Whether you've invested in more than 100 companies or you're considering your first investment, it pays (literally) to learn from the greats. During an interview with David Campbell, managing director with Goldman Sachs, five pearls of wisdom rose to the top. It's a great refresher course for seasoned investors and a foundation for newbies. However, begin by asking yourself what you want to get out of investing.
For great investors, it's more than just a means of making money. There are two reasons the sharks on Shark Tank only pursue projects they're familiar with: 1) They're passionate about it (which makes it more enjoyable) and 2) Their experience and background in it means it's easier for them to make more money.
Ready to get started? Consider these five things one Goldman Sachs investor always looks for before investing:
1. Market for the product or service
Applause is a good example of a company with a large market opportunity. It provides 360-degree application quality for mobile and Web apps serving some of the largest names on the Internet. Given the recent shift to the apps economy, any business that is online needs to know that its app works for everybody, on every device, in every location. This is impossible to do yourself. Applause, however, has hundreds of thousands of professional testers worldwide who can test your app and provide immediate actionable feedback on functionality, usability, security, and performance. This is a huge market given the number of apps emerging on the Web and mobile platforms.
Conversely, it doesn't matter how mind-blowing an idea, project, or product is if the market isn't big enough.
2. A great management team
A smart investor always looks at the current team, learns its strengths, and fleshes out any weaknesses.
Spiceworks is a great example of a seasoned management team. The team members have worked together before to build successful technology companies, and bring a lot of experience to the table. They are passionate about the community they're building and serving their customers--but check their ego at the door and work hard every day to run the business, deliver value, and avoid mistakes.
Again, it doesn't matter how great an idea or project is without the right management. Of course, it's possible to restructure the business and sometimes (rarely), an investor will do this. Particularly as a company scales, it is important for a management team to scale the business is in place. Venture capital investors often help companies build out their management team. Growth investors are more likely to expect strong management to be in place.
An investor doesn't want to be a management consultant and won't force something that's just not working.
3. A defensive barrier
It doesn't matter if it's technology or market share. There needs to be an existing defensive barrier in place, or at least the potential for it, before a great investor will take the plunge. Investing, like business, is a game and there are best practices that can help you win. Both offensive and defensive opportunities need to be identified and capitalized upon.
4. Where the company is and how much of an investment it wants
In contrast to venture investment, a growth investor is usually looking to supply cash and support after a company has made its own profits. Growth investors rarely want to get in on the ground floor--a growth investor waits until the company has proven its business model. This doesn't mean it needs to be making millions, but regular cash flow is crucial.
Likewise, an investor is considering how much a business is asking for. Too much or too little, both are red flags. This is a way to gauge the realistic mindset of the founders and see if there are any signs the company is in danger of going under soon.
5. Growth opportunity
The potential market size is just one variable that can indicate growth opportunity. At Goldman Sachs, investors want to know how they can help a company achieve success. There's also such a thing as growing too quickly--overinvesting before the foundations of growth are established. It's all about pace, and how good a hold the company already has on it.
What has a company already proven successful with? Guerilla marketing, online reputation management, social media engagement? Investors consider all of that in the whole package, too.