Home > Articles > Software Development & Management > Agile

  • Print
  • + Share This
This chapter is from the book

Prepare a Written Summary Before You Begin to Invest

We firmly believe that every investor should prepare a written summary before formally investigating the situation. A summary of one or two pages can crystallize your thinking about why this is such a great investment opportunity. It will also put in a concrete form what you want to discuss with your friends, your banker, your accountant, and others. All of them can help you to determine whether it is a good investment opportunity. After reading this book, you should be able to prepare such a summary. This summary should be a response to the following questions:

What Are You Investing In?

Here you are trying to define the entity that you are investing in. For example, specify whether it is a partnership, a subchapter S company, a limited liability company, or a corporate entity. Also, it’s a good idea is to have the name, address, and telephone number of the business. It is also helpful to describe in ten words or less the type of company you are investing in. Describe the industry and describe its stage of development, such as a start-up. Try to pinpoint the kind of business you will be investing in. Often, this information does not appear in a conspicuous place on the proposal. Before you go any further, you should wade through the proposal to understand who and what you will be investing in. This information will also be handy in the future when you want to talk to the company’s people.

Who Is Your Contact at the Business?

Many proposals list a number of contact people in the firm, but as an investor you need to know who you will be dealing with directly during the due diligence process and during the monitoring after you have invested in the company. Usually, it is the president of the company, although sometimes the vice president of finance will be your contact. Find out immediately who this person is and make sure you have a clear channel for gathering information from this person. If your initial contact is a broker, you should ask the broker to introduce you to the person who is going to be your contact at the business. Don’t let all of the information filter through the broker. Get it from the “horse’s mouth.”

Summarize the Business Situation

Prepare a thumbnail sketch of the company’s situation. Emphasize the strong points that draw you toward this investment. You should be able to do this in one paragraph, perhaps two. But it should be brief, and it should crystallize in your mind the business situation that you are getting involved with. If you cannot do this in a few words, ask yourself whether you really know what you are investing in.

Who Is the Management Team?

Although management is the most important section in the entire analysis, you don’t need to cover entire backgrounds of the individuals involved in the investment you are considering. Do hit some of the highlights that make you want to invest, such as the entrepreneurs’ experience, past achievements, and “go-power.” Make sure you put down the names and the credentials of the top two or three people. You need to highlight in only two or three sentences what aspect of their backgrounds sets them apart from other management teams that you have seen and why their backgrounds are pertinent to this investment situation. Remember, you are investing in a team. If you don’t have a good team at the top, it will be hard to win.

What Are They Selling?

In a very brief paragraph, describe the product or service the company is selling. State why the product or service is unique, and if it is not unique, explain why this product or service will succeed over other products and services that are offered by the competitors. You need not discuss the competition in detail, but it is important to differentiate the company in summary form from others in the industry. More than a paragraph here would be too much.

How Much Money Are They Raising and How Much Are You Considering Investing?

Every business proposal tells you how much money its principals are looking for, but the amount should not be expressed in ranges. For example, the business proposal should not say $5 million to $10 million. The company should know how much money it needs to do the job and should state that figure. In addition, you will want to know the type of money that the business is raising. Is it selling common stock, preferred stock, convertible debentures, subordinated debentures, or junior loans with warrants? What structure and format will be used in raising this money? You should know exactly what the deal involves on all levels of the balance sheet.

Is There Any Security for Your Investment?

Every banker looks for collateral when making a loan to a company. Even though you are an investor, your investment can be in the form of debt with collateral security (sometimes referred to as second liens). You may take a second mortgage on the assets of the business or you might have outside collateral, such as a mortgage on the person’s house. Venture capital takes many forms, but whatever the form, your prime consideration should be how to lower your risk. Collateral is one way to lower your risk. However, most VCs who invest using stock, options, and warrants are the farthest down on the balance sheet and usually never see any type of collateral, which is why they demand such high returns.

How Will the Money Be Used?

The proposed use of proceeds is not always set out in great detail in the business plans. However, after investigating and discussing these plans with the entrepreneur, you should have a good idea of how he or she is going to spend the money. You should be able to state in one short paragraph where the money is going. You should not have to use such broad terms as working capital, but should be able to specify where the funds are to be used. A detailed explanation of sources and uses is essential.

What Is the Past Financial Performance?

In this section, you want to summarize the sales, earnings, assets, liabilities, and net worth of the company. In three or four columns, you should be able to sketch out where the company has been and what kinds of trends it is setting. You may be surprised by what you can learn by dredging through the business plan and placing these items in your summary.

What Are the Projections?

As a VC taking a long-range view of the situation, you should look at the five-year projections for the company. Even though the fifth year is highly speculative, it gives you a clear idea of how the company will grow and, in essence, how much money you stand to make if it meets the projected goals. Without a summary projection in the same format as the financial history, you will not be able to develop a basic understanding of the company.

A word from the wise: Always make your own projections and do it with your own model. We know how easy it is to use someone else’s model, but don’t. Building your own model will give you much deeper insights into the business than you can ever get from reviewing someone else’s model. You need to look at the business from your own perspective.

How Will You Cash Out?

As we mentioned before, no venture capital company wants to remain a stockholder in a company forever. Every VC must realize the capital gains on the fund’s investment in the business. Even though your horizon may be three to seven years, you must have a clear perception of how you are going to get out of the investment before you go into it. You should be able to state in three or four sentences how you plan to get out of this situation.

How Much Can You Make?

The expected profit is the final test of a promising business proposal. If you own a certain percentage of the company, what will it be worth when you cash it in? We like to set out in a tabular format the cash that we will be expected to be put into the company over the next seven years and the cash that we can expect to receive back. This format enables us to summarize clearly the cash in and cash out. There are probably a thousand ways to determine this, but we use a calculator that gives us internal rate of return. If a company can’t show a strong internal rate of return and the situation entails all of the typical risks of a venture capital investment, it doesn’t deserve any more of your time.

What Do You Like About This Situation?

List in point form three to five reasons for making the investment. What is it that you like about the situation and is compelling you to invest? If you can’t express it now, you probably will never be able to do so.

What Do You Dislike About This Situation?

No investment opportunity is perfect. Every one of them seems to have some “warts.” You should be able to explain those dislikes in three or four lines. You should know exactly what you don’t like about the situation. If it goes bad, you will know what to avoid in the future.

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020