Why Do We Choose to Invest in One Company Over Another?
Forecasting the success of a business is a speculative endeavor. As an investor, operator and financial strategist for over two decades, I can tell you that there are key lessons I have learned that allow a private capital firm to better mitigate investment risks and enhance returns. The secret is a continuous diligent inquiry and an ongoing partnership with the company.
Private capital firms do not consider their investments to be games of chance. They are strategic investments in companies that benefit from the experience and advice of the firm. After a thorough vetting, the firm de-risks its investment by offering strategic advice, engaging at an operational level and helping entrepreneurs take advantage of scalable opportunities.
In effect, the company chosen for investment is only chosen because the firm is confident it will add value in both capital and leadership support. Our firm complements the company’s operations by working ‘shoulder-to-shoulder’ with them. This usually increases its already strong chances of success. This part is intentional and not a guessing game. In actuality, when the right firm commits to invest, it leaves very little to chance.
When our team determines which companies are the right fit for us, we consider a variety of factors. Below I share the qualifying questions we consider before determining an investment. Although returns are never guaranteed, these inquiries bring us closer to achieving superior financial results in our investment portfolio.
What problem does this company address?
One of the first questions we consider is: What problem is the company solving and how is it disrupting the marketplace for the better? If it doesn’t solve an identifiable problem, there is likely not an addressable market at this time in plain vision.
If there is an addressable market, then that must be measured through established analyses focused on total addressable market (TAM), serviceable addressable market (SAM) and serviceable obtainable market (SOM). Broad markets with a large reach tend to be more lucrative than niche markets with a narrow target audience. Solving big problems for many people is the most surefire way to make money.
How mature is the company?
Those who invest early in start-ups have the most to gain when the company succeeds. However, they also have the most to risk because the company is oftentimes unproven at this stage. This is one reason we don’t invest in start-ups that are in the idea or testing phase. In our opinion, the risk will typically outweigh the reward.
Before we invest in a company, such company’s products, services and technology must be substantially finalized. Companies that are in the late stages of product development, typically have the most to gain from our firm’s experience. This is our sweet spot as we lend our expertise to help influence how a product goes to market. This creates a relationship with symmetrical benefits that reduces the risks for both parties.
Will our internal experience leverage the company’s potential?
Our relationship with a company is not purely capital oriented. It is also about the experience and expertise that we offer to make a big impact on the company’s success. This impact is realized through our partners and team members that offer both vertical market and horizontal functional insights to avoid missteps.
When we first met FreePower they were focused on bringing their innovative wireless charging products direct to consumers. We were impressed with the way the product could change the industry and helped the leadership team to look at its product and opportunities outside of a consumer-focused lens. We helped them identify the home building industry as a clear market fit. Then we leveraged our firm’s deep connections to broaden their reach into this space. FreePower is now changing how we charge our devices in our homes. This shift was game-changing for FreePower and will allow them to bring this technology to consumers where there is the greatest need.
Similarly, we were able to expand the market for FluidLogic, which previously focused on hydrating race car drivers and those participating in other motorsports where hydration is otherwise inaccessible. We recognized an opportunity for use of active hydration in the military and armed forces. One of our senior partners at our firm has extensive experience with the Department of Defense. She is leading FluidLogic’s effort to get its hydration technology into the hands of our armed forces.
Our firm’s distinctive connections and perspectives establish us as genuine partners with the companies we select for investment. We will not invest capital in a business where we do not offer value outside of dollars alone.
Is the founder and leadership team open to collaboration?
A company’s leadership team is a common advantage or barrier to investment from firms like ours. The leadership team must have chemistry, both with each other and the investment firm. They must be willing to collaborate and adapt in order to grow. We take non-control positions in companies, which makes the chemistry even more critical.
We work shoulder to shoulder with the founder and leadership team to help it thrive. No amount of due diligence in what is typically accomplished in 3-6 months can be done to really understand a company. Our approach of being involved, leading with human capital, and writing milestone-based checks, helps us collaborate with companies in a way that will take them to the next level. Companies that are unwilling to take advice or that are reluctant to receive outside input from experienced professionals are not good investments for us.
Determining the chemistry within a leadership team often takes time because businesses may present an initial facade of collaboration. We spend a lot of time and care ensuring that the company’s leadership team is willing to work closely with us.
What are the company’s lines of revenue?
Finally, our firm gives significant consideration to the company’s current lines of revenue and opportunities for new lines of revenue in the future. Early-stage companies must be nimble and able to seize opportunities to secure profitability, and sometimes unexpected, lines of revenue. We look at the company’s current and potential income streams, and this identifies opportunities for growth and a good investment.
As I discussed previously, no amount of initial due diligence can determine the long-term reality of a company. This is the reason we actively collaborate with the leadership executives within a company. We work closely together to build a team comprising both human capital and capital investment that fosters success.
At Solyco, the first investment in a company comes from us. Once we are confident that the company is a good investment, we use a Special Purpose Vehicle (SPV) to raise capital from our Limited Partners (LPs) to help the company scale quickly. This may not be a process that founders are used to from past fundraising experience. Some founders subscribe to a “get all the money now” approach which can mean significant ownership dilution for them. We believe in patience. We’ll write smaller milestone-based checks over time to preserve more equity for the founding team. We want our founders to think about their equity as currency. While it can take patience on the part of founders, in my experience this phased approach in deploying capital benefits everyone – our firm, LPs and founding teams in the long run.
I once had a Limited Partner say to me “I invest with Solyco so I don’t have to look at the ticker on TV to know how I am feeling about my investments on any given day”.
– Ajoy Sharma, Senior Partner
Some companies that we turn down will have great success, and it is possible that a chosen company will not perform to expectations. For our LPs who understand that alternative investments can be a strong piece of their investment portfolio, they choose to invest with us because they like our approach to capital deployment and high touch involvement with our portfolio companies.Share On LinkedIn More News & Views