Bill Gurley, a former Uber board member and venture capitalist, has compiled a list of key characteristics to consider when evaluating a business for investment and valuation. These questions can be useful for both early-stage and late-stage investments.
The questions are as follows:
- Does the business have a sustainable competitive advantage, also known as Buffett's moat?
- Does the business benefit from any network effects?
- Are the business's revenue and earnings visible and predictable?
- Are the customers locked in? Are there high switching costs?
- Are the gross margins high?
- Is the marginal profitability expected to increase or decline?
- Is a significant portion of sales concentrated in a few powerful customers?
- Is the business dependent on one or more major partners?
- Is the business growing organically or is heavy marketing spend required for growth?
- How fast and how much is the business expected to grow?
Considering these questions can help assess a company's potential for success and help with investment decisions.
Likewise, the following short checklist by Li Lu, a highly successful value investor and the founder of Himalaya Capital is extremely useful as well.
- Is it priced affordably? In other words, is it cheap?
- Is it a good business? This includes factors such as its competitive advantage, cash flow, balance sheet health, management team, history of strong returns, and growth potential.
- Who is running the business? Evaluating the leadership team's track record and qualifications is essential to determining if the business is worth investing in.
- What else may have been overlooked in the analysis? It's essential to be thorough when evaluating an investment opportunity, so ensure that all relevant factors have been considered before making a decision.
