What are your main considerations when evaluating an investment opportunity? What does an investor look for in terms of return? Despite the particularities, such as preference for certain sectors, strategies or even financial metrics as position size, risk and return, every investor has a ultimate purpose that guides their allocation decisions.
Of course, the goal is to maximize return with the lowest possible risk, but to reach this goal our analysis needs to be based on solid parameters, we must ask ourselves the right questions to ensure that the investment is aligned with our purpose.
Investing in an established company, pondering only its size and market position, no longer guarantees the permanence of the business or the return of investment in a rapidly changing environment. The company’s ability to innovate is increasingly important, whether in its products or services, business model, its use of technology or even its ability to aggregate people.
One movement already evident is the search of companies established by new businesses, disruptive, to use a word in vogue but that represents the moment quite well. The companies constituted in the previous century, under the old paradigm, are concerned with the continuity of their business, and rightly so. We are going through a transition period in an accelerated pace, we have not yet reached the new definitive model, but we know that we can not continue to do the same, expecting an extraordinary return, something new or disruptive.
Not every return can be easily measured in financial terms. Companies that are technology- intensive and adopt new business models, such as startups, are a good example. The IPO of Uber, to cite a more recent case, showed that the company has been burning a lot of cash to be able to remain a protagonist in the market.
A fundamental question to ask when analyzing an investment is whether the company in which we are considering investing is becomes very successful (with exponential growth). Is the business big enough in terms of potential, is it relevant? Are the products, services and/or business model authentic in order to benefit the customers, generating a great impact in the market? The vision, purpose and commitment of the entrepreneur are one of the most important differentials that can make the business a great success and deliver a truly superior return to all stakeholders.
What use can we make of our capital, beyond the ultimate goal of only generating more capital, if not to build a vision and generate positive impact? Do you have a focus on competing or dominating the market? Market domination, in a good sense, requires more than mere differentials, requires an authentic point of view, with a well-defined purpose, and can not be easily replicated by competitors, such as the Blue Ocean Strategy. These are the real reasons that make contemporary investment analysis challenging.