The attractiveness of an investment (What can I achieve by investing in this company?) comprises five areas: impact investment, leverage of financing, financing need in the future, added value portfolio for other companies and exit potential.
”The four most dangerous words in investing are: ’this time it’s different.'”
– Sir John Templeton
Impact investment is a key decision-making criterion for a surprisingly large number of investors in an investment situation. Even though a company might be excellent otherwise but does not, for example, help the community, make the world more ecological or increase well-being, an investment deal might not necessarily be made. There is a simple explanation for the above, which has already been pointed out previously: business angels are primarily motivated by factors other than money.
Leverage of financing means a situation where the entrepreneurial team has already prepared other forms of funding, in which case the equity provided by an investor constitutes only part of the total funding required. –
Follow-on financing need/capital intensity raises a number of questions for investors. The first question concerns resources: the stage at which it is necessary to commit key persons to the process of seeking a new round of financing. Another question is the holding of an investor in potential dilution: the amount by which a holding changes. The third question concerns the terms brought by new investors: the terms under which the next investment will be obtained. The further a company gets with the funding being sought and the lower the needs for follow-on financing, the better and more attractive the investment is in the eyes of a business angel.
For some investors, the added value portfolio for other companies is even a prerequisite. It is easier to keep up with development and manage a group of companies whose activities support each other, rather than rush off in every direction. In an optimum situation, the new investment can purchase products or services from other portfolio companies or vice versa. It is therefore good to know the investor’s background.
For the investor, the exit potential is the alpha and omega of all activities. It is only when exiting a company that investors receive their reward (or liquidate losses) for the risks borne by them. If an investment target does not have an exit potential on the horizon (also for the next investor), an investment will not be made. Occasionally, so-called cash machine investments are made whose sole purpose is to generate a steady cash flow for the investor, without exit goals.