer what we would do if we had to invest!!!
The first thing that I will look at is IDEA. Idea that derives your business. What long term goals you have for your business?
There are two kind of organizations whether small or big. One we can call as a true business oriented organization making revenue and profits from the first day of launch and another an organization which has come with an unique or existing idea and is working on it to change the game in its niche industry.
As an investor I may have a policy to invest in innovative companies say second kind of organization or exclusively in business oriented organizations say first kind.
When I invest in first kind of organization what would matter most for me is REVENUE and profit margins. These are the companies which are operating in already established market and I have to look at the valuation of these companies purely from accounting point.
I have to look at the DCF, assets and revenue-profit margin. I have to look at the market size and market share the investee company holds and in future may hold. My all assumption would be purely based on the numbers in their financial statement. More or less I would be behaving as a bank since the market is already established and future is some what predictable. Valuation would not be multiple of revenue but more or less my concern will be on DCF.
Coming to second kind of organizations, which are innovative or you say organizations started by entrepreneurs. Here more than DCF my concerns would be scale at which company can reach, technology and market share it will hold. These are the companies facing uncertainties and can give you lot of returns or completely wipe off your investment.
Revenue is of less important since these companies take at least 2-3 years to see their first stream of cash coming in. My focus would be completely on scalability and team behind the business. These are the companies such as Redbus, Flipkart and many other internet based companies or technology driven companies.
As a venture capitalist I will be have different factors to value a company. Generally second kind of companies has better chances of getting funding.
For example, a retail store will have less chance of getting funds than a online market place. Online market place have more chances of scaling large than a retail store even if it has its own online E-commerce portal.
As an investor Financial statements matter most in first kind of business and qualitative factors such as scalability, team, technology, Idea matters most in second kind of companies.