Now, the investor would also look at some of your operation parameters. A very simple and typical ones is what is your gross margin? Well, gross margin is calculated by subtracting your revenue by the cost of goods sold. So if you are selling a - let's say a pair of shoes, how much are you getting that pair of shoes from the factory? How much the factory is charging you? And let's say, for example, you're selling a pair of shoes for $100 US and the factory that you are getting the pair of shoes is charging you $40 US for that pair of shoes. Then your gross margin would be 60 percent, in fact. Now why is this important? Well, to start with, you must have a positive gross margin, which means you can cover the cost every time you sell a product. But also, the gross margin will give the investor a sense whether you have a viable business. Because for a lot of business in different industries, there are already some kind of established margins concept. For example, for retail, in order to support each layer of distribution, each layer must have their own margin in order to survive. So typically, each layer needs to have at least a 100 percent markup. So in other words, if you only have 50 percent margin for yourself, you probably not have enough margin for a distributor. And if the distributor have yet another reseller and another reseller - so for each layer is getting a cut from the margin, so it's getting thinner and thinner. Can your product - can your gross margin support so many layers, which is probably essential for selling your product? That would become an issue for the investor. So therefore, looking at your gross margin, the investor would have very good idea whether you can sell your product or whether you can support enough layers so that you can sell your product in a much larger distribution channel. And, of course, equally important is the net margin. Net margin is when your revenue, after subtracting the cost of goods sold and then you also subtract your fixed costs - so now you have really subtracted all the possible costs. That will give you the final profit. And with this final profit divided by your revenue, that give you the net margin. Now, of course, the net margin will improve as you scale up your company, because your fixed costs is shared by a lot of the sales. The more you sell, the more favorable fixed costs on the per unit basis. And this will give you a better and better net margin. Investors are very experienced business people. When they look at your gross margin as well as the net margin, that would give them a very good idea whether you have a viable business. That's why they will look at these two numbers very, very carefully. And they will look at how quickly or when you would, in fact, reach the break-even point. A break-even point has a definition of the following: When your revenue can cover your total cost. So in other words, at the break-even point, your revenue minus your cost of goods sold and the fixed cost equal zero. Because beyond that point, your revenue should be bigger than your fixed costs and the variable costs. In other words, you have achieved positive profit; you have achieved break-even. How do you answer the question when investor asks, "So when are you going to break even?" Well, there are several ways of actually describing or answering that question. Well, one answer could be you tell the investor: "When I reach a certain revenue size - so if I get this amount of revenue, I will break even." You could answer that in a different way. You could answer that saying, "If I reach so many customers, then I will break even." Or you could say, "If I have sold so many pairs of shoes, then I will reach break-even." So you can answer the questions of when you break even by revenue, number of customers, or number of products that you are going to sell. From the investor's perspective, they are trying to see whether this is realistic or whether this would be a very challenging business. For some business, you may take a lot of customers to break even and they may not be realistic. Or if it takes too many number of units sold, that may not be a realistic or, in fact, could be a very challenging target. So the investor will judge from your break-even point to see whether you have a viable business. Another parameter that the investor really pay attention to is called the payback period. Well, think about it. When the investor put in the money in Year Zero - at the beginning and what they are looking at is if this company that they are investing generates positive cash flow every month or every year, how long will it take for these positive cash flow to sum and to be greater than the investment that they put in? So in other words, how many years would they get the positive cash flow to be bigger than what they put in? Now, I have seen start up where they make projections; they ask for, let's say, millions of dollars from the investors. But the profit, let alone positive cash flow that they generate, are only a fraction of that number. So the investor would have to question, "If I put in millions of dollars into the company and I simply counting the cash flow that your company is generating, it's going to take me decades before I see the money comes back. And that's not a good investment for me". So that's why they really, really care about this number. Not to say that they going to take the cash out from your company, but is a good indicator of whether you are running a very profitable business and whether you are asking too much of a investment and you are giving back too little return for them. Remember, the investors have a lot of choices. They could invest in some other company, not necessarily yours. And therefore, they would have to look at each and every single one of these parameters. And if they see any red flag, that's when they say no to your investment. So pay attention to all these numbers return on investment, annualized return on investment, IRR, break-even, net margin, gross margin, and the payback period. And you must try to make all these parameters in a favorable way for your investors.
