At Movac we seek investment opportunities that have the potential to return 30 times (or more) our initial investment over a 5 to 7 year period. Greedy buggers, i hear you say! Well the reality is that this simply reflects the level of risk associated with working on start-up businesses. Internationally its been shown that only about 1 in 12 investments made by an Angel investor will “go large” the balance will be made up of some that manage to return the initial cash invested and a bunch where the money is lost. Across all our investments we’re targeting a 25% rate of return (not a big number). Remember also, that if we’re getting 30x then you (the business creator) should be doing better than that for the right opportunity.
Putting the justification to one side, what does it take to create a 30x business? In this post i will look at the numbers side. In later posts we will go through the characteristics of the businesses we think have the best chance of achieving this level of returns.
The maths is pretty simple; working backwards:
- If we invest $500k we need to see the potential for a return of $15m (30 x $500k) or more – at year 5.
- If we own 30% of the business at Year 5, this means the business must be worth $50m ($15 / 0.3 )
- As a rough, first cut rule of thumb i value most businesses at 10x NPAT. There are cases that can be made for using numbers a little higher and a little lower. At 10x NPAT this suggests the business at Y5 must the potential of generating $5m NPAT per annum.
- Assuming tax at 30% this means $7.14m EBIT. ($5m / 0.7)
- Assuming a 15% net margin (on sales) this suggests an annual turn-over of $47m. ($7.14m / 0.15)
In my experience most financial people (around the world) look at the numbers in this way, they may spin it differently (using DCF) but the answers tend to come out the same. These numbers mean that we must aspire to find break-out / world beating ideas.