In the world of VC/PE, you're expected to make quick decisions regarding how you can make money. To do that, it's important to have some mental deal frameworks handy. Would love folks to share some that they've got across the spectrum of asset classes they're investing in. I'll start:
In the growth equity world, cost of equity is a 25% IRR over 5 years, or make 3x your cash on cash. In the simplest deal, that requires that you grow the business at a 25% revenue CAGR over those 5 years, assuming your revenue exit multiple is the same as your entry multiple.
If you're not growing the business at a 25% CAGR (say 15-20%), you can get to 3x CoC with leverage. In some cases your exit multiple is greater than your entry multiple, but that's harder to control. Multiple expansion usually requires the business to sell new product and expand TAM, M&A, improve revenue quality, etc. Seems simple enough, but in reality it's not so easy.
In both cases you're assuming you can generate operational leverage as the business scales. Sometimes you can get price increases as well.
Very interesting thread; BTW Are you in the USA or EU ?
USA
There's video of Buffett and Monger talking about similar stuff. Warren looks at 5 metrics / ratios and doesn't need to build a model.
Link please?
In terms of figures & math, we tend to look more at EBITDA than the business as a whole. This means that you can have a 15% growth of the top line combined with an improvement of the EBITDA from 10% to 15% to get similar results. In addition, this works assuming no impact of cash/debt, gearing and so on.
Some things equally important are: - the industry, or you can lead a horse to water but you can't make him drink. Once you own a business, you can do virtually anything. However, changing the industry is one of the hardest thing to do, so if you are not reasonably sure that 10 years from now the industry will be in better shape than today, it's better to walk away from the company. - the team, or it takes two flints to make a fire. Business are basically people doing things together, you need to trust them and they need to get along to bring you anywhere. - the (asymmetric) risk-return profile, or better to be rich and healthy than poor and sick. You can only do a few bets at the same time, so you must really be ultra selective and find the businesses in the sweet spot and at a good price.
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