Why do investors invest in a business?

This is for the business owners on the forum. Please share your experience on this subject. And thank you in advance.

 

The same reason any investor invests in anything, to capture favorable returns within their risk and asset allocation parameters.

 

I guess a better question is what are the thing that excite them to invest and what are the things that make them not interested in a project?

 

Oh man, you are better off googling "What do venture capitalists look for before investing?" or "How do private equity investments work?" or "Munger on investing" or just plain old "investment strategies and models" than asking here. It's a huge, broad topic. Try that.

 

In OP you asked why investors invest in a business and here you ask why companies undertake a certain project?

So what do you actually mean?

Do you mean "why do investors invest in a certain business?" If yes, then look into Discounted cash flow valuation models.

Do you mean "how to businesses decide which projects to undertake?" This is more a corporate finance question and it relates to capital budgeting. Profitability of a project is usually measured using Net Present Value or Internal Rate of Return.

 

Usually to make money or as a write off.

 

Are you talking about venture capitalists, or an entrepreneur starting a business, or buying stocks in general?

 

My experiences were investing in my own projects, or my time in helping other small business start ups. The motive was to make money, by improving on other like business. C-Stores, Restaurants, Bowling Lanes, Bar/Restaurant, either from scratch or an existing business.

Investing, as in equities of some sort, are basically believing in other ideas, for either the dividends or hope for increased values. Most Energy Stocks for instance, will pay dividends equal to the value of a stock every 8-10 years and Apple has gone from a virtual penny stock to the highest valued corporation today, 128.00/share (no dividends).

http://stockcharts.jparsons.net/stock/apple-aapl.php?timespan=20yr

Basically investing or contributing to some retirement plan (401K), helps you cover your savings recover all or part lost through inflation. Commodities, gold silver, coins/stamps, collectable's, generally have been used here, and one of the best today, with interest rates being so low....

 

Seems like there has to be something in it for the investor. they don't just give money away.

 

Of course. The investor has to receive a return on his investment. That's the most general answer I can give based on your question. If you want a more specific answer, you need to clarify what typer of investment you are referring to.

 

I start threads for others to read and learn not so much for myself. A lot of people don't comprehend or even thought about the information in the posts. So thank you for contributing. But I also would like someone to post about the actual value investors look for. Some people think that just being a nice person with a dream can offset the actual numbers that show where your company is headed.

 

Actually American's give more money away than any other society, it's call "Charity". Motivation can very from life experiences, but returns are rarely considered.

I'd suggest most investments, however defined, are based on unforeseeable events, children, sickness, death, loss of a job and the ever presence of inflation.

 

I will just assume you mean how investors perform a valuation and then decide if investing in that company is worth the risk.

First, as an investor, you can look over the financial statements of the company - balance sheet, income statement, statement of cash flow. There are several things you look for - liquidity, solvency, efficiency, profitability, are probably the most important.

Liquidity. Here, the goal is to see if the company has the ability to pay off short term liabilities. Looking at the ratio between current assets to current liabilities is one way to determine this.

Solvency. This is a measure of the company's ability to pay off long term liabilities.

Efficiency. This looks at how efficiently the company utilizes its assets. It can be measured using inventory turnover, accounts receivables turnover, working capital turnover, etc.

Profitability. Gross profit, operating profit margin, return on equity, etc.

All of the information used to compute these ratios are found in the financial statements.

Now, if you want to go further and come up with a fair value for the company (and its stock if it is traded publicly) then you would probably use a discounted cash flow model. The inputs to such a model would include: free cash flow (cash flow from operations minus capital expenditures), weighted average cost of capital, growth rate, time frame over which you want to make your valuation, etc.

If the company is publicly traded, then you have more information at your disposal about its equity. You can compute the risk of the equity by measuring the standard deviation of its historical returns.

A lot of investors will want to forecast future financial statements in order to predict the future value of a company. Usually the forecast is sales driven, meaning sales are forecasted and from there each line item is derived. One simple way to do this is to first determine the correlation between GDP and industry sales (the industry in which the company in question operates.) You do this by performing a regression analysis. Using the results of the regression analysis, you get an equation that you can use to forecast future industry sales. Then you can derive the future sales for the company by multiplying future industry sales by the company's market share.

This is just an outline of the major points. There's obviously more to it than that, but it's a start.

 

To bring home a profit that is livable instead of having the normal 40 hour a week office or blue collar job, but normally putting in more hours and more work than the average employee working for someone else.

 

What goes into your evaluation process?

 

Thank you. That is a lot for people to consider when trying to get others money. Very good illustration.

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So obviously when people don't get an investment they don't do a good job of showing this to the decision makers?

 

Does anybody ever invest in the brand or the team even if the monetary value isn't there?

 

Local market, business planning, processes, risk vs potential return, stability of the workforce locally to support ongoing operations financially (low unemployment), initial investment capital cost, sustainability (service required over and over vs. one time service), and so many other things.

 

Some trade graphs and lose a lot of money. The only way to invest successfully is to look at the potential for profit increases.

But there are other reasons to invest. If you want to safeguard against uncertainty you might look at commodities, for instance.

 

It depends. Investors have different objectives, philosophies, and risk profiles.

A venture capitalist will invest in new companies that have a high earnings potential but will also be riskier. In exchange for undertaking the risk, they will get a large share of the company's equity and they will also have input into the decision making.

An individual investor can be either a growth or a value investor. They can have different objectives (liquidity, safety, income, growth, etc.) They also have different risk profiles (some are more risk averse than others.)

So even with the valuation method I outlined in that post, different investors can come to different conclusions based on their own needs.

But in general, the underlying health of the company needs to be strong and have the potential for a positive future outlook.

 

Trading is entirely different though. There are people who are successful trading graphs (technical analysis) just as there are people who are successful investing based on analyzing financial statements and other fundamental data. As a matter of personal preference, I do prefer fundamental analysis when investing, but some technical indicators are pretty important.

When you talk about trading however, there are other methods of asset selection. Algorithmic trading has been pretty successful for large institutions. Most of the algorithms used are based on statistical properties of asset prices and not on the underlying business. In fact, the underlying health of the business is almost always entirely ignored.

 

Sure, you can predict the sways in public valuation, but it's an incredibly imprecise science. Unless you have some serious knowledge and capital behind you - stay far away. As you said, use fundamental analysis instead.

 

So they look at the future and not the past? What if they were huge profits before but it looks like there is bad profits in the future?

 

The past is not relevant except insofar as it relates to the future price. You aren't going to sell your stake in the past, you're going to sell it in the future. On the other hand, past performance and investment of the company in new strategies and technologies is generally all you have to work with. If they've set themselves up in a way you find likely to increase profits, you invest.

 

And likewise, if you have a history of running the business in a negative unprofitable way then that has to be looked at? Or if there is hope of future profits then they overlook past performance?