Importance of valuation in the venture capital equation

January 26, 2010

Valuation raises its head as a subject after an investor has determined that the business is worth looking at. It is not the first thing that an investor will look at. In fact, considering the number of business plans that don’t get read past the executive summary, it is something which business owners spend far too long dwelling over.

Having said that, once a plan is actually being considered, it becomes an important factor.

There are two sides to the valuation.

For a business owner, it controls the “cost” of the funding that they are seeking ie how much they need to give up (in equity) in order to get money into the business.

For an investor, it controls what they get for their money.

An investor buys into a company (and its potential) so that it can earn some money and then get that money out again. The mechanism is generally an exchange of funds for a percentage of the ownership of the company. This means a calculation must be made about what the company is worth, and what the business owner is prepared to give up to get the funds.

In addition to the valuation question it’s a complex negotiation that has many factors involved:

The valuation of the company, and the method used for this
- How much the owner is willing to give up and how much the investor wants
- How much the investor needs these particular funds
(if cash is low, and there are no other sources, the investor will probably negotiate a better deal)
- How the deal is structured – debt or equity, a mix, or debt that converts to equity.
- What else the investor is putting into the deal – expertise, contacts etc (“Smart money” is better than just money)

A valuation that is too high, and by implication represents a higher cost of entry to an investor, means someone might walk away from a deal. A valuation that is too low means the owner is underpaid for their asset.

At the heart of this are two opposing forces. Generally the owner will want to give up as little as possible, and the investor will want to take as much as possible. With all other things being equal, and hoping that the owner isn’t out of cash (which means the investor will pretty much get whatever he wants!) then the valuation provides a mechanism for structuring a deal.

There are many methods for valuation. Some are explained here.

None of these is completely accurate, and in fact they may give wildly different valuations.

At the end of the day, the business owner has to decide if what he gives up is worth the cost (in equity). So, often the right question is not to look at what you have now, but to look at the potential you can have with this investor on board (with the benefit of the funds, plus the advice).

A few years ago there was a great show on Seven called Dragon’s Den which had budding entrepreuners pitching their ideas to four succesful Australian business people. The question that was often asked, and was foundational to the negotiation was “would you rather have a smaller slice of a big pie, or a big slice of a small pie?”. Venture Capital in prime time was great viewing, and there were some instant lessons on how to pitch and negotiate.

This remains as the question to you as well… what are you willing to give up to get to where you want to be?

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Comic relief: How NOT to pitch your idea

January 26, 2010

Ali G pitches to various investors including Donald Trump with his ground breaking ice cream glove. I love his ‘Zen Diagram’ showing his market- “people who has hands”, and of course his indepth “Intranet search”.

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Options To Venture Capital

January 23, 2010

Venture Capital is a specific term that refers to funding obtained from a venture capitalist. These are professional serial investors and may be individuals or part of a firm. Often venture capitalists have a niche based on business type and or size and or stage of growth. They are likely to see a lot of proposals in front of them (sometimes hundreds a month), be interested in a few, and invest in even fewer. Around 1-3% of all deals put to a venture capitalist get funded. So, with the numbers that low, you need to be clearly impressive.

Growth is usually associated with access to, and conservation of cash while maximising profitable business. People often see venture capital as the magic bullet to fix everything, but it isn’t. Owners need to have a huge desire to grow and a willingness to give up some ownership or control. For many, not wanting to lose control will make them a poor fit for venture capital. (If you work this out early on you might save a lot of headaches).

Remember, it’s not just about the money. From the perspective of a business owner, there is money and smart money. Smart money means it comes with expertise, advice and often contacts and new sales opportunities. This helps the owner, and the investors grow the business.

Venture Capital is just one way to fund a business and in fact it is one of the least common, yet most often discussed. It may or may not be the right option for you (a discussion with a corporate advisor might help you decide what is the right path for you).

Here’s a few other options to consider.

