Since starting Finstock Capital, we have been fortunate to meet some incredible companies who set out to achieve highly ambitious goals - some are medium sized corporates with developed sales strategies whereas others are still putting together their business plans. We have worked with all these companies to try and find financing solutions which work for both of us - with our objective being that both parties feel happy with the arrangement. If they feel they have a good deal, they will become a recurring customer which is more valuable to us than a one-off, so we don’t feel the need to eke out every last penny of interest or take advantage of good companies which have short term worries but high quality underlying businesses.
Some of our clients are seeking a short-term funding solution, others are looking for an equity boost or some form of exit. Regardless of how we invest, we have always agreed that the principle components of any investment surround three distinct pillars: Cash Flow, Characters and Core.
Understanding the company’s cash flow, intimately, as well as you know your own features, is a must. Being able to understand its flexibility, its moving parts, its drivers, its assumptions and its limitations - we cannot think of a more important skill. Surprisingly, we have found that developed businesses which have been running for years are not always better at understanding this first principle. A solid cash flow understanding gives a company a solid base from which to talk to potential investors who can help solve their issues.
This year we have met some colourful characters - from the arithmetic checker (you know who you are) to the obvious manipulators. We do not believe we are any better at assessing personalities than many others, but we can quickly build trust. The personalities in a business are one of the key drivers, particularly in early-stage businesses, and honesty, hard work and determination will prove successful in our opinion.. When we define risk, much of the conversation we have surrounds our ability to work with individuals and to believe they can achieve their goals.
The final pillar is an understanding of the company’s core, which we define as the mission statement and the businesses objective. How easily can a sole entrepreneur define the company’s potential size of the market it is seeking to disrupt or, more importantly for a larger corporate, around whom does the business revolve? Many of the larger, private equity type deals that we have dealt with have fantastic leaders at their core whereas others have a pool of talent. That said, it is important not to ignore business fundamentals just because you have strong feelings about management (positive or negative). . As Warren Buffett noted, “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.