Top 20 Destroyers of Business Value # 14 – Not Understanding an Outside Investors Viewpoint

Posted on November 12, 2012 · Posted in Blog

The fear of losing money has more influence over people’s investment decisions than their desire to make money.

“Because of the pain of loss, people are willing to take greater risks to reduce that pain and to avert it than they are willing to do to maximize their profitability,”

—Ari Kiev, Trading to Win

My son started skiing at three.   Now 18, he thinks nothing to ski double black diamond runs, try high flying tricks off jumps and hike up to runs outside the ski boundaries.   Since he has grown up skiing and progressed to this level, he does not assess the risk the same as an outside observer does.   To him it’s challenging and fun.  To the outside observer, it’s risky and dangerous.

The same is true for entrepreneurs and outside investors and potential acquirers.   The entrepreneur understands the business intuitively and overtime develops a sense of confidence and lower perception of risk.

Outside investors do not have this same viewpoint and assessment.   They are looking from the outside in.   Like Ari Kiev says above, they are more concerned with the downside loss of their investment versus the upside gain.

While investors in private companies are certainly looking for above average returns and are willing to take risks, their first concern is not to lose capital.    Their initial questions are always from a basis of downside protection and in my experience fear of losing.  “Why are you selling or need investment capital?” really means…..Why are you dumping the business?  Are customers leaving?  Is the industry changing?

In order to increase value, business owners must look at their business from the outside in and understand that downside risks will be magnified by outside investors.  Once the downside risks are understood and protected, investors and acquirers will give greater consideration and a higher valuation to the overall business and its potential.

Are you destroying value by not understanding an outside investor’s viewpoint?

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