Question

1. Position yourself as a potential investor in an early stage IT company. Clearly articulate and explain three (3) key considerations that would need to be sufficiently addressed / resolved prior to closing an investment. Explain why these items are so important.

Answer 1

1. Best use of your money

Making the best use of your money is the golden rule to remain financially stable. It becomes important to determine whether investment is the most appropriate use of your money. For instance, you may assume that you have money available for investment, when in reality you may have a huge outstanding credit card bill to pay. If the interest payable on your outstanding credit card amount is higher than the return received on your investment, you are bound to suffer a financial loss. In such a situation, it is wise to repay your debt on priority basis and consider investing later

2. Financial position

A company’s balance sheet strength is paramount to its long-term survival, unless it happens to be fortunate enough to have a dual-class share structure and a direct line to the government for subsidies. A good management team will know how and when to use debt and equity and maintain a proper balance between the two.

3. Profitability and margin outlook

Depending on where a company is in its life cycle, it will attract different kinds of investors. Management’s ability to navigate that life cycle, even as the investor base changes, is a key determinant of a company’s level of success. For those that have already become highly profitable, the question becomes whether the model is sustainable or not and how long the profitability can be passed along to shareholders in the form of continual dividend hikes.