Any man (or lady) who can take a relatively boring subject like corporate finance and make it sound interesting deserves respect.
One such man is Bill Ferriss (pictured left), Co-Chairman and Co-Founder of CHAMP Private Equity and author of Inside Private Equity.
Inside Private Equity is a ripping read for anyone working in the PE industry, or anyone working in business for that matter.
Bill is Harvard MBA graduate and is arguably the founder of Australia’s venture capital industry having founded the country’s first venture capital company in 1970.
Bill later teamed up with close friend Joseph Skrzynski to form Australian Mezzanine Investments Pty Ltd (AMIL) in 1987.
AMIL achieved outstanding success during the 1990s with investments in Datacraft, Austal Ships, LookSmart, Fingerscan, Seek and many others.
Bill has been the chairman of the successor company to AMIL, CHAMP Private Equity since 2000.
He has stepped backed from the day-to-day to management of billions of dollars of investors’ money at CHAMP but his hard-learned lessons in the roller-coaster world of private equity investment are still just as relevant in today's business world.
You could write a novel on the lessons learned by Bill over his extensive career but today I wanted to share a clever 3 Step Process that Bill used to assess the merits of any business or venture prior to investing.
These criteria could apply equally to any business or venture seeking equity funding from investors. The three components that he typically focused on were:
1. Core Proposition
What is the core proposition of the deal?
Bill would always ask why he could expect to make exceptional returns from an investment. To answer this he looked at what was so different or superior about a product or service that would ensure above average profits and a sustainable competitive position. He would also assess if there was protectable intellectual property. And importantly, each core proposition must have been capable of articulation in less than one A4 page of text.
2. Key People
Who are the key executives that can make it rain?
And Bill’s first question to assess this? do the owners of this business have their life on the line for this? He would then look at what experience, contacts and existing business opportunities they could bring to the table? Finally, he gave careful attention to whether key executives were people of integrity?
Chiefly, what do the numbers look like and are they credible?
If the core proposition is exciting and the people check out, Bill would ask how good the numbers were in reality and if everything went according to plan then what are the likely financial returns? And how disastrous will they be if things go badly? How do these various upside and downside cases or scenarios correlate with the nature of the risks involved? In other words, does the risk/reward profile really warrant the exposure of time and money?
That was it. Millions upon millions of VC investment made on the basis of a 3 Step Process. Obviously it was collated using a war chest of qualitative and quantitative information but the 3 step process provides a simple formula for assessing any business in any industry.
Success or failure for Bill and his portfolio of investment companies could usually be sheeted home to the degree to which the pre-analysis of the critical components actually applied in practice—always acknowledging that luck invariably played a key role “sometime wonderfully, and sometimes horribly”, according to Bill.
In any case he always had the same philosophical outlook before making an investment in any business, “Nothing ventured, nothing gained.”
How would your business look through the prism of Bill’s three components of investment analysis?