Before we jump in, let me give you a quick breakdown of what Venture Capital is so we are all on the same page.
In simple terms venture capital firms are collections of rich investors (I mean really rich) who invest in private companies. Think of it as all those guys who invested in Facebook before it went public. You have to have a net worth of over 1 million (not including your house) to work with venture capital firms.
Since I’m guessing you don’t have an extra million lying around in your bank account, you’re stuck investing in companies that have already gone public like the rest of us.
Enter the stock market. It’s where we invest in public companies with the intention of making money off of future business growth; just like venture capital firms who invest in private companies.
The difference is venture capital firms tend to make more money on their investments because they get first pick. The good news for us is these guys are SUPER smart and know what to look for when determining whether a company is going to be successful or not.
It’s good news for us because you can borrow some of their techniques to discover great investments and increase your own investing profits investing in the stock market.
Read on to “borrow” the savvy venture capital technique for identifying stocks destined for high-profit returns. I promise a jargon free easy to understand read. No need to breakout the financial dictionary to start using this simple technique for yourself.
Make sure you never over pay for a stock again with the Investing Price Calculator
Savvy Investors Want to Know
When a private businesses are bought and sold, the first metric discussed is sales. This is because the sales of a company can tell an investor more about the company than any other financial metric. If you have ever watched Shark Tank (or Dragons Den if you’re in Canada), then you know how important this number is. The sharks (the investors) ALWAYS ask what the sales numbers are. Always.
The sales tells you if consumers actually care about the products and services the company sells. Without sales, there is no way a company can be competitive. The greater the sales of a company, the more likely it is the marketplace actually wants the products the company creates and sells.
There are thousands of companies with great ideas. However not all ideas are going to produce enough money for you to make money. Sales validate the entire reason for a company existing in the first place. This is why private business investors care so much about sales.
The best sales forces in the country could not hope to sell anyone a telegraph. The market just doesn’t want one, when they can have a smart phone for a couple hundred bucks.
Looking at the business from the standpoint of sales, provides another valuable insight. It tells you how much money the company is actually making now. It’s very hard to play financial games and fib sales numbers.
- Venture Capitalists use sales to gage how well the company will do in the market place
- Sales tell us how much money the company is actually making
Microsoft became a technology giant because it had more sales than anybody else. It didn’t provide a great return by acquiring other companies, amassing debt, or cutting costs.
Sales validates the entire business itself, since it lets you know that people actually care about the products and services the company makes.
One Number Tells it All
Alright, we know sales are important and that savvy venture capitalist use sales to discover great investments. How does this help you?
Using a metric called Price to Sales, you can take the venture capital technique for finding great investments and apply it to stocks. This metric measures the sales of a company compared to the current stock price. In a nut shell using this number will insure you never pay too much for a company given its current level of sales.
The worst investment mistake you can make is paying too much for a stock. When it comes to investing you make money when you buy, not when you sell. The less you pay for a stock, the more profit potential it has. I would venture to guess that 90% of people who lose money investing in the stock market, lose because they over paid for a stock.
Now it’s time to look at what a good price to sales ratio is. How much should you be willing to pay for each dollar of sales ?
Here’s my simple rule. You don’t want to be investing in a company with the price to sales of more than 10. This will insure when you invest, there is room for the stock price to grow. No one wants to buy at the top. You want to buy at the bottom and on the way up.
Using a Price-to-Sales of 10 will help you discover great investments primed for future growth. Finding gems in the market is how you can lock in the double digit returns enjoyed by the professionals.
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