The co-founder and managing partner of a technology-driven venture capital firm shared his three key questions to ask before investing in a company.
Doug Clinton, managing partner at Loup Ventures, shared three questions that he asks himself when he invests in companies of any size and whether they are private or publicly traded.
Does The Company Solve A Time, Money Or Meaning Problem?: One of the most important questions for Clinton to ask of the company is if they solve a need.
“From a first principles standpoint, time, money, and meaning are the only problems we humans have. Thus, every company at its core must solve a time problem, a money problem, or a meaning problem for its customers.
Clinton says Alphabet Inc (NASDAQ:GOOG)(NASDAQ:GOOGL) solves the issue of time as it gives answers faster than anyone else when users ask questions.
“Google was notorious for limiting the amount of words on its homepage. No distractions that take up time.”
Tesla Inc (NASDAQ:TSLA) is cited as an example of a money company as they provide transportation that’s cheaper per mile than anyone else.
Costco Wholesale Corporation (NASDAQ:COST) is another example Clinton gives of solving a money problem, as it still sells $1.50 hot dogs in a high inflation period.
Clinton said companies can also change which of the three problems they solve over time, citing Apple Inc (NASDAQ:AAPL) starting as a time company and over time becoming a meaning company and later becoming a time company once again.
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FCF Generation: Clinton said that future cash flows are a vital part of an investment thesis in a company.
“If the value of an asset is the sum of its discounted future cash flows, then a great investment must generate far more future cash flow than is priced in at the time of investment,” Clinton said.
Clinton noted that if a company isn’t paying 50% or more of its valuation back in free cash flow in the next decade, the company might not be a good investment.
“The power of the question extends even better to what not to invest in.”
Working for the Company or Founder: Another important consideration for Clinton is company management, specifically the founder or person in charge.
“Investors rely on management to understand where opportunity exists to drive sustained growth. This requires that management build effective strategies to capture the opportunity and to excite and retain talent to execute,” Clinton said.
Clinton said potential investors should ask if they would work for the company or founder.
“If you’d quit your job and go into the trenches with some founder, chances are that other smart people would too. The most intelligent of those make sure they ask all three of these questions.”
