INSUBCONTINENT EXCLUSIVE:
Blair Silverberg
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Blair Silverberg is co-Founder and CEO of
Capital, a financial services company using technology to accelerate the fundraising process
Prior to founding Capital, Blair was a principal investor at Draper Fisher Jurvetson where he sourced and managed venture investments during
his four-year residency.
I&ve always told companies that investors have a much easier job than they do
To be good at their jobs, investors have to know how to do math and make decisions
As a business owner, you have to do both while also running your business.
The math piece can seem cumbersome, but it vital for
understanding whether your company is creating or destroying value
A few simple metrics can demonstrate to investors the health and viability of your company, and they can show you which levers to pull that
will best optimize your company for investor interest (and secure a higher price)
But before you can ever hope to communicate your business& value to an investor, you must understand it yourself.
The numbers are simple; it
the calculations that are complex
Investment math itself is not complicated
In essence, it just about understanding whether your company is creating or destroying value by asking:
Whereis your company investing
itsfinancial resources?Most growing companies invest heavily in sales and marketing or research and development.
What is the return on this
investment?For example, how much gross profit (revenue x gross margin percentage) does a given sales and marketing investment produce?
How
does that number compare to your cost of capital?If it higher, your company is creating value
If it lower, you&re destroying it.
Investors use this information to determine if their return would be higher than their expectation (e.g.,
15% hurdle rate), should you continue down your current path of creating or destroying value
Then, they make their decision based on that calculation.
A caveat I&ll add here is that it not necessarily a deal-breaker if your company
Oil rigs, after all, are considered investment assets, even though they are perpetually declining and will eventually run out (i.e., destroy
Although this article focuses on calculations that demonstrate value creation, all investment assets can be financed at the right price.
A
deep dive into calculating value
One of the best metrics you can use to demonstrate value creation is your cohort-level return on investment
It a calculation most investors are familiar with, but it may not be as straightforward to companies who don&t see it as often
Again, while the metrics and concepts of investment math are simple, it the process of getting there that requires complex analysis.
Whether
you are evaluating these metrics yourself or bringing in outside counsel to assist you, use the process below to show investors you are
creating value.
Determine which information to analyze
The first step in calculating value is to understand which information from your
income and cash flow statements to analyze as &investments.&
Start by dividing your capital allocation into three main buckets: short-term
investments, long-term investments and expenses
In general, short-term investments will be the ones you want to focus on, but it helpful to walk through each.
Short-term investments (pay
