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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









- 3.7 Margin of Safety - Is there any protection?

"Only the Paranoid Survive”
- Andrew S. Grove ~ Intel

There are numerous outside factors that can affect a company’s destiny. Each business and each entrepreneur is unique. It's important to understand the risks and be prepared to withstand potential shocks that are beyond a business control. Understanding these outside factors which can hurt a business will allow for more accurate risk management as well as a more accurate evaluation of potential returns.

Due diligence is always needed by both investors and entrepreneurs to ensure that good business decisions are being made. In 1998, volkswagon outbid BMW to purchase Rolls Royce, including all of their intellectual property. Unfortunately they forgot to buy the Rolls-Royce brand name, which BMW had purchased at the last moment.2 Volkswagon didn’t perform due diligence and missed out on one of most important assets that Rolls Royce had.

Consequently, various protections have to be carefully evaluated.
That is done in two ways:
1) What kind of foreseeable marketplace changes could affect the company?
2) How prepared the company is to mitigate and deal with these surprising events?
3) How can the company recover from unforeseeable market changes or events?

3.7.1. Competition Awareness

Absence of good analysis and lack of appreciation for competition are of the most common mistakes made by entrepreneurs.

It is important to know:
Are existing and future competitors well analyzed, understood and prepared for?
What are the strengths and weaknesses of each of them?
How successful are they? Market shares, revenue wise, etc.
What are their product differentiators?
Do customers and vendors love them?

3.7.2. Barriers to Entry

"Barrier to entry" is an insurance for small companies. It is the obstacle and difficulty of duplicating the core competencies that will discourage or slow down competitors.

Barriers to entry established through:

Response/lead time
Legal, contractual advantage
Contracts and networks
Key people
Proprietary protection
Geographical leverage

It is important to know:
Are there barriers to entry or other leverage points in place or planned to sustain the projections?

3.7.3. Controllable Expenditure

In resource-poor startups any downturn, delay or shift in projected income can prove fatal. To survive management has to take control of the burn-rate.

It is important to know:
How much control does the management have on spending? (i.e. salary liability, long term lease, . . )
Are there any contingency plans for miscalculations in technology, people and market?

3.7.4. Knowledge Retention

Companies spend a significant amount of their time and resources in acquiring Knowledge. The ability to learn, innovate and improve directly impacts company's value, if retained in-house. Knowledge retention can be achieved through management practice, communication, documentation, measurement metrics and business processes.

It is important to know:
Is the company conscious about and proactively involved in retaining gained expertise and knowledge in house?
Is the retained knowledge utilized in improving core competencies, internal processes and quality of product/service?

3.7.5. Asset and Collateral

A company’s asset serves as protection if the business fails. Investors take a greater risk and are less likely to recover depending on the gap between investment amount and company’s asset.

Among others assets include:
Cash and cash equivalents
Marketable Securities
Accounts receivable
Prepaid Expenses

It is important to know:
Are there any tangible assets to protect the investments?
What is the fair market value of tangible assets?

3.7.6. Marketable Intangibles

Intangible assets including brand, goodwill, customers, partners and intellectual property contribute to a company’s intrinsic value. Marketable intangibles can serve as additional protection of investment. The analysis and appraisal of intangible assets is complicated, due to the nature of these assets.

It is important to know:
Are there any intangible assets associated with the business?
What is the fair market value of company’s intangible assets?

3.7.7. Liquidation Seniority

Under liquidation, those investors whose investments are backed by collateral are paid first. Other investors may take a greater risk and are less likely to recover due to subordinate position or other liquidation preferences.

It is important to know:
Is there exposure to any existing liens or commitments?
What are there the liquidation preferences, if any?