Viable, Valuable, and Investable

Our co-founder, Mike Princi, coined this triplet years ago. He used it as a shorthand to remind people that new businesses, whether tech-style startups, corporate carveouts, or IP commercialization attempts, have to satisfy all three of these requirements to survive. If they don’t, they’ll look very different than they hoped.

Viable

Viability for a new business focuses us on core economic principles: is there a market for what the company does? Is there a business model that covers not only the cost of operations but also the cost of necessary capital investment?

Silicon Valley has many graveyards’ worth of companies that provided services for free and never found a business model. Burning VC cash is not what “viable” looks like. Free cash flow from operations (FCFO) is.

Valuable

Value comes from the size and scale of the returns the business can create. Does it cover its cost of capital? What are its returns on invested capital (ROIC)? The bigger those numbers, the more Value the business creates.

Investable

Investable is the biggest disconnect between folks who start small businesses and those who create “startups.” “Investable” means that a business has characteristics that make it a good candidate for third-party investment by a financial investor (one who explicitly seeks a reasonable return on their investment). What does investable look like?

Investable:

• scalable, either because there’s a big market or there are meaningful economies of scale (network effects are the poster child for economies of scale)
• repeatable – the business has to be able to repeat what it does. A business that owns a single asset does not have a repeatable business – at least not yet.
• reliable – the business has to be basically compliant and well-run, so that litigation, financial misdeeds, and ad hoc decisions are substantially less likely to derail the business.

Not investable:

• services business with high-paid employees – lawyers, consultants, doctors. These businesses only become investable when they are either (1) large enough that the individuals providing the service are no longer critical to bringing in work or (2) large enough that they can bring in clients even with turnover of professionals. FWIW, your small firm is not the exception: Accenture is.
• low profits – as a young teenager, I ran a fruit stand at the corner of my dad’s gas station in Daytona Beach. One thing I often bought from the distributor was a case of great-quality red delicious apples for $20. At the price I sold them, I made $25 in revenue. That 20% margin sounds great, but it was still only $5. Low sales prices require tremendous volumes to work – like Google’s ads at $0.15 a click.
• Costs not accounted for – typical small businesses are often run as sole proprietorships. The owner runs the business and keeps the money. That applies at high-dollar values too, such as with single-doctor medical practices. In a business like that, it’s easy (and common) for the business owner to think that their business makes $x a year, but that number isn’t really economic profit. Those types of businesses ignore the fact that the owner’s work has independent value. How much would you have to pay a third party to do that work? You have to account for that to figure out what the real profits are. That’s the difference between a high-paying job and a business.
• Sloppy accounting – it’s absurdly common for small business owners to mix business and personal expenses, to have relatives on the payroll for no clear business reason, to have loans back and forth between related entities, and so on. All of that makes it clear that the business is not professionally run (yet) because the actual financial results are not clear on the face of things.

Why does this matter?

Lots of small business owners believe that new capital investment will make things great, that it will solve all their problems. But the problem is that many of these owners don’t realize that their businesses aren’t ready because of one or more of these problems.

Businesses seeking professional private capital need to be Viable (solve this first!), then Valuable (solve this second), and Investable (solve this third).