Friday, July 31, 2020

Availability of Financial and Non-Financial Information Impacts Investor Interest in Delta County Michigan

Municipalities in the post COVID world are struggling to find methods to improve revenue and weather the damaging effects of economic shut down. What many of these administrators don't see is a path through the fog by harnessing the power of economics and the capitalization of information. Throughout the pandemic we were able to see how investors maintained stock prices but much of the rest of the economy struggled. Stock stability is unlikely to continue unless new investments in businesses lead to stronger revenue returns. Helping businesses attract investors by providing the right kind of information for research and investment algorithms is helpful in creating an investment rich environment that benefits local and government stakeholders.

Information is a central need of any investment and economic decision matrix. With proper information and tools investors can be attracted invest in promising local businesses and business ideas. To gain their revenues businesses and municipalities must do their part to provide information in a way that is useful to larger institutional investors and the development of these businesses alike. The quality of that information will determine not only business and location selection but also return revenue which leads to other investments in the area.  

Research into the types of financial and non-financial data for investment leads to an interesting finding of an evaluation tool that better predicts investment match success.  The researchers state, "Compared with other decisions, financial investments should be more rational, and investors need to acquire immediate and accurate information for their investments (Shang, Chen & Chen, 2013).

The Formula has four major components that help investors make decisions.

Pre-Money: Money available (i) at the time of investment (t).

Non-Financial Data: Data on team composition, founding team size, management team, CEO qualifications, in-house experience, first reference customers, cooperating partners, patents and prototypes.

Financial: Cash and non cash assets, long term debt, R&D expenses, SG&A expenses and revenues.

Deal Characteristics: Investment monies from Venture Capitalists available, firm age, money available in the VC industry for 4 quarters, etc...

What the researchers found is that their valuation system did notably better than other valuation systems in successful investment match when compared to industry specific or total asset multiples models alone. Thus more information in this cases was better as long as that information is directly related to the potential health of the firm and whether or not it will succeed and grow in the market. Investors seek to minimize their risks through a better understanding of an organization will rely on proper data so making it available to them upfront will have an impact. In layman's term you need the proper bait to attract the big fish. 

The Need for "Good Data" in Investment Decisions

Financial data is helpful but so is non-financial data that helps to round out the decisions that venture capitalists need to make. In so doing, a firm takes into consideration the hard and often soft aspects of an organization as they relate to money and non-monetary considerations (i.e. team and skill). Creating this wider context is helpful in business investment and development. Having numbers, facts and figures is great but knowing how and who is running a company makes a big difference in success. That is why I have said for years EBITDA shouldn't be used as a sole metric for firm evaluation.

Organizations that want to attract investors and those that desire to invest need good data and information. Often they are left to research sources that pick and pull different pieces of data from various industry and company markers. That leaves them sort of guessing as to the meaning of this disjointed data. However, offering this information upfront may make a big difference in the overall ability of the organization to find a successful investment match. 

Governments can consider redesigning their websites, literature and offer opportunities to connect to investors by providing appropriate information through online forums and communities. Particularly helpful will be to used organizations like the DDA and others to encourage businesses to put an investors page on their website (or government website) to draw in investors to consider investing in the scalability of their businesses. That information should include the financial and the non-financial aspects that investors need to inquire directly with governmental and business stakeholders. 

From Previous Postings

I try and continue to integrate the knowledge to come up with a better plan for Delta County that can be scaled and used in other locations that have high unused potential. 

1. Online forums can connect government, business, and investors. 
2. Offering the right kind of data leads to more venture capital interest.
3. Using online investment forums can improve upon the amount of money being invested.
4. Attracting entrepreneurs with investment cash that want to purchase downtown business helps rejuvenate the downtown through the use of store fronts, improved reality values, and tourist base micro-manufacturing that leads to exports. 
5. Supporting entrepreneurs through packages, grants, low interest loans, a regulations/business liason, etc..
6. Focus on clusters that are likely to create the greatest innovation and growth. 
7. Capitalize on the areas natural strengths such as eco-tourism, shipping, deep sea port, area military installations, mining, etc.... to create clusters. 
8. Think about extended hub clusters that create secondary innovation and growth and lead to whole new industries. 

Sievers, S., Mokwa, C. & Keienbug, G (2013). The Relevance of Financial versus Non-Financial Information for the Valuation of Venture Capital-Backed Firms. European Accounting Review, 22 (3). 

Petty, R.E. and Cacioppo, J.T. ( 1986 ),Communication and Persuasion: Central and Peripheral Routes to Attitude Change , Springer-Verlag, New York, NY .

Shang, R., Chen, Y. & Chen, C. (2013) The social and objective value of information in virtual investment communities. Bradford, (37) 4. DOI:10.1108/OIR-06-2011-0087

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