Your Own Money – many business are funded from the owner’s own savings, or from money drawn from equity in property. This is often the simplest money to access. Often an investor would like to see some of the owner’s fund in the company (”skin in the game”) before they’d consider investing.

Private Equity – Private Equity and Venture Capital are almost the same, but with a slightly different flavour. Venture Capital tends to be the term used for an early stage company and Private Equity for a later stage funding for further growth. There are specialists in each area and you’ll find different companies with their own criteria.

FF & F – Family, Friends and Fools – Those closer to the business and often not sophisticated investors. This type of money can come with more emotional baggage and interference (as opposed to help) from its providers, but may be the fastest way to access smaller amounts of capital. Often multiple investors will make up the overall amount needed.

Angel Investors – The main business angels vary from venture capitalists in their motives and level of involvement. Often angels are more involved in the business, providing ongoing mentorship and advice based on experience in a particular industry. For that reason, matching angels and owners is critical. There are substantial easily locatable networks of angels. Pitching to them is no less demanding than to a venture capitalist as they still review hundreds of proposals and accept only a handful. Often the demands around exit strategies are different for an angel and they are satisfied with a slightly longer term investment (say 5-7 years compared to 3-4 for a venture capitalist).

Bootstrapping – growing organically through reinvesting profits. No external capital injected.

Banks – banks will lend money, but are more concerned about your assets than your business. Expect to personally guarantee everything.

Leases – this may be a way to fund particular purchases that allow for expansion. They will normally be leases over assets, and secured by those assets. Often it is possible to lease specialist equipment that a bank would not lend on.

Merger / Acquisition Strategy – you may seek to acquire or be acquired. Generally even a merger has a stronger and a weaker partner. Combining the resources of two or more companies can be a path to growth – and when it is done with a company in the same business, can make a lot of sense – on paper at least. Many mergers suffer from differences in culture and unforeseen resentments that can kill the benefits.

Inventory Financing – specialist lenders will lend money against inventory you own. This may be more expensive than a bank, but might allow you to access funds you could not have otherwise.

Accounts Receivable Financing / Factoring – again a specialist area of lending that may allow you to tap into a source of funds you didn’t know you had.

IPO – this is normally a strategy after some initial capital raising and having proven a business is viable through the development of a track record. In Australia there are various ways to “list”. They are useful for raising larger amounts of money ($50m and up) as the costs can be quite high ($1m plus).

MBO (Management Buy Out) – This tends to be a later stage strategy, rather than a startup funding strategy. In essence debt is raised to buy out the owners and investors. It is often a strategy to gain back control from outside investors, or when investors seek to divest themselves from the business.

One of the most important things to remember across all these strategies is that they all require a significant amount of work in order to make them work – from the way the business is structured, to dealings with staff, suppliers and customers – need to be examined and groomed so that they make the company attractive as an investment proposition. This process of grooming and derisking can take anywhere from three months to a year. It is often costly both in actual expenses (consultants, legal advice, accounting advice) as well as changing the focus of the owners from “sticking to the knitting” and making money within the business to a focus on how the business presents itself.

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De-risking – getting ready for investment

January 23, 2010

Make Your Business More Attractive to Venture Capital Investors By Derisking

Derisking is the process of removing risk factors from your business in order to make it more attractive to an outside investor or to an outside buyer. It is one of the most important factors in the grooming process in order to be an attractive company to invest in i.e. “Investor Ready”.

There are dozens of areas and hundreds of ways in which a business may be exposed without knowing it. In the normal course of business an owner may not worry about these factors, as they are within the “comfort zone” of operation. For an external party to get involved however, they need a much more transparent organisation so they are not confronted at a later date with skeletons in the closet.

It is important because businesses already face uncertainty. And while a venture capital investor may have a reasonable tolerance for risk, they will not welcome unnecessary risk. The goal is to control as many areas of risk as possible, so at least the risks are known. Most companies who have had an internal focus (i.e. have focused on sales, marketing and operations in order to grow) have not thought about all the areas in which they are vulnerable.

