Evaluating Investment Opportunities

As Romeo’s Pizza and Pizzafire have been accelerating in growth we have had the opportunity to structure alternative investments for a number of individuals. The appetite of the investment can be drilled down to 3 points.  The answer to these three points are a necessity when considering the investment.

1. Evaluating the Leadership Team

“Leadership is the capacity to translate vision into reality.” – Warren Bennis

Does the Leadership team have the capacity to pull this off? The only way to evaluate the leadership team is to ask them questions.

Questions to consider:

  • Who are the founders and key team members?
  • What relevant experience does the team have?
  • What key additions to the team are needed?
  • Why is the team uniquely capable to execute the company’s business plan?
  • What motivates the founders?

 

2. Evaluating the Product or Service

“The more alike two products are, the more important their differences become.” Regis McKenna

Will there be a demand for this product or service today and in the future?

Questions to consider:

  • Why do customers care about your product or service?
  • What are the major milestones thus far?
  • What are the key differentiated features of your product or service?
  • What have you learned from early versions of the product or service?
  • Provide an explanation of the product or service.
  • What are the two or three key features you plan to add?
  • How will the company market its product or service?

 

 3. Risk and Reward

“If you risk nothing, then you risk everything.” — Geena Davis

Does the risk of the proposed investment match the reward?

Questions to consider:

  • What are the company’s three-year projections?
  • What are the key assumptions underlying your projections?
  • How much equity and debt has the company raised; what is the capitalization structure?
  • What future equity or debt financing will be necessary?
  • How much of a stock option pool is being set aside for employees?
  • What are your unit economics?
  • What are the factors that limit faster growth?
  • What are the key metrics that the management team focuses on?
  • How much is being raised in this round?
  • Will existing investors participate in the round?
  • What is the planned use of proceeds from this round?
  • What milestones will the financing get you to?
  • What is the likely exit – IPO or M&A?
  • When do you see the exit happening?
  • Who will be the likely acquirers?
  • How will valuation of an exit be determined given market comparable?
  • What structure is the payback for investors?

Investing in a company can be a tremendously exciting time for both the investor and growing business. The prospective investor needs to keep a few factors in mind when considering the investment. Can the leadership team pull this off? Will this product or service be demanded today and in the future? Does the risk equal the reward?

Happy investing!

Here are some great links on investing:

http://www.investmentnews.com/article/20140527/BLOG09/140529947/4-considerations-when-evaluating-alts

http://www.forbes.com/sites/allbusiness/2013/06/10/65-questions-venture-capitalists-will-ask-startups/

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Ryan Rao is a Principal of Apex Franchise Development Group and is a franchise development expert who has grown multiple franchise based businesses into national and international brands. Franchising has allowed him to help individuals realize their dreams of business ownership, while permitting them to experience the independence, flexibility, and freedom that comes with being a business owner. He also serves as a franchise consultant, and is a personal growth advocate.

Follow or Connect with Ryan on LinkedIn at https://www.linkedin.com/in/ryan-rao/