FROM THE TANK: HOW I PICK TECH COMPANIES

Written on the 17 June 2016 by Dr Glen Richards

FROM THE TANK: HOW I PICK TECH COMPANIES

JAMIE Pherous, the founder of Corporate Travel Management (market cap $1.4 billion) said it well at the Brisbane Business News breakfast last week: "Business is simple, don't overcomplicate. Learn the rules of the game and play hard". 

Business is a little like a game of rugby, where you pass the ball backwards and run forwards. It's a game where you always have to make sure income is greater than expenditure. What happens when I'm being pitched on Shark Tank, or outside the tank, by a technology company with negative earnings?

I've tried to move from gut instinct to a more calculated approach when deciding whether to invest. Holding a finger in the air and feeling for the breeze doesn't seem the smartest approach, but to be fair, there is still so much speculation and execution risk in valuing tech companies. The founders want minimal dilution in a valuation process and an investor wants as much bang for his buck during negotiations. This is all in the hope the company makes it through the 'valley of death' as expenses run aggressively ahead of revenue with corresponding difficulties to raise capital.

My approach in evaluating these speculative investments is influenced by McKinsey & Company. As an angel investor, I prefer to invest after the entrepreneur, friends and family have invested but before venture capital gets too interested. This is at the stage where there is proof of concept, product and business plan have been developed, financial forecasts have been made, and marketing has been sweated over. The business should be about to move from an exhausted boot strapped startup to an interesting 'scale up' business with potential, provided it manages to raise capital.

My initial framework includes asking a series of basic questions:

Understanding

  • Do I understand and like the idea, product or concept?
  • Does it resonate with me personally?
  • Do I like the industry that it relates to?

Team

  • Do I think the right team and founders are involved?
  • Are they capable of executing the business plan?
  • Is there in-house or highly responsive tech capabilities (fellow Shark Steve Baxter's favourite)?

Journey

  • Am I investing at the right phase in the company's journey (transitioning from boot strapped startup)?
  • Are we starting to see some traction by customers?
  • Is the product past the proof of concept phase?
  • Am I getting in at a sensible valuation? Will I have to keep kicking the tin for this company to survive before it thrives?

Following that, I review the company's five-year financial forecasts and see if they gel with my view of the future - be it from a pessimistic, probable or optimistic standpoint.

Customers

  • How many customers does the business currently have and what is the likely customer penetration rate five years from now?
  • What is the revenue per customer and operating margin per customer (and is the margin sustainable up against likely competition)?

Capital

  • What are the fixed costs versus variable costs versus income and how much more capital is needed before profitability emerges (i.e. Is revenue climbing faster than wages, rents, marketing and technology spends, and at what stage does it go from burning cash to printing cash?)
  • What size of the pie do I want and what return on my invested capital am I hoping for based on the forecasts out to five years? Discounted-cash-flow valuation is the preferred method by the guys at McKinsey.

...with all that said and done, and with plenty of time to review and speculate, I still think my large gut plays an exceptionally large part in my decision making. Or was that my wet index finger?

Dr Glen Richards joins resident Sharks Steve Baxter (internet pioneer), Janine Allis (Boost Juice), Andrew Banks (Talent2), and Naomi Simson (RedBalloon) for season two of the Network Ten series Shark Tank Australia on Wednesday and Thursday nights. Follow 'From the Tank' - Business News Australia's Think Tank - for Richards' views on everything from private equity to IPOs and those unbelievable Shark Tank pitches.

Read more about Jamie Pherous' simple business strategy, the inspiration behind this column.

More From the Tank:


Author: Dr Glen Richards
About: Dr Glen Richards is a veterinary surgeon and founder and former CEO of Greencross, Australia’s largest pet care company. Glen spent 10 years building a multi-million dollar integrated pet care empire, which now operates more than 130 veterinary hospitals in Australia, New Zealand and China. The company is also Australasia’s leading specialty pet care retailer, with more than 200 stores operating under the brand names Petbarn and City Farmers.
Connect via: Twitter LinkedIn

Latest News

AGENTS REPORTING STRONG DEMAND FOR MELBOURNE CBD OFFICE SPACE PURCHASES

SEVEN Melbourne CBD offices have recently sold for more than $11 million in total, demonstrating huge demand for c...

DREAMWORLD PARENT COMPANY DEMOTES CEO DEBORAH THOMAS

ARDENT LEISURE, the parent company of Gold Coast's Dreamworld theme park, has reshuffled its core leadership w...

MELBOURNE SHOPPING CENTRE SELLS FOR $48m AS CHINESE DEMAND RAMPS UP

A MELBOURNE shopping centre has been sold for $48 million, bringing the total spent by Chinese investors on Victor...

HOW WEDDING WOES INSPIRED A BOOMING BUSINESS FOR MEGAN ZIEMS

WHEN she was dress shopping for her wedding in 2010, Megan Ziems (pictured left) was disappointed to discover a ma...

Related News

FURNITURE DISRUPTOR SET TO SHARE HIS ONE OF A KIND BUSINESS MODEL

IT'S no secret that Australians love homemaking. Their ceaseless quest to create the perfect place to call hom...

WEEDING OUT THE ASX'S BURGEONING CANNABIS TREND: 8 COMPANIES TO WATCH

A NICHE is budding on the ASX in the form of medical cannabis, an industry which has been on the country's rad...

FRESH CLASS ACTION TO REVEAL ANOTHER SIDE OF SLATER AND GORDON DOWNFALL

ACA LAWYERS has issued a formal letter of demand to Andrew Grech (pictured), managing director of Slater and Gordo...

STARSHIPS WERE MEANT TO DELIVER DOMINO'S PIZZA

NICKI Minaj may have been off the mark when she declared 'starships were meant to fly'. However, she m...

EVENTS COMING UP

 

Contact us

Email News Update Sign Up Contact Details
Subscriptions

PO Box 2087
Brisbane QLD 4001

LoginTell a FriendSign Up to Newsletter