How is value created?

Do you understand how value is created in an ecosystem of suppliers, competitors and customers?

What is the value? Where does it come from? Is it the (cheap and reliable) access to raw materials and other inputs? Is it unique and proprietary production technology? Are there economies of scale? Is it marketing, branding, and distribution?

Do you understand the ecosystem?

Sketch the flow from A to Z, from sheep to sweater, from mine to car model.

Who are the main agents and interest groups?

Is the company dependent on any single supplier? What proportion of important components comes from a single supplier?

What percentage of sales comes from the largest customer, the three largest, ten largest? How are the customers doing financially? What happens if one of the biggest customers is lost?

An intuitive understanding of the above questions, including a clear picture of the flow of inputs, production, competitors, marketing and distribution, makes it easier to find sources of uncertainty/risks in the forecasts.

Preparing a pitch can help you identify value destroyers

Is the case rational and value creating, or possibly a Ponzi? Can you pitch your investment idea concisely and convincingly, explaining how the company is actually creating value and why it can be expected to keep doing it? What exactly are the company’s durable advantages, that ensure it can produce and distribute goods and services that can be consistently be sold at a profit?

 

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