I would say ‘based on’ because you will find similarities, but the mistakes in this list are MINE, not his!
So what would I look at while investing – I am not including management integrity – I would not even consider a company if I am not sure about the integrity. Recently saw a company which had its Income tax, Company Law matters, and Service tax in a mess. Did not go beyond that! So as a private investor (or investment investigator) where you start does not matter..but yes I would look for these things.
- Dealing with the revenue authorities: if the records are clean, they have nice IT orders, their company law compliance is clear, the returns filed on time, …it gives a sense of comfort. Many businessmen ignore this thinking that all this can be set right at a later date. It is not that simple. How much of tax to pay is mathematical, not emotional. Tax payment dates are sarcosanct and not negotiable. For an auditor a very good place to start instead of cash flows 🙂
- Promoter / Merchant banker should be able to explain the business in one breath: a very complicated business catering to a very big, complex market, multiple locations, multiple currencies, etc. is just not my cup of tea. I prefer a straight forward business, well implemented and proof of cash surplus.
- Proven cash flow from a few clients: Clear cash flow for a product / service. An annuity kind of a business is easier to value rather than an I.P. based product which has been sold to a few clients. Unless of course it is a product that has mass appeal.
- What is the Risk that I am taking: How will I find an exit if I want to exit in say 8 years if the promoter is not able to get the listing done? Will a bigger VC buy me out? will the business cash flow justify my equity buyback? will the buy back kill the company? Can I get a bigger round of VC funding by myself even if the promoter is unable to? How much of a haircut am I willing to take?
- What return am I expecting in this business?
- What is the quality of people that this business is able to attract? and how long do they stay?
- The ‘favorite’ employees are favorites for what reasons? Probe them.
- What view do the vendors have? One finance company was rejected by a VC because one software vendor accidentally mentioned the client as a guy who had stolen the vendor’s idea (and was confirmed by one ex CTO).
- Strong barriers to entry?
- Intuitively, a product that can be sold to a lot of people and scaled up without too much risk?
- Is the technology subject to obsolesence?
- Exactly why the money is being raised, and how many new investors are coming in?
- Based on the valuation being offered, what is the value-price gap?
- Am I paying too much of a premium for growth?
- If the current top team were to be replaced how disruptive would it be?
- If previous rounds of funding have happened, have those people got good exits?
- Age/attitude / health of the promoter
will add more..!!
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