The process of derisking limits the areas of exposure, and therefore decreases exposure to uncertainty. It also increases the chance of success through improvements in clarity in almost all areas of the business.

Derisking falls into two areas – one is simply clarification (i.e. creating a contract where an informal arrangement was in place) and the other a change of substance i.e. changing a supplier because it lowers risks.

Some examples include:

  • Formalising employee agreements. This may mean creating contracts for employees that have previously operated without one, or strengthening existing contracts. Particular issues would be with protection of IP, ownership of IP, confidentiality and restraint of trade after employees leave.
  • Creating / clarifying written agreements with suppliers
  • Creating/ clarifying agreements with customers
  • Moving “ad hoc” sales to contracted revenue where possible
  • Formalising and documenting internal processes
  • Protection of IP – patents, designs, copyright and so on.
  • Protection of data by limiting and monitoring access to key systems (CRM, accounts etc)
  • Key employee insurance (including of the owners) in the event of death.
  • Creating or clarifying credit terms and policies. Getting credit offered back within trading terms, and ensuring that all credit offered is documented with the correct application forms and personal guarantees.
  • Removing reliance on key personnel, in particular vulnerability to information or relationships which may be lost on their departure. This may mean adding additional points of contact to key client accounts so individual relationships are less critical.
  • Documenting key processes – getting the knowledge out of people’s heads
  • Ensuring insurances of assets are up to date, and sufficient.
  • Lowering legal exposure (liability). Ensuring insurances are held that cover product liabilities and so on.
  • Ensuring compliance with all ATO and ASIC regulations. Creating systems for their ongoing compliance.

As you can see, this is a lengthy, but not even remotely exhaustive list. The due diligence process will highlight those areas which need further work. This might cost several thousand dollars, and lead on to significantly more expense than that. In some cases the process may take a year, and cost hundreds of thousands of dollars.

One of the important things to remember in raising capital is to build in the cost of raising the capital.

This falls into two main areas:

  • Actual costs – such as hiring consultants – legal, accounting, corporate advisors, strategists etc
  • Opportunity cost and change in focus. The process of raising capital for business can take anywhere from three months to a year (or more) of attention from key owners and managers of the business. During this time, it can be difficult to maintain a normal focus on things which are essential for survival – sales, marketing and operations for example. This cost can be significant, while at the same time be difficult to measure. In fact, this defocusing may have a major impact for any growing company that is pursuing two goals – new business, and business funding (or preparing for a sale of the business).

The need to derisk is apparent if you place yourself in the shoes of a buyer contemplating a purchase of (or investment in) your company. Without going through the derisking process, your company could contain any one of a dozen hidden time bombs (key staff who could leave and set up in competition, unsettled legal issues, poor data security etc). By transparently documenting how you have examined, reduced or been able to totally eliminate risks in your business then you are showing a buyer that you understand their concerns.

The flip side of the coin is that your company is now a far more attractive proposition to purchase or invest in. You will have invested a significant amount of money and time in the derisking process, but the result will be a company that is now sellable (all other things being equal) compared to a mystery. This means first of all that you may achieve a sale when previously none would have taken place, and secondly that you are likely to achieve a far higher sale price than before.

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“Small Business” and other confusing terms

January 17, 2010

You hear the terms ‘Small Business’ and ‘SME’ (small and medium size enterprise) all the time. In some contexts they refer to very small business – a husband and wife team, or a sole business operator. Others would refer to these businesses as micro-businesses. There’s significant differences between what people think they are, and what investors label these companies. If there is confusion, it is compounded by the fact that everyone wants to look bigger than they are, so a business that has grown to a few million dollars in revenue will feel compelled to begin calling itself a medium size business.

There’s also international variations in these terms. In Australia “small business” seems to mean owner operated companies up to thirty or fifty staff. Beyond that, they start to call themselves a medium size company. In the US by contrast, anything less than about $100m in turnover is considered small, and our Australian version of small would be considered “microbusiness” or a cottage industry. The factors seem to be related to size and ownership, but are non definitive.

