Blog
Think like an analyst 1
If You Sold Your Business:
Would You Re-Invest In The Same Business Segment?
'You must be joking.'
Image generated by Microsoft co-pilot/bing image creator/MS Design/Dalle-3 ai, based on MH/Stragenda prompt.
Your company in itself is an investment/a realisable amount of capital
As CEO, you are allocating capital – are you doing that effectively?
Have you unwittingly painted yourself into a corner?
Question.
If you sold your company at a fair valuation and had to start another venture, how would you re-invest the proceeds?
Where would you get the best return?
Would you re-invest in the same business segment? If not, why are you allocating capital to that segment at the moment?
In simple terms, you sold the business because the amount paid met or exceeded how much you thought the business was worth. So, rationally you would not re-invest in your own business at the price you sold it for.
But what about the thinking beyond that?
Would you invest in the same business segment? If not, why not, and are you currently over-allocating capital to that segment?
Would you invest in the same industry, but in a different segment? Are you doing that now - if not, why not ... ?
[Of course, there can be a logical reason for investing in declining businesses, if the return you lose from not investing in the existing business exceeds the return you can get from elsewhere].
This simple question should throw light on all the decisions you are currently making in your business: how you are 'allocating capital'/resource, from the top-down decision to practical implementation. One simple example that I come across often, is throwing more salespeople at a stubbornly static revenue line and ignoring the underlying structural/strategic problem (because it's easier to do so):
Is recruiting a new salesperson focused on your existing business segment really going to generate a positive net return?
Maybe you should re-allocate some existing employees to exploring and effecting new opportunities?
Of course, as the CEO, you may get emotionally attached to your own strategy (we are all human nobody like getting things wrong), or simply be so busy dealing with constant issues, that you get stuck in a corner.
Asking yourself the big, simple questions, as per above, is not time-consuming but can bring factors that will make a big difference to your business into sharp focus.
Practice makes perfect - work with us to learn to learn how to assess your business like an equity analyst, and to understand investor requirements. We have been in thousands of investor meetings, and on thousands of investor calls - learn from the professionals.
Think like an analyst 2
Page Headings Are Not The End Of The Thought Process
Market Share As An Example
'Cracked it'. Image generated by Microsoft ai based on MH/Stragenda prompt.
There are numerous examples of what should be in a fund-raising pack;
Unfortunately, I see many presentation packs that list such investor requirements as page headings, but then don't actually address the issues raised by the respective page titles in a logical manner, and just pay lip-service to the requirement encapsulated in the heading.
There may be a valid reason for this - in that you don't really know why you set the business up in the first place and haven't a clue what it's for and where it's going ('it seemed like a good idea at the time'), but if you have a genuine idea, demonstrate that you have thought things through:
Where IS the thought process, where is the reasoning?
As an analyst, what would I think if you don't demonstrate this:
If you can't think through things properly at the point of making a presentation to investors, when you know you are being closely observed, what will be your thought process when you are on your own, making daily decisions within the business?
The classic example of using a heading and then not thinking about it logically, even though the logic in this case is implicitly set out within the terminology itself, is market size. Absolutely key for an investor, but so easy to appear ridiculously over-optimistic.
Headings of TAM (Total Addressable Market), SAM (Serviceable Addressable Market) and SOM (Serviceable Obtainable Market) have an implicit pointer - it is saying: hone in on/filter down to the market you can realistically address; don't ludicrously over-estimate your market opportunity (aside: and certainly not as regards early traction/adoption).
So, talk to that implicit message; take it on board. Don't put the heading and the acronyms up and then fly in the face of what they are telling you to do. Think about it.
Think like an analyst/put yourself in the investor's position - explain why you think the market is of this order, explain why you think you can address a certain sub-segment of it; estimates by, quotes from, and the opinions of, 'experts' help, but what do you think - what are your estimates - show the investor that you are an expert in your own industry, and a clear and logical thinker; sensible approximations based around what the investor is asking .
In doing this you are reassuring the investor not just about the scale of the opportunity, but also about your own skills. You are absolutely critical to their investment decision: can you be trusted, can you execute; a decent idea AND execution are both NECESSARY conditions for success.
Aside - Pet Hate
The average investor in start-ups will have seen numerous companies saying something like 'all we have to do is take a 1% market share within 3 years and we will generate £5m of revenues ...'.
Most times the SOM will be significantly over-estimated, and in most instances 1% is a huge share anyway, let alone within so short a space of time.
If you seriously think that such a position is attainable, at least recognise upfront that you understand that it looks a big ask, otherwise there will be doubts about your sanity.
Practice makes perfect - work with us to learn to learn how to assess your business like an equity analyst, and to understand investor requirements. We have been in thousands of investor meetings, and on thousands of investor calls - learn from the professionals.
