No company can grow at the same rate indefinitely but rather goes through a growth cycle. There are 4 main stages:
Start-Up or Development Stage - the market for the co's goods may be small and growth small. There may be little or no profits due to major development costs.
Rapid Growth - co's products attracts a growing market. Sales growth is rapid.
Mature Growth - the company may now have more direct competitors. Sales growth is still above normal but slowing.
Market Maturity - the co is a cornerstone of the industry. Its progress will now likely be dictated by the direction of the industry. Competition and capital expenditure is high.
We look for early-stage companies we think will grow strongly over a long period of time. We select those who we believe the fundamental outlook for the company is such that it will continue to increase its market share.
There is a great deal of difference between a 'great company' and a 'great investment'. Identifying a great company is looking for 'growth', looking for a great investment is akin to searching for ‘value’. We try and combine growth and value - the ideal opportunity in which to invest is one which 'is a value investment with a growth catalyst'. That is, an early-stage company with a story/idea/potential to enable it to improve its balance sheet year on year.
We focus on companies that have the potential to deliver return on investment because there is real purpose behind the opportunity. We like to build strong relationships with the people we do business with. Believing in a management team is a big part of financing any business or project.
As well as talented people, we also like specific sectors, especially those where we have had personal experience and success. We focus on sectors and industries where positive change can deliver maximum returns, technology, healthcare, real estate and renewable energy.
When looking to see whether a company is worth investing in, what is important for us as early stage investors?
People - people make a company. What have they done in the past, how much experience do they have in this particular sector? Are they well known within the industry, enough to win significant business for the company? How much more likely is an investor to invest in a company run by a famous business person?
Assets - a strong balance sheet is a wonderful thing. The preferred asset is cash - it can also be land or another type of asset. What if a technology company owned 20,000 acres an hours’ drive from NASA headquarters? Notwithstanding its usual operations, the overall value of the company can be given a considerable boost. We find that the sum of the parts is often worth more than the whole.
Technology - how is it using technology? Maybe it is a tech company on the cutting edge of research. Many investors are concerned with the tech efficiency of the company - especially when investing in traditional nuts and bolts companies where the biggest expense is often the replacement of defunct machinery.
Strategy - what does the company want to do and is it feasible? Is it ambitious and if so how is it allocating its resources to achieve its objectives? Is the strategy such that it would attract other investors and enable it to form successful partnerships with other companies?
Competition - is it in a strongly competitive industry? If so what advantages does it have over it's competitors? Why buy a particular company vs it's competitors? Is the company's idea unique or easily imitated? What safeguards has it put in place to ensure that this does not happen?
Cyclical - how will fare in bad or leaner times? For example if it sells ice creams how well will it fare during a particularly cold summer? If it's an oil company, will it survive if oil drops substantially in price?
These are amongst the factors it is necessary to look into to gauge the true 'fundamental' value of a company. If we find that the value of the company will increase after looking at these and other factors, we would deem the company to be 'investable'. We recommend then that these companies offer 'good value' for the price and that sooner or later the company will be more realistically valued, enabling us to make a profit. Early-stage companies by and large are difficult to value due to their lack of trading history and publicly available information. We therefore have to look not at the past of the company and what it has or has not done but instead at its future and what it is hoping to achieve.