By way of example, in “Small Giants” by Bo Burlingham http://www.smallgiantsbook.com/ there is a “small” brewing company used as an example which has a turnover of a few hundred million dollars. This is probably small compared to the brewing giants, but it is still a significant company. (In this context it was labelled small because of its structure and because it was still run by its founder).

There are similar confusions over what businesses call themselves at various stages of development. For example… “Startup” for some implies a concept of a company – similar to the companies that popped up overnight in the dotcom boom with almost no plans, just a domain name and a few people with a desire to sell petfood over the internet. For others, “startup” might mean a five year old company that has a reasonable trading history, but has a new strategy that requires funding to get new momentum.

Investment terms are also used somewhat freely, and without a lot of accuracy – private equity, venture capital, angel investment. Sometimes these terms are clear cut and sometimes a deal might come together that is somewhere in the middle. What one person calls venture capital finance another will call private equity. Even investments vary. Even within a given investment, the cash might be contributed as equity or as debt. Or it might start out as debt but be converted to equity. The overarching terms of venture capital and private equity fit all these scenarios.

The lesson from all this is: definitions are less important than actual business plans and people, and actual dollars. What IS important is how you convey your opportunity to a prospective investor with clarity on your market, the opportunity you have, what you want from them, and what they get out of it. The actual terms used are less important than the deal itself.

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Sources of Finance

January 16, 2010

Download or open this Guide to SME Business Finance which is a Commonwealth report on sources of funds (2004). Despite the age of the report it is a highly valuable comparison of options.

Contents

Introduction

1. Options for Financing Business Growth
2. The Business of Finance
3. Financial Information Requirements
4. Business Planning
5. Accountants
6. Government Assistance
7. Other Australian Government Information Resources
8. State and Territory Programs – Websites

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Get Anything You Want – selling investors on your business

January 16, 2010

Zig Ziglar said “You can get anything you want, as long as you help enough other people get what they want.”

Of course he was talking about sales. Which makes it perfect for you. (In case you forgot you were in sales!)

Everything you do is a sale, and selling your business idea is no different. Forget about what you want from the transaction, and focus on what an investor wants. Your business plan needs to answer what is on their mind. Namely – Is this a high growth opportunity? How risky is it? Where are you now? What is the exit strategy? What has to happen to get there?

There is a writer’s trick which is worth keeping in mind. The trick is to look back and read what you have written, and ask “So What?” . If your copy doesn’t answer the “So What?” question, then it has failed.

Use this when you are writing your business plan, and put everything through a filter – how does this section or piece of information answer the questions in the investor’s head, or support my case that this is the right opportunity for them.

Figure our how you can help the VC get what they want, and have a much better chance of getting what you want.

Consider this… there are funds available to invest. Your job as a business owner is to make it clear that you are worth investing in.

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Understanding Private Equity and Venture Capital

January 15, 2010

Some Great Definitions

This is a useful overview of some main points, as provided by VentureCapitalSA

Can private equity help my business?
If you are aiming to start up, expand, turnaround, buy into or buy out a business, private equity funding could help you. Private equity investors are seeking unlisted businesses with potential for growth who are willing to trade a share in the company for investment. Private equity funding is provided to businesses in all sectors including food, technology, retail and manufacturing.

Do I need a private equity partner?
For private businesses, finding the money required to achieve significant growth can be the biggest factor prohibiting expansion. If you are willing to trade a share of your business to an experienced private equity investor, you stand to benefit from not only the injection of money but also the experience and skills of your new partner. Private equity investors aim to increase the profitability of their investment companies by providing a stable base for strategic decision making, not by taking day to day control. Think of it this way: you may have a smaller percentage ownership, however in a few years, that percentage should be worth more than the whole of your business was before. However, if you are not willing to release a share in your business, private equity investment is not suitable for you.

Expansion
The company is now established and requires capital for further growth and expansion. The company may or may not have made a profit at this stage. This may be a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan.

