A few months ago my dad, a WVU alum, told me he was judging a Business Plan Competition for undergrads at West Virginia University. He floated the idea of me judging the competition as well saying that it would be a fun experience. I told him that it sounded interesting but I was too busy to get involved.
A few days later I receive an email from the coordinator of the business competition thanking me for signing up as a judge and sending me a link to the business plans I was to evaluate. My dad went ahead and signed me up despite my hesitations. At first I was a bit annoyed at how much time I would have to “waste” mulling over a few college-level business plans. However, judging the competition has actually served as a fascinating learning experience so far, and there are several more steps yet to go in the judging process. Looking over the business plans really helped me refine my thinking on how to look at investment opportunities and determine the feasibility of a business.
The two factors that shape the way I analyze any investment are my experience working at Goldman Sachs and the countless hours I have spent playing poker. How does poker possibly inform my investment analysis? It’s pretty simple. I think of a company simply as an asset (read: Stock or Bond) and the money I invest is the “risk” I’m willing to take on to earn the returns of owning that asset (in this case, owning that business). What is an ideal investment? One with high returns, and low risk. Wall Street analysts spend hours digging deep into financial data to find investments with attractive risk/reward.
The key distinction between owning stock and owning a company is control. This is why investing in a business you own or have an influential stake is much more attractive than investing in public companies, when your investments are at risk to wide market fluctuations. In both scenarios, its important to do detailed analysis on your investment, but at the end of the day having control gives you an extra edge over simply owning the SP500. One of the most important concepts in poker is making plays that have a positive expected value. In essence, this means the odds of me winning are greater than the amount of money I am risking. For example, if I have a 25% chance to win a $100 pot, but I only need to put in $10, that is positive expected value. My expected value is the chance of success multiplied by my potential reward. In this case, $100 x 25% is $25 expected value, so risking anything up to $25 to win that pot is a play that will always be correct. In this instance, risking $10 to win $25 is a 250% ROI!
Finding investment opportunities with a high ROI and a limited downside is both an art and science . Going through all of these plans has really helped me sharpen up my skills. I even broke out excel and did some pro forma analysis on a few of the concepts to see how feasible they would be under certain assumptions. I think the biggest take away for me has been to think of each of these businesses as an asset, with an initial investment and some sort of return – and asking important questions like – what is my return? What is my initial cash outlay? What are my big risks? What do I do if this business fails? How can I test some of these assumptions, etc etc. Helping out with this competition has already been a fascinating learning experience and I hope to learn more as I stay involved with the process. If your alma mater or a university near your offers a program like this, I highly suggest getting involved if you want to sharpen your skills and get some new ideas flowing.