Think like an analyst 3
You have a solution to a problem - but why will anybody buy that solution?
'Sorry, where is the market for this?'.
Image generated by Microsoft co-pilot/bing image creator/MS Design/Dalle-3 ai, based on MH/Stragenda prompt.
You show me a problem, and that you have a solution, or you show me a much better way of doing something, and you do so sufficiently well that I believe your analysis.
That does not mean I believe it will be adopted by the market.
Assuming you execute effectively wrt production and marketing etc., there are many reasons why your product may not gain traction.
Before you over-allocate capital, or go to investors, have you done your homework wrt the real-world barriers to adoption. Are the demand parameters really what you think they are/is the impulse to buy really there?
A few examples
Is the problem you are addressing sufficiently big for potential customers to switch away from existing, established solutions?
If your solution is much cheaper, is it such a significant component of your potential customers' costs for them to switch away from existing, established, solutions? In highly competitive industries, with low margins, and industries with multiple inputs, shaving small amounts from costs can actually make a significant difference; in a less competitive environment it won't.
How critical to their business is the product/service service you are displacing - is it safer to stay with the incumbent: how can a company trust you if they don't know you, you haven't been in existence for long (you might disappear quickly), and most of all how can they trust that your product will do what you say it does, and for as long as you say it will?
Sheer convenience/inertia/laziness can be a substantial barrier. People are people, and if you are several steps away from the centre, having first to get past technical 'experts'/gatekeepers/'doctor's receptionists' in a department of a bureaucratic company, where 'we have always done it this way' is the mantra, what can you do? (Of course, this is one area where an experienced/known investor can actually help, via possibly being able to facilitate access to management).
Think like an analyst 4
Don't Bury Bad Stuff
'I think we need a bit more sand.'
Image generated by Microsoft co-pilot/bing image creator/MS Design/Dalle-3 ai, based on MH/Stragenda prompt.
If there was one thing I learnt very quickly as an equity analyst, it was that burying bad news is not sensible.
An analyst will not thank you for causing them to say something positive on first sight of a results announcement that proves wrong when they, or someone else (disaster), spots a buried negative later in the statement.
In my experience, the best approach is to bring negative issues up front, and address them: show that you recognise them and that you have a plan to deal with them.
If an investor belatedly asks a question that reveals such a negative, you will look as if you were hiding it, undermining trust/reducing valuation.
And as for a major negative having to be forensically clawed out in fund-raising DD ... let's not go there.
Regardless of anything else, it is a matter of trust, which is absolutely critical in investment, as it is a key component of risk. Valuation, of course, is a function of growth and risk.
In spite of all this, companies do still try to spin bad news, bury it after less relevant content; and, of course, an adjacent problem, certain companies also develop a reputation for being over-optimistic and underdelivering.
All I can say is, don't do either - don't bury bad news, don't be over-optimistic wrt forecasts/prospects: possibly easier said than done but, to put it in investment terms, the discounted sum of the future hassle and under-valuation you get significantly outweighs taking an upfront hit.
Think like an analyst 5
Duality And Reverse Discounting
Rapid Sanity Test
There is another way of looking at it
Bottom-up modelling is very time-consuming, and can lead to ludicrous outputs if one is not very careful.
In assessing valuations/investments, especially if one is inundated with proposals/options, looking at the mix of INPUTS required to attain a certain valuation cab be a very quick way of determining feasibility.
For those in the (unfortunate!) position of micro-modelling/tumbling into a whirlpool of spreadsheets, it also provides a rapid sanity test.
For those with an economics background, turning things on their head will be a familiar concept. In microeconomics, in maximising profits, duality is used: maximising revenues vs. a given cost constraint, or minimising costs vs. a given revenue constraint.
A similar approach can be used in valuation, especially given that bottom-up modelling can come up with ludicrous numbers. More than twenty years ago, when I was a media analyst, we used to produce a monthly review of the sector. In the individual company sections we used to ask what combination of growth rates and discount rate etc. would be needed to justify the current valuation of the shares. Of course, this became somewhat fantastical in the TMT bubble.
The concept of 'reverse discounting' has gained a lot of traction since then, and is a very simple and quick way of common sense testing your projections.
Helping you to get simple tools such as this embedded in your skillset is something that is at the core of what we do. We don't get bogged down in crazy models that conceal what is really going on, but help you to clearly see what is going on, to identify the critical factors in your strategy. With us to guide you, you will apply these tools often simply by using a bit of mental arithmetic, on the hoof.
Think like an analyst 6
The Beauty Of Approximation
The Need To Understand The Order Of Things
Thinking On Your Feet
It was this big
The ability to approximate is a great skill, and extremely easy to acquire, but it does require 'letting-go' of the supports you are used to, and changing your mindset.