How does private equity work?
Private equity investors receive an agreed share of the company in return for the risk of investing. The investor is a business partner, sharing the risks and successes of the company. Funding through private equity is very different than receiving a bank loan. Repayments for bank loans must be made according to a contract, regardless of the success or failure of your business. Private equity investors hold a stake in your company and their return on their investment is dependent upon your business growth. Many private equity investors provide management expertise and experience, contacts and discipline. The investor has to be very careful about their investment because of the high risk in a company failing. They therefore have to check that the information provided is correct (due diligence) and they seek returns that are very high. In general, private equity investors are interested in companies which have the potential to significantly increase turnover within 2-5 years.

How does the investor realise their return?
The investor will want an eventual exit, there are a few ways they can exit the business and it is important to have an exit strategy agreed as early as possible. Ways for an investor to leave a company and realise the return on their investment include: 1. Sell the shares back to you for a profit 2. Sells shares to another investor 3. Sell when the whole company is bought by a larger company 4. Help list the company on the stock exchange

IPO (Initial Public Offering)
The sale or distribution of company shares to the public for the first time (i.e. listing on the Stock Exchange).

Management Buy-in (MBI)
These are funds provided to enable a manager or group of managers from outside the company to buy in to the company.

Management Buy-out (MBO)
These are funds provided to enable current operating management and investors to acquire an existing product or business from a public or private company.

Pre-listing (or pre-IPO)
Investment into a company where it plans to list on the Stock Exchange, usually within a period of a few months to two years.

Pre-seed / R&D
Refers to funds used to expand the concept and advance product development, usually during the research and development phase of the business.

Seed
Provided to companies which have not yet fully established commercial operations, and may also involve continued research and product development.

Start-up
The company is in the process of being set up or may have been in business for a short time. Such firms have not yet sold their product commercially and have no track record. Investee companies have completed the product development stage and require funds to initiate commercial manufacturing and sales.

What do investors look for in a company?
In order to gain private equity investment a company must be able to demonstrate: – A product or service with a unique selling point – A business plan showing growth prospects and the ambition of the company – An effective management team with relevant experience Efficient financial management – A planned strategy for offering a share in the company in return for investment

What is a Business Angel?
“Angel” investors tend to be wealthy individuals who may look to invest in a high-growth company that has synergy with their own business or competes in a market where they have succeeded. “Angel” investors generally invest in small businesses in deals considered too small for private equity firms. Typical “angel” investments are around $10,000 to $1 million. As “angel” investors generally invest in companies within their own expertise, the investor may seek a hands-on role in the management of the company or will look to act as the company’s mentor.

What is a private equity firm?
Private equity firms are fund managers who invest capital on behalf of institutional clients such as superannuation funds and insurance companies. They are exposed to the risk of the company failing and as a result, look to invest in companies which have the ability to grow very successfully and give higher than average returns to compensate for the risk. When private equity firms invest in a business they become part owners and generally require a seat on the company’s board of directors. They usually do not take day to day control.

What is private equity?
Private equity is finance provided in exchange for an equity stake in a company. Private equity is provided on a medium to long term basis and provides a capital base for future growth. Investors can provide strategic operational and financial advice based on experience with other companies in similar situations.

What is the difference between Private Equity Firms and Angel Investors?
Private equity firms are professional investors who dedicate all of their time to investing and building innovative companies. The angel investor is an individual who invests in companies for their own interest. Typically angel investors invest less than $1 million in any particular company, whereas private equity firms usually invest more than $1million per company. Angel investors are usually successful business people who have spare cash that they see achieving comparatively little in their bank accounts. The value of angel investors is that they often back and finance small businesses. Angel investors expect a return on their money of at least 30% and want equity as a security for risk. Angel investors generally invest in companies within their own expertise; the investor may seek a hands-on role in the management of the company or will look to act as the company’s mentor.

