How to Pitch a Risky Investment
One of our clients is considering a major strategic investment that could help the company become a major player in an adjacent product market. The move would leverage the company’s current customer relationships and customer service infrastructure, but it’s still a risky investment given that the company would be entering a product category where it has little experience.
We built a robust pro-forma model for what this new business could look like—and were subsequently peppered with questions from the management team:
• What penetration rate are you assuming of our current customer base?
• What market share do we have to achieve to break even?
• How many new customer sales reps do we need to hire to service this business?
• What happens to the business model if these assumptions are wrong ?
We expected these types of questions, because we’ve found that no matter how much research you do and how robust your Excel model is, executives always get nervous about making a major business investment. The CEO and major shareholders are naturally concerned about their capital. Other executives are concerned about their jobs.
The best way to work through these questions is to use them as a starting point for discussion, not as a hard and fast proposal. Getting the team to consider a series of strategic alternatives for entering the market will help them think a little more creatively about how to minimize the risk.
For instance, what do the numbers look like if we:
• Invest with a partner to share the risk?
• Take a slower approach to the investment?
• Try a lower-cost model?
• Or, for comparison sake, what if we go all-in with a more aggressive timeline?
As the management team throws out the options on either end of the scale, you may often end up where you started with the initial analysis. But that’s not the point. The process will help the team get their arms around the real differences in upside and downside risk (and opportunity) with a major investment. A better understanding will increase their comfort level with the path they ultimately take.
The end result is a clear conviction and action plan, rather than inaction and delay. And that’s often the difference between a successful investment and one that destroys value.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.