We have talked about the use of the ‘P’ words as an aide-memoire to ensuring that a proposed investment has the right ingredients.
The main P words that we are using are People, Proposition, Profit, Potential and Plan. After some considerable deliberation I have decided to prioritise them in this order. Let’s look at why and also add some meat to the bones of each of these points.
Certainly you could debate my ordering considerably. You could say, for example, that without the right Proposition, the right idea, nothing else matters. You could also say, especially in the light of Google, Facebook and Twitter, that Potential is more important than Profit. However I think that lots of people would agree with me that Profit is, generally speaking, more important than Potential.
I have put People at the top because I believe, and indeed I have seen, that People can make an average Proposition really work and that People can also really kill a good Proposition. In that sense People are more important than the Proposition. I think that it is also the case that a lot of business’s are similar to one another but the thing that differentiates one similar business model to another is the People that are running it. In addition, almost all Propositions will be challenged really hard during their business lifetime and it is the People that will recognise the challenge and fine tune it, rise above it, side step it, go around it or simply change the original business model in order to succeed. This seems to me to be almost inevitable – that the original business Proposition will have to be changed in the light of experience to succeed.
If People are the most important aspect of the company that you are proposing to invest in then what are we looking for in those People? We don’t know how many People we are talking about here, or what roles they hold. If you are talking about a number of People then it is great to see them working as a team, each with their own skills, but working together. It is also important that there is a leader. Ideally we would like to see experience. Experience of starting and growing a start-up or early stage company.
In no particular order we are looking for a number of characteristics in these People. These will include – passion, persistence, determination, professionalism, present-ability, believability, likeability, honesty, loyalty and innovativeness.
The Proposition will be our second most important P. Some people would say that the Proposition is the most important P but I have explained why it is not for me. The Proposition must be logical, understandable, researched, focussed and it must generally scream ‘I have to buy one of those’ or ‘I can see exactly why someone would have to buy one of those’. In my experience the original Proposition rarely stands the test of time fully intact. It is almost always not quite true in the light of experience.
If the People and the Proposition look good then we come to the debate about Profit and Potential. We must also consider whether we are talking about Gross Profit (Transaction Profit) or Net Profit (Trading Profit). Profit before all overheads are considered or profit after all overheads are considered.
What we know from, for example, the dotcom experience, is that companies that have relatively small transactional revenues and profits become hugely valuable when huge transaction numbers come into play. In other words if they are scalable and replicable globally then small amounts of revenue and profit turn into massive overall revenues and then profits because of the huge numbers involved. (Microsoft, Amazon, and eBay might be examples of this.)
Profitability (It costs me this, I sell it for that and make a profit of whatever) is clearly important but it might not lead to the company being as valuable as when it had huge Potential.
It is also one thing to be asking yourself whether you will achieve a highly valuable company by going for a low profit, high revenue model versus a high profit, low revenue model but entirely another to be asking whether you should go a virtually no profit ( or negative profit ), global transaction model! Google, Facebook and Twitter being examples of these. The founders of Google could easily see how they could get millions of transactions, well users anyway, but not so easily how those millions of transactions would turn into revenues and profits.
Our assessment of Potential will include considering whether it is applicable globally and whether it is scalable and replicable.
The final thing that we will look for is a Plan. A financial plan (sales, costs, profits/losses,cashflow) and a business plan (how is it all going to happen). This will be clear, simple, achievable, at least on paper and concise. I put the Plan at the bottom because, inevitably, it will change!