What is venture capital?
The term Venture Capital refers particularly to the private equity investments made at the very early stage of a business in order for the business to grow and develop. The terms Private Equity and Venture Capital are often used interchangeably.

What rate of return do Private Equity Firms expect?
Private equity firms tend to favour high growth companies that are likely to provide them with a high rate of return. The rate of return sought will vary with the risk: seed and start-up deals are considered very high risk and the minimum rates of return sought over the life of the investment will generally be around 30-40 percent per annum and above. As the perceived risk diminishes with the early expansion stage, expansion stage and management buyout and buy in deals, the minimum annualised rates of return may reduce to the 20-30 percent range. Investors generally look to exit the investment after three to seven years. The private equity firm only realises a return on their investment if the company goes public (IPO) or is merged or purchased by another company. In some cases the investment will be sold to another private equity firm.

Where do Private Equity Firms get their funds?
Most private equity firms raise their funds from institutional investors such as pension funds, insurance companies, endowments, foundations and high net worth individuals.

Who provides private equity?
Private equity is provided by private equity firms and by business angels

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Financial Modelling – Tips To Getting It Right

January 11, 2010

A sound financial model and projection is one of the core ingredients of a business plan.

Here are some thoughts on how to do it right.

1. Keep it real. Don’t overstate sales projections. It is a common enough mistake to make because human nature says we want to put the best case forward. The solution is to have various scenarios, assign some probabilities, and tell an investor honestly what needs to happen to reach these targets.

2. State assumptions clearly in the projection, so the investor knows what it is based on (fact, opinion or fiction).

3. Make it easy to adjust and show the consequences – what if sales are lower, what if churn is higher, what if our costs decrease, what if our main customer leaves? Investors are a (justifiably) cynical bunch, so you need to be able to lay out a best case and a worst case scenario.

4. Show the impact of growth on cash flow. As sales increase, what is the increased need for further capital. This will show an investor not only how much they’ll need to put in, but when.

5. Acknowledge knowledge gaps. If you don’t know something, that is OK. Explain the gap in the knowledge and either how you’ll get the knowledge, or its likely impact if you don’t. If you claim to know everything, it’ll be clear you are not being honest.

6. Focus on readability – it’s easy to get wrapped up in the complexity of your own spreadsheet and end up with a wall of numbers which is incomprehensible. KISS (Keep It Simple Stupid). Use clear labels, colour code, space, and remove less material variations (put them elsewhere). Separate inputs and variables from calculations – so the user can see what they can adjust.

7. Get in a pro. You may be surprised by what you can achieve in Excel. For a small investment (a few hundred to a few thousand dollars) you can may build something which becomes a key factor in winning over an investor. Remember the quality of the brief to the programmer may have a major impact to the success… don’t assume they know anything about your industry. Explain everything.

8. GIGO (Garbage In Garbage Out). Get good input figures.

Scotia Macleod provides financial modelling services as part of its corporate advisory role.

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What’s Driving The Growth?

January 11, 2010

There’s apparently only about seven movie themes, and every movie is a mash up of these, with a few variations thrown in. There’s the underdog coming out on top (any Rocky movie), impending doom and the lessons it teaches us about ourselves (Titanic or any disaster movie), love lost, revenge, love won… In fact, there is a point at which if a movie doesn’t fit one of these classic themes, it will either 1. Flop incredibly, 2. Be a major success and create a new genre. (Hint: there’s more flops than genre creation going on).

It’s not unlike cooking… there’s only so many ingredients. What matters is how you put them together.

One of the implications of this is that originality is overrated. You are far better taking a slightly worn business idea and apply it to a new product, then try and come up with something truly unique.

Business is the same. There are a limited number of paths to follow to grow.

Here is a list of “drivers” that can change a business or an industry. Where does your idea fit?

