Series | Insights into corporate finance
Why investors invest in consistent and comprehensible investment cases
When companies approach investors, the focus is often on the business model.
Products, technologies and market potential are presented in detail – in the expectation that these factors will form the basis for an investment decision.
In practice, however, the decision-making principle is different.
Investors do not invest in individual aspects of a company.
They invest in a consistent overall picture.
This overall picture arises from the interplay of strategy, market position and financial development – brought together in a comprehensible investment case.
This is precisely one of the key challenges facing many companies.
The individual elements are in place:
a functioning business model, growth prospects, initial market successes.
What is often missing is the consistent linking of these elements with reliable financial assumptions.
How exactly does the business model lead to sales growth?
What cost structures result from this?
How is profitability developing?
And how is the capital requirement derived from this?
If these correlations are not clearly derived, a coherent overall picture does not emerge.
For investors, this means: open questions.
And open questions rarely lead to investment decisions.
A convincing investment case is therefore not created by individual strong arguments, but by consistency.
All key aspects of a company must be logically linked – strategically and financially.
This includes in particular:
– the link between the business model and financial planning
– the comprehensible derivation of growth and margins
– a clear presentation of capital requirements and the use of funds
– as well as consistent assumptions about future development
In practice:
The more consistent this overall picture is, the faster investors can classify and evaluate a company.
The investment case thus becomes the interface between entrepreneurial reality and external valuation.
It makes the economic substance of a company visible.
The next article deals with a practical question:
When is the right time to actively establish this financial structure and consistency in the company – and what role can a temporary CFO play in this?