Investment Decision Making for Dummies?

We talk to companies and their investors almost every day about the difficult decisions surrounding whether or not to raise/invest additional capital given the current economic climate.  Most of them have come to understand that growing a company organically today  – without investing additional capital - is like trying to grow flowers in the shade.  It’s time-consuming and frustrating, and you end up with more weeds than anything else.  But spending money is no guarantee of success, and additional capital continues to be difficult to come by.     

Early in my career, I had a job as a corporate weenie reviewing significant capital expenditure requests for a giant company.  We prioritized and pushed along the best ones for senior management approval, and rejected the others.  My boss at the time loved to say that each of these requests should have such a compelling business case and be so well documented that a monkey could make the correct decision.  (… today, I imagine him sitting at a desk somewhere with his pet chimp struggling to write a book called “Investment Decision-Making for Dummies” … priceless). 

I suspected then, and I know now - business investment decisions are never easy.

It is critical to understand that no matter how desperate the business needs it;  no matter how compelling the business case is; and no matter how many market studies and projection spreadsheets are created for justification;  there is always one wild card in each of these decisions – competing uses for that same capital.

Every investor has alternative uses for capital.  Friends and family investors have bills to pay or other investments like college tuitions and retirement accounts.  Angel Investors are bombarded with lots of great ideas (and they have those same personal investment decisions, as well).  Venture Capital investors are looking for the newest ideas with “home run” potential.  Private Equity investors are collecting management fees and hiding from limited partners in their offices (just kidding … sorta).  Large “strategic investors”  – like a business’s competition or suppliers - have the internal struggles between investing in the current business, or looking outside for growth.  Even companies that are generating enough cash to reinvest in the business have difficult decisions to make about the best use of that capital. 

Despite what my former boss told me, it’s not easy to make these decisions, and sometimes projects and companies with a great business plan and complete analysis and documentation don’t get the capital they need.   Ultimately, making capital allocation choices is a balance of strategic thinking and risk assessment and I believe it usually separates great managers and investors from the average ones.

Our advice to those seeking capital is to do the homework, and understand the risks in the business.  It’s almost always about finding the right match – someone who thinks your project is the best use of their scarce capital at that point in time.  Use the advice and criticism you get to improve the plan, and don’t take rejection personally.  Keep networking and talking to everyone that will listen, and if you believe in your plan – don’t give up.