Reconstruction of the value chain and distribution model: This usually happens when a step is dropped from a distribution channel . Examples: a store (Bunnings) becomes an importer and avoids middlemen creating unbeatable value (extreme case – some brands are manufacturers and retailers ie Ikea): Technology makes manufacturers or services more accessible such as publishing (self publishing is easy, and avoids having to be “chosen” by a publisher, as well as putting a higher percentage of profista nd control in the hands of the writer): Virtually anything sold on the internet: Remote delivery of services (guru.com). A decade ago, just getting bigger –and creating a superstore was a paradigm shift – now it takes more to be unique. How does your business jump over a previously imperfect delivery system?

Changes in sales strategy or payment terms: Some companies exist because they have taken an idea from one industry, given it a slight twist, and applied it to a new industry. Rentsmart and its competitors are an example of this. Going back 40 years, everyone paid cash for purchases. Credit enabled access to machinery for production or recreation (cars and boats for example…) that would have been otherwise out of reach. The simplicity of the financial products drives the sales process. Taking this concept and applying it to what was normally a smaller business purchase anyway (desktop computers at $1000-3000) and converting this to a weekly $10-30 ongoing payment makes the products so much easier to buy.. therefore making money for the financiers as well as the product suppliers.

Creating economies of scale: Many industries are populated with small inefficient firms. An example would be the printing industry where the investment in machinery is significant compared to the size of the business. Competitive advantage can be created by combining many inefficient companies. Fixed costs as a proportion of sales go down, and this way be sufficient to create a new advantage of lower costs – continuing with the print example, there are several large companies in Australia which have acquired dozens of smaller firms, and as a result of the combined strengths of these plus new practices (such as running three separate shifts per day on the same machinery) can drive down costs of production.

Changes in technology: Improvements and inventions cause change… wireless technologies, biotech, mobile phones. You have a new thing. This is a clear reason for creating a new business. This category refers to revolutionary change.

Evolutionary change: Moore’s Law states that in some areas (speed of computer chips for example) speed will double every eighteen months. Where this law applies, there will always be room for new players and new applications. Costs are driven down as well as potential lifted. How can an existing range of products use these benefits?

Imperfect information: A business can be driven by finding deals and maximising their value. Examples include licensing, mining and exploration, art, private equity, antiques. In other words, what makes insider trading illegal can be a good thing in other industries. Your business might be built on one such deal and then the company is there to exploit it (buying rights to a technology because you believe it will become a new standard) or it might be an ongoing source of knowledge (such as a property developer whose advantage comes from researching and buying land that is expected to be rezoned, and thus take advantage in changes in value).

Accessing undervalued assets and resources: This might be in the form of turning around another company and breathing life into it. A customer base may be neglected. New management, new strategy, new ideas and new marketing might make this type of turnaround a viable proposition.

Changes in regulation: This can create or wipe out industries overnight. Consider the implications of changes in security to the airline industry, and the supporting services which then became necessary. Consider the boost to the home insulation industry when the government decided to subsidise installation worth up to $1600 per household. Hundreds of companies were created overnight to take advantage of this free money. Consider also the vulnerability of these companies to further changes… when the subsidy was dropped to $1200 per household half of these companies closed. Similar artificial (but profitable) niches exist in dozens of areas – including energy (solar hot water). Deregulation can also provide a pathway for companies to enter an industry, as has happened in airlines, telecoms and TV. It is believed that financial services changes will also create and destroy various companies in the years to come – changes are afoot (end 2009) that will change the way funds deal wih and renumerate fund managers which will have a major impact in financial services. This will mean both creation of new services and companies, and perhaps the demise of others.

As a business owner, one of the ways you need to sell yourself to an investor is as an agent of change. To do this credibly, you need to put forward a case about what you are doing it, why, and what the driver for the change is. If your business is merely hoping to grab a share of an existing market, and not really make a difference, it is unlikely to really excite an investor. This is not to say that the business won’t work, just that it may not be revolutionary enough to get funded.

Investors are generally looking for something which is a catalyst, and to be there when the change is clear, but has not yet occurred, and sometimes to be part of the energy which creates this change. Every investor (individual or firm) is different and will have varying criteria, but most will want a massive upside potential.

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