Innovation: 3 Keys To Successful Direct Investments

Direct investments are indeed a profit motive approach to acquiring private equity and ensuring maximum ROI. It is certainly much more in-depth than just risking capital to invest in a business and hoping for the best. To Baroness Stephanie de Sarachaga direct investment and business acquisition is an art form. What makes her stand out from most investors is her broader based impact-driven approach to ROI. To craft business deals with an infusion of both art and science. She has an incredible ability to look at companies as if they were works of art placed proudly in a gallery. With the same eye for detail and aesthetics as a museum curator, she's able to deeply analyse the technical aspects of a business whilst identifying the main driving component of a company that makes it a potential success. With a penchant for stewardship and social return on investment, she has positively impacted communities and has consistently made smart successful business deals and partnerships. A legacy that her noble ancestors would certainly be proud of. With her family run company Sarachaga et Compagnie, Stephanie invests directly in innovation and social responsibility. She has decades of experience under her belt and has even branched into direct investment advisory and M&A strategy. In this article, she shares her deep wisdom on the three often overlooked keys to successful direct investments.

1. Don't Be Afraid to be Active

Whilst in many cases direct investing does not require you to take a pivotal role in the company, you can still be an influence on the success and direction of the business. It may seem easier to just sit back and invest passively, but it will better serve you in terms of ROI if you have an active line of communication and offer your wisdom.

Your role may not be as the main advisor, but it could be, as good management is always looking for a quality sounding board. At the least you could provide value to the company and directly influence the ROI by contributing your expertise to the company's board. Also, by finding crossover skills and looking for areas to value add your experience, you become more than your investment. Stephanie believes your guidance could steer the business out of treacherous waters in a time of need. She takes an active and gentle but social approach to direct investments. What helps greatly is her focus on lifestyle, media, art, beauty and hospitality. Because she has paved a career in media and has a strong passion for lifestyle and art, she is better prepared to provide the company with her expertise if needed.

Your past experience should be somewhat compatible with the business you are directly investing in, though Stephanie has discovered there are core business competencies that crossover. If there is no experience or passion for the field you are investing in, how are you to know what will drive the company to success? It is for that reason that you should have a special interest in the type of business you are directly investing in. An investor with a rich knowledge in the farming industry is going to be left in the dark investing in a film production business. Unless he has some vested interest and insight into the industry of that business, he will not likely be able to influence the ROI in a positive way.

Businesses look to Stephanie for her expertise because she is able to think creatively outside of the box. She was part of the team that launched Tel Aviv Fashion Week. This was a great success and a historical milestone in Israeli fashion. Now the event is on its sixth year which was opened by legendary designer, Alon Livne. Stephanie looked at current trends and sought a way to provide those in Israel with an avenue that was much needed, which is why she spent time nurturing local Israeli designers after Fashion Week and assisting them with market penetration abroad. Stephanie devoted her years of experience in the Israeli startup scene with her love of fashion and lifestyle, giving designers additional tools and partnerships. This is how historical innovative ideas are created by looking outside of your current market and studying the trends to infuse something else entirely.

Whilst a passive approach is the default and in some cases a much-needed outlook at times, it must be derived from a strategic decision such as haste makes waste. An active approach could directly impact the business into greater success. Stephanie advises you to ponder, “Direct investment is about partnership. So ask yourself, how can I lend my expertise to the company? What do I bring to the table? What value can I provide to ensure we maximise ROI together?"

2. Clear Communication and Expectations

An active line of communication is essential for perfecting the art of the deal, as well as clarifying your expectations. This means you should pave a clear concise open path to communicate about the business, as well as ensure the communication is two ways and the business knows how and what you want communicated to you. When companies are looking for investors, they are potentially selling a subjective narrative with an idealistic projection of the company. It will serve you better to grasp the objective and factual details of the business before plunging head first into a direct investment, it is about the business model and the people. The only way you can truly discover the facts is by building a connection with the members of the company at all levels. Too often investors take a top down approach and ignore the grassroots, companies are as much about people as products.

Get to know the people behind the company and understand their work ethic. Their milestones for the company, their realistic output for the projected future, and their systems (they should have them, if not it’s a major red flag). Perhaps you could provide value to any sticking points or weaknesses to the company. Communication will ensure you are able to perform realistic and quality due diligence. Referring back to Key #1, identifying where you can add value.

