Three Qualifiers Every Private Investment MUST Pass

view original post

There were tears in my eyes, but I didn’t make a peep. I couldn’t. It would’ve been too embarrassing.

Source: goldleviza /

It was the end of the day at my firefighter academy, and we were all cleaning up equipment. I was cleaning off hand tools when I dropped a sledgehammer onto an axe head…

And my right ring finger happened to be in between these two pieces of metal…

Really, I barely dropped the sledgehammer, but it was plenty of force to smash the tip of my finger into something that would turn your stomach. It was one of those painful experiences that becomes engrained in your head.

Perhaps it was a good lesson, as I didn’t lose a finger. To this day, whenever I am handling tools or near heavy equipment, I am extremely cautious.

It’s experiences like this, where you experience personal pain, when some of the best lessons are learned.

Similar to my axe versus sledgehammer encounter, I’ve had numerous painful investment experiences. I can tell you hundreds of stories from failed investing ventures over the past decade.

I’ve learned a lot.

And here’s the secret…

While there are many things I examine when evaluating a possible investment… before I even start, a company has to pass the first test.

The first test only includes three “qualifiers”…

In my experience, if a company can’t stand up to these three things, then your money is better off elsewhere.

Here are the three “qualifiers” I use:

1. Location

This is the easiest qualifier.

I only invest in companies that are located in countries that have real rule of law and standardized financial ecosystems.

Basically, I want to invest in a company that is located in a jurisdiction that will actually provide a fair route to a solution, should something go wrong.

From a U.S. perspective, here is my list of countries I’d consider investing in (for private companies). This is obviously not a complete list. I generally always focus on the U.S., but sometimes there are rare opportunities in other jurisdictions:

  1. USA
  2. Canada
  3. UK, Australia, Ireland, New Zealand
  4. Germany, Switzerland
  5. Denmark, Netherlands, Norway, Sweden, Finland

Keep in mind that investing in any of these countries comes with language barriers, different currencies, varying business practices/etiquette and geographical challenges (time zone issues).

I have personally invested in companies in over a dozen countries. I can tell you firsthand that it’s just not worth pursuing opportunities that don’t provide realistic legal protection.

You never think that you’ll involve lawyers in an investment… but if you’re a serious investor, you’ll eventually have a lawyer on retainer.

2. Valuation

Once you find a company that’s in a jurisdiction you feel comfortable with, you can do a quick valuation check.

As an early-stage investor who expects to have many investments fail, you need to get comfortable with realistic exit potentials. You need your winning investments to return at least ten times your original investment.

With so many companies set to fail, that’s what will allow your total portfolio to succeed.

The quickest way to do this is to add a “zero” to an investment’s current valuation.

So, if a company is raising money and is currently valued at $10 million… they better be able to get acquired or go public for a valuation that exceeds $100 million.

(How do you figure that out? That’s a topic that deserves its own space. Stay tuned!)

This is probably the No. 1 mistake that beginner venture capital investors make: They invest in companies that have unrealistic valuations.

3. Team

Once you get comfortable with the location and valuation of a company, it’s time to do a little bit of work.

Don’t worry, it should take no more than 30 minutes.

You want to find out the background of the company founder(s).

In addition to a general internet search, check out the founders’ social pages (LinkedIn, Twitter, etc.). Take a look at their past ventures. You want to get a general understanding about why the company founders are raising money (and not investing their own!).

Other Qualifiers…

There are hundreds of other qualifiers you should be looking for when considering an investment in a private company (and I’ll be covering them in these pages in the coming weeks and months).

However, if you don’t start with the three above, you could make a big, costly mistake!

On the date of publication, Cody Shirk did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

By focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investing space. To make sure you never miss Venture Capital Digest, click here to subscribe.