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Who do you consider as the right investor for your business?

Angel Investors (Individuals)

Strategic Investors (Corporate Ventures)

Institutional Investors (Investment Banks, VC Firms)


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Table of Contents
1. Foreword
2. The Venture - A Profit Machine
3. Assessment Elements
3.1 Market Opportunity
3.2 Product/Solution
3.3 Execution Plan
3.4 Financial Engine
3.5 Human Capital
3.6 Potential Return
3.7 Margin of Safety
4. Mathematical Model
5. Score, Confidence & Weight Criteria
6. Disclaimer
7. Acknowledgements
8. Author
9. Copyright
10. References


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3.  Assessment Elements









- 3.6 Potential Return – Can it produce enough return?

Before making a significant investment of time and money, one should know the potential return should were successful. Remember that for any investor or entrepreneur, there are other things you could be doing with your time or money. It is important to realistically evaluate a business opportunity to make an intelligent allocation of your own human or resource capital.

The potential return or payback is a function of the total available market, revenue model, pricing, profit margin and time-span. While investment bankers analyze the information by crunching the numbers, some other investors use instincts instead. While instincts can many times be valuable, several key areas should be evaluated to assess the potential return on investment.

Important to know:
How realistic are the projected returns?
How feasible is it to achieve those with proposed resources, in a timely manner?

3.6.1. Accurate Market Size

In developing business plan, companies of all sizes face the challenge of determining the right size of their markets, particularly if they are competing in new or rapidly evolving markets. Companies have to clearly distinguish between total available and servable markets and accurately estimate their market size. The servable or target market represents segmentation characteristics within the total available market.

Mistaking the total market size for the actual servable market is one of the most common errors in business planning.

It is important to know:
Are the total available and servable markets known and accurately estimated?
Are the sources of data or estimation methods reliable?

3.6.2. Realistic Market Share

As a general rule, a company is better off to achieve dominance in a smaller market, than owning a small share in a larger market. Companies able to obtain greater than 30% market share are almost always profitable.

At the same time it is not possible to capture 10%+ market share without getting noticed by big players. Accordingly company’s plan should take the potential reactions into account.

It is important to know:
What size of the market is this venture projecting to own? Is it big enough?
Is the expected share of the market realistic and achievable?

3.6.3. Convincing Revenue Model

A solid revenue model is the foundation for a sustainable business. It defines the path to profit and should reflect cyclicality, seasonality and growth.

It is important to know:
Are the existing and projected revenues clearly defined and understood?
Is the revenue model viable, scalable and acceptable to target customers?
Is market seasonality or cyclicality an issue?

3.6.4. Attractive Profit

The projected profit has to justify a business existence and demonstrate enough growth potentials. That is driven by pricing strategy, profit margin and future prospects. Ultimately profit margin dictates the business capital requirement, time to breakeven and positive cash-flow.

Pricing has to be set according to customer’s ROI and present a reasonable breakeven timeframe for them. Future prospects are constructed based on addressable and achievable markets.

It is important to know:
Is there any customer validation for unit volumes and pricing?
What length of time is required to achieve profits and then how long after that before positive cash flow?
Would those who have the problem able to afford the solution?
Would they agree that the cost is fair?

3.6.5. Reasonable Valuation

The way in which a business conducts its operations is an important element to take into consideration when evaluating a company's value. For instance, companies that are devoting significant resources to creating a new product may have relatively weak earnings now. But, if that new product catches on, profits could quickly rise and the earnings may begin to soar. Meanwhile, companies that have great earnings now, but are not investing in innovation and/or new products to ensure their continued success, may have significant problems in the future.

It is important to know:
Is the anticipated valuation realistic and up to market standards?
What are the goodwill or intangible assets of the company?
Does it reflect the existing intrinsic value and justify the risk?

3.6.6. Predictable Dilution

Raising capital in multiple rounds has two major benefits when planed properly: managing dilution for existing shareholders and mitigating investment risk. Measures such as anti-dilution clauses and focus on value creation can improve the predictability and mitigate dilution risk.

It is important to know:
Is there any future capitalization planned?
What IRR (based on realistic valuation) is forecasted for the next round of investors and how does that impact this round of shareholders?

3.6.7. Realistic Exit Plan

Perhaps the single most important event for investors is a successful exit. A well thought out exit plan is indispensable in the financing process.

It is important to know:
Is there a credible exit/return plan for investors in place?
Is the company open to a range of exits (acquisition, mergers, or IPO)?
Are there a sufficient number of likely acquirers?
Can the company exit valuation be estimated based on public companies in similar industries?
Is the exit potential within a reasonable time frame (e.g. 3-5 years)?