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The Capital Minute, Issue #001 -- What is Value?
December 17, 2003
brought to you every Wednesday by Mike Elia
Financial & Marketing Consultant, Author
"Business Plan Secrets Revealed!”
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Vol. 1 Issue #1
“The market will only reward you for the value you create.”
But what is value. . . social, personal, spiritual. . .?
The truth is the market rewards those companies that can generate more money than the cost of the money they use to start, expand, or operate their businesses.
Notice I said money, not accounting earnings. As we all know all too well now, cash and profits are not created equal. In business. . . cash is king--always was and always will be.
No matter if you’re seeking a bank loan, venture capital or angel funding, your investors are entrusting you with their funds, and in return they expect to get their money back plus some.
But not all investors expect the same return on their money. A banker might be happy to get his money back plus a percentage that’s higher than his cost to borrow those same funds. On the other hand, a venture capitalist or angel investor usually invests in a business before it has an established market position or any customers at all. As a result, they take on an extra amount of risk, and therefore expect not only to get their money back, but to make 5 to 10 times their investment over a 3 to 5 year period.
Here are what statements like this and other more common ones can mean to you in terms of a rate of return:
3 times in 3 years = 44% return
To calculate a specific return, use this formula:
Take how much the investor wants to make on his or her money (x times) and raise it to the power of 1 divided by the number of years and then subtract 1.
Let’s determine the rate of return for an investor that wants to make 3 times his investment in 3 years.
First, take 3 and raise it to 1 divided by 3 (or .33333) and you get 1.44225 now subtract 1 and you’ll get .44225 or a rate of return of 44%.[. 4]
Now the next time an investor says she wants 5 times her investment in 7 years you’ll know that means she's looking for a 25.8% return on her investment from you.
Did you know you can sign-up for the F R E E Business Plan Secrets Revealed! Four-Part Mini-course and get tips on how to:
- build a case for your business that leads investors to conclude that you are the obvious investment choice
- write a business plan that captures investors’ attention
- find funding sources.
You'll get Part 1 immediately after you register and the remaining three parts over the next three-day period.
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