If you could ask a CEO one question to understand quality of his business what would it be?
Hi there,
Long-time lurker, first time poster. I was recently interviewed by a London Growth Fund - however, there was one question that really stood out:
They asked if you could ask the CEO of a company you're considering investing in only one question what would that be? This really confused me and I just think it's so tough to distill so many different thoughts into this one question - do you have any thoughts on what I should have said?
Thank you!
Who his most valuable employee is
Just realized the subtle assumption of CEO gender on this post :)
me too. I could work on that
What was the worst job you ever had
I don't know.. strange question, I would dodge. You're never gonna make compelling decisions based on one question.
Interesting question but kind of an impossible task. Off the top of my head, I would ask some catch-all such as to describe the company's strategy over the next 10 years. Hopefully this will delve into markets, segments, geography, competition, products, channels, customers, suppliers, regulation, etc.
What differentiates you from your competitors that allows you to deliver superior value?
This is usually at the beginning of every earnings release call. I wouldn't burn my one question on this, personally.
Tell me something about the business that you would never want your shareholders to find out.
Wow, I would've never expected this question from an auditor. He said sarcastically.
Most companies are pretty quick to tout their strengths and talk about their competitive edge, superior product, etc. No sense in asking a question you can get the answer to by listening to the first fifteen minutes of every earnings release.
We first need to define what is meant by evaluating the ''quality of his business''. In my opinion, a good business is a business that generates superior profits through time (in absolute and relative terms). I would therefore ask this question ''How have your FCFFs evolved over the last 10-20 years compared to your competitors''. I would require a thorough answer that would include:
What I like about money-making capabilities is that it is not subject to a biased opinion (subjectivity). I can ask the CEO how he differentiates himself from the competition, what is his strategy, etc... but his views will be heavily biased, or could be dead wrong.
Money never lies. (unless miscounted of course, and that's why we have accountants)
I was literally about to type this, and then I saw your post, so I gave you a banana. (Is it heretical for a consultant to focus on cash flows? Don't think so but maybe it is).
You must be fun at the party.
What would your customers do if you raised prices 20 percent tomorrow?
We used a similar question to vet PMs when I was at a BB AM. "In which market condition would your fund not perform well in?" If they say; "well we perform well in all markets (up and down markets)." they are full of shit because they would have a risk neutral fund or not understand their own ips.
Edit- that's what I would ask a pm at the London growth fund.
I would ask a company I was investing in the following: what makes your company different from others that are trying to solve that same problem or provide that same solution.
Shows they understand their: market, competition, strategy, consumer, and edge. Similar to porters five forces.
"what has been your worst mistake as a company?"
They don't usually mention their faults or mistakes, so you could learn something new from that.
What's your target total/share price?
It'll tell you whether the guy's an idiot or not
"Please explain the profitability model of your business"
What is the one non-public metric you track and are most focused on?
Any variation of "how do you make money?" should work
Which Italian mobster gang do you contract with?
Is Joe Flacco an elite QB?
I'm pretty sure you could learn everything you would want to know about a company by how their CEO answered this question. You could also find out if he was born in Baltimore.
Where was this from again? A classic.
PFTCommenter from Pardon My Take
Which of your competitors do you lose sleep over at night and why?
If price were not an issue, what company would you buy to best enhance your own business?
M&A is the most public way to communicate a company's strategy to the market. If they say something along the lines of doubling down on the current strategy, they believe in their business. If they say a competitor, they are scared. If they say something in a new field, it shows they don't believe their own story. There are many interpretations of the answer that show what the CEO really believes about his own business that he can communicate without giving up non-public information.
Growth Fund? As in VC or early-stage PE?
I believe it is fairly well documented that the most important part of a young company is the senior management, even more so than the product/service being sold. So I would ask about the senior management team and their experiences. Do they have experience building profitable companies and delivering shareholder growth? That would probably be my first question.
EDIT: changed it a bit to better respond to the question being asked
What is the most important information do you need to be updated on daily?
I would question the motives why he founded/joined the company.
Maybe I'm naive, but I spent time working in a startup accelerator and the companies that attracted investments were the ones with founders who were really passionate and clear about what they are doing.
Yeah except you look at the stats on VC investments and you realize how many of those great founders closed up shop
How much of your shareholders' money do you spend on 36-year-old partners, 29-year-old associates/project managers and 22-year-old analysts to tell you how to run your business in PowerPoint format?
Can this company survive without you as CEO?
If I were in the CEO's shoes, that answer would be "yes, but 'surviving' is a different scenario than 'growing'"
When's the last time you personally bought equity?
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