February 17, 2011
When you think of an investor you will more than likely imagine an ROI Investor. Not that each is going to be your typical Wall Street wolf, but their concern is going to be based around how much they will get back on their investment. That is the fundamental of an ROI Investor, it’s even in the name, Return on Investment.
However, knowing where your focus is and understanding why your focus is there are two completely different things and we’re willing to put our stake in the ground and say that understanding is more important by far. Knowing that “if I’m an ROI Investor I focus on my returns” is not enough, there needs to be an understanding of why you are focused there and what drives that attention.
To do this you need to determine the number one characteristic associated with different types of investors. Each type will exhibit similar tendencies and characteristics but each will showcase one far stronger than others. For you, as the ROI Investor the characteristic that will present itself most strongly will be your tactical nature.
The focus for you is on the structures in place that produce the numbers. As this type of investor your interest is peaked when you see documentation about sales and project (or actual) revenue, the expected margins, financial forecasts, models and exit plans. Not only do you want to know what your upside is going to be, but it’s imperative for you to know the numbers so you can limit your downside.
For many it comes down to the science of understanding numbers. The cause behind the startup, the management team or the ideas play secondary roles, if any when consideration is being given to an investment. It invariably comes down to what the numbers tell you for the investment’s financial viability and what can you plan to get as a return.
If you are an ROI Investor this is typically what you focus on:
1: The CFO – You want to know who they are, what their strategies are what their successes and failures in the past. Your concern is the money; your focus is on the Chief Financial Officer.
2: Worst Case Proformas – Your concern is the money, so you’ll want to see the expectations these startups have for current and future performance. Above that, you want to see what their worst case scenarios are.
3: Liquidation Value – There’s a reason you want to see the worst case proformas, you want to know what will happen if you have to get out or when you get out.
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