It is especially useful in valuation, as it is a way of increasing productivity (by keeping it simple), and creating clarity (by not getting caught up in the minutiae).
I've found over the years that even those with a strong maths/science background can tie themselves in knots by over-complicating issues, and especially can find themselves in difficulties in meetings due to their constant need for faux accuracy and convoluted 'models' ('Scientism').
The Order Of Things - early-stage, by way of example
When you are looking at the size of an opportunity at an early stage, you really should not be looking at whether that opportunity might be worth £52m or £58m in, for example, 10 years time, not least of all because it is ludicrous to think one can forecast to that degree of accuracy.
The starting point is whether you believe that it is more likely to be worth single millions, tens of millions, hundreds of millions ... and then maybe iterate from there. What is the approximate order of things?
In a meeting, being able to approximate this will free you up to think quickly and clearly, and not get side-tracked by unnecessary/faux accuracy.
Practice makes perfect - work with us to learn to learn how to assess your business like an equity analyst, and to understand investor requirements. I and my associates have been in thousands of investor meetings, and on thousands of investor calls - learn from the professionals.
Think like an analyst 7
Use The Experience Of Investors - Listen To Them
'What do they know, they've never had a real job in their lives ...'
Their objective should be your objective
Company management can often be dismissive of shareholder opinions. I have heard many, many comments over time along the lines of 'what do they know, they've never had a real job in their lives', 'they've never run a company ...' with the usual hasty caveat of: 'erm, of course we don't mean you, ... '.
In reality, experienced investors, and analysts, will have seen far, far more problems/critical strategic situations at companies than the average businessperson, and witnessed how those problems have been dealt with, simply because they hold or follow/research so many companies over the years.
So, don't dismiss that experience: listen to what they are saying. It is a significant resource.
Shareholders Can Provide Objectivity
As an executive, it is very easy to lose objectivity and, since your direct employees likely will be deferential, even if they superficially appear not to be, critical independent input might be in short-supply.
When you ask staff for their opinions, their motivations might well be a million miles away from those of investors, and especially so if you have furnished your opinion to them first.
A good investor will by their very nation be objective in wishing to maximise returns. Unlike some/most of your staff, their objective is not to please you (in order to get salary increases, promotion, bonuses ...), but to maximise investment returns.
Serious, practical, ramifications - an early-stage example
By way of example, a time-served investor will know by experience (via their holdings) that if you have an opportunity with a large client, while it undoubtedly should be viewed as an exciting opportunity, one should also be wary of over-commitment/over-enthusiasm, and will want to temper that. Many large clients are very bureaucratic, siloed, stuck in their ways, can take a very long time to take a decision, and often will look at things just because they have the resource to do so/to confirm their scepticism/to gain knowledge, not because they are crazily excited by your proposition. If you don't appreciate this, or you downplay it because of your enthusiasm, you can make very bad decisions wrt to the level of investment/spend, and find yourself with serious cashflow problems.
So, for those with existing investment, when considering your strategy, pull on your investors' experience; make sure that you talk through significant decisions with them. All analysts and investors will have been in a number of positions where they know it is highly probable that a company is about to make a bad decision, but the company hasn't listened, with inevitable consequences further down the line.
Art vs. Science
The Necessity Of Value Judgments - There Is No Magic Formula
'Eye of newt and toe of bunny, show me how to make some money.'
I am sure that all investment professionals have come across those who expect there to be some magic formula for making laser-sharp/ highly accurate valuations, profit forecasts, or investment decisions.
Indeed, I have seen the odd recruit from a pure science background who just cannot understand that there are no definite answers to many investment questions.
This is a big problem, because decisions have to be made. Problems don't just go away. In the simple context of an equity analyst reacting to a company announcement, fund managers want to know what to do with the shares, even if it is nothing.
For a company making a strategic decision, capital has to be allocated; where should it be allocated? Things are going wrong - what should be done? Most times there is not one, simple, scientific, answer. A value judgment has to be made.
Inputs into forecast calculations are subjective and even a process of logical approximation and iteration can only hope to give a broad feel (a tautologous statement if ever there was one).
I say this not to denigrate analysis - as I have said before, approximation and gaining a sense of order are extremely useful skills that should, in my opinion, enable able practitioners to, on average, outperform their less able competitors. I state it, in this piece, in the context of companies taking investment decisions:
If you have a fear of making a necessary decision, join the club - that is eminently sensible; but if a decision has to be made, one has to make value judgements. Sitting on one's hands and doing nothing, unless that is a logical decision ythat hjas been taken, rather than a cop-out, is not an option with a great chance of continual success.