Friday, December 17, 2010

Business Investment Checklist

Before offering business finance to a business plan, any investors will hopefully go through a rigorous testing process where the entrepreneur's business plan will be analysed, the financial forecasts scrutinised and the marketing research pondered upon. Whether an online business or regular, similar processes will be in place. You are putting your money into someone elses idea with the intention of bot contributing the business and also ultimately getting a healthy return. So what are you looking for from an investment point of view? Here are a a few issues that I hope you will consider before choosing whether or not to back the business in question.

In the spirit of transparency, please see my list below and let me know if you think I am missing any core issues.

The Basics
Can I understand the business?
what is the product?
what is the value?
who is the buyer and why would they buy?
can the buyer quantify the value? If so, what unit?

The Market
Is the market attractive?
Growth rates?
Is there a fundamental disruption that is the basis for the opportunity and limits the incubments' competitive response?

Market --> SaaS, Open Source
Product --> core innovation
Is the product delivered in a buyer appropriate way?
open source for infrastructure
SaaS for a business app buyer
REST/SOAP/JavaScript for a web service

Is the core value tied to a technical innovation?
ex. HWVP's portfolio company examples = Baynote's collective intelligence algorithms and Move Networks' streaming protocols

Requirements and Obstacles
Are their frictions in....?
time and resources required to test the value proposition?
time and resources required to deploy?
time and risk to realize value?
Is there a good market comparable for both the business model and the exit multiple?
What unit scales the revenue model?
page views, sales heads, downloads, sessions?
Is the architecture scalable and does it leverage the best available infrastructure - EC2, S3, Rackspace, etc?

Are there exogenous dependencies?
carrier or MSO deals?
RFID deployments, etc?
Is there a market master?
WMT or MSFT or Dell....

The Entrepreneur
Who is the incumbent? How will they react?
Who are the other new companies in the space?
Is the team able and honest?
Prior track record of working together?
Is the CEO special?
What is his/her motivation, passion, strength?
Where do they need help and complement?

The Investment
Are the round size and pre-money reasonable?
Is the model reasonable (profit margins, growth, burn)?
Is the plan capital efficient?
how much money for 18 months?
margin of safety?
are their clear milestones in the plan that will allow for an objective assessment of value creation - ie a new investor

Opportunity and Possibility
Can this be a home run?
What are the core risks?
why will the company fail? is their a plan in place to mitigate such risks?
What are the KPIs - ie leading indicators to measure and track the company's progress?
Is the cap table clean and the paid-in capital reasonable?
Is the progress to date commensurate with the money in?
Has the money in to date been productive?

While I am sure there are risk and questions not raised above, the goal is to systematically measure a prospect against a consistent analytical framework that, hopefully, ensures smooth take-offs, flights, and landings.

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