What Should I Look at Before Deciding to Invest in a Company?
By: Alex S. Freeman
Tags: Personal Finance, Investing, Money, Venture Capital, Startup

What Should I Look at Before Deciding to Invest in a Company?

Every investor looks for different things. Here’s what I consider.

Photo by Dan Dimmock on Unsplash

Before we dive into this, I just want to make it clear that I’m not a financial professional. I do manage my own investments, so these considerations come from my own personal experience.

What is their primary business?

If you don’t at least have a fundamental understanding of the way a company makes their money, then you probably shouldn’t put your money into it. Warren Buffett utilizes this principle and famously doesn’t invest in tech stocks because he doesn’t understand the business. That’s probably a little too extreme, though who am I to argue with one of the most successful investors of all time?

What I’m trying to say is that though you don’t need to be able to run the company yourself, how can you understand the potential for growth if you don’t even fully understand the kind of market the company is operating in? Are they a biotech firm? What is their primary research position? How do they conduct that research? If you can’t explain to someone else what it is the company does, how can you be sure that it’s a good place for your money?

This is also going to factor into your thinking about the future opportunity for the company. When investing, I’m looking for companies that are going to be strong performers for the life of the investment — companies with room to grow, room to operate, and a business that isn’t going away anytime soon.

Who is the management team?

In addition to knowing and understanding what the company does, you should know who is guiding the company. Who occupies the c-suite? How long have they held the position?

Founder led companies are typically still looking to grow. Think of a lot of the hot stocks in tech, and you’re likely looking at a founder-led company. Companies that have moved beyond their founder are typically in a position where they are no longer growing but are built to maintain a massive position.

Think about a company like General Electric. There is a lot of red tape with these companies, and they can have great benefits — but be aware that they may not grow the value of your investment as much as founder-led companies. That doesn’t mean you should avoid them — just know that the value proposition is different. A lot of these companies are high and regular dividend payers.

One of the best rules of thumb is to keep in mind that the management team of the company works for the shareholders — you. If you were hiring a team to look after investment, are these the people you’d hire?

Does the business pass the snap test?

One of the last things I consider is based on a piece of advice that the Motley Fool regular gives — does the business pass the snap test? As in, if someone snapped their fingers and this business disappeared — would the world be different? Would people notice?

These are the companies that have become central to our lives in some way. The foundational companies of our society. Now, this obviously doesn’t mean that those companies won’t be without their problem — again, I’ll point to General Electric. This was a company that was central to the American experience for generations. Then mismanagement deeply damaged the company. The automakers also come to mind. Or the airlines.

Another form of this question is to look five, ten, fifteen years into the future and ask yourself if this company is going to be more or less relevant than they are today. This can be important for companies that still have a lot of growing to do and haven’t become quite as ubiquitous as their larger counterparts. Or for companies that operate in a market that isn’t as obvious to your every day Americans. These aren’t always sexy companies, either — how many people really pay much attention to who holds the contracts to pick up garbage in your local municipality?

Conclusion

These considerations aren’t the be-all and end all of the things to look at when considering an investment, but they are certainly where I start. As I said in the conclusion, this shouldn’t be construed as financial advice either — I am not an investment professional. All investment has risks, and you should gather as much information as possible before you make any individual investment.