Stephanie’s early start at Universal Music Group helped her forge connections with business leaders and board members. As she climbed to the top of the ladder, she ensured that she made friends along the way. Communication is crucial in order to ensure you are making a smart direct investment. Without the connections, you could miss out on potential business deals that will reap a higher ROI.

Courting business connections is essential for growth. A business deal could be enhanced by introducing the company board members to other experts in the same industry. Your connections could boost potential growth for the company taking it to ground breaking success which otherwise would not have happened without the right connection. As the saying goes, "It's not always what you know but who you know."

Stephanie recommends you open yourself up to business networking events in your local area. LinkedIn is also a great place to networking. Which could be the best route if you do not have a lot of time on your hands. She treats every business connection with compassion and empathy. Simply because she genuinely values their expertise but on a personal level, she values them as an individual.

When building connections you must ensure you also offer them your expertise. To take a completely passive role could end up being a detriment to the business deal because you will be left to second guess and rely solely on the company's projection for a return. Offer mutual value and you will forge long lasting friendships and connections. When you value others, people will be more objective and real with you on expectations of the direct investment. Start by doing a small favour for the business owner, see where you can place your knowledge and expertise. The world is truly your oyster when you are open to networking.

3. Research The Company Thoroughly (Including a Feel for the People)

Direct investments can be extremely risky in an evolving market. According to Harvard Business School, senior lecturer Shikhar Ghosh as many as 75% venture capital based companies never return a profit to investors. In fact, 40% of investments are lost completely (https://www.fastcompany.com/3003827/why-most-venture-backed-companies-fail). So it pays you to be incredibly thorough and research deeply into the business or company that you are directly investing in. Though venture investments is what makes the news and tech is the riveting new direct investment option. Stephanie reminds us, “remember that there are plenty of later stage companies that are in need of growth capital and are comprised of experienced and innovative individuals doing amazing things in their markets. Tech is disruptive, but it’s good to diversify with sustainable offline opportunities.”

Stephanie believes that whilst you must convey compassion in your approach to business deals, you should also remain hesitant and skeptical until proven otherwise. This means during your due diligence it pays to always be on the lookout for red flags. Companies are going to paint a picture in a similar vein like a car salesman because they're going to be eager to have you invest. They are going to establish a subjective narrative and place an optimistic spin on the company's financial projection. This is usually the role of the founder and/or CEO, backed by the CFO and board, and supported by the rest of the management, which is why connecting and communicating with the people in the company is so important, getting past the pitch. The pitch is all well and good but this is not always grounded in reality. However, this also means that the majority of red flags and sticking points of the company are swept under the carpet. You don’t want to dive head first into investing in a company to then uncover shortly over time that there are an overwhelming amount of red flags.

Such was the case for Stephanie de Sarachaga and her private equity firm Sarachaga et Compagnie when they were asked to invest in a lifestyle company. On the surface, it seemed like the perfect investment. However, Stephanie felt something was just ‘off’ and as she did further research into the company she started uncovering numerous red flags. The core business model was concrete, but as she connected with the founder and they moved beyond the pitch, it became clear that the exit strategy was not realistic. They wanted to hold onto the company, which severely didn’t add up to the initially presented investment opportunity. On top of that, no one who had invested in the company had any experience in lifestyle.

Stephanie’s family-run company is focused on direct investment activity and private equity. Her core values are to bring social change whilst a focus on maximising profit. To get there, she develops strategies and performs business analysis to tackle sticking points. She takes a strong stance on red flags because as soon as you start noticing them, you must be prepared to walk away. Which can be incredibly hard to do if you have been mesmerised by the idea of the potential success of the ROI. However, you must always ground yourself in objective reality as your job is to make smart risk assessments and maximise your return on investment.

Once you start noticing the red flags you must always be willing to cut it off completely. This takes practice to be able to cut ties and it may seem quite cold but that’s what it takes to ensure you are making smart direct investments.

The key is to think outside of the box whilst adhering to objective reality. Stephanie recommends that you take calculated and affordable risks. If you are unsure you can always look to the opinion of other experts to get a fresh perspective. And If you see potential investments to be made with companies you can forge relationships with them and figure out how you can provide value to maximise your investment. When you think outside the box and look into other avenues and markets, you open up a world of unlimited potential.