The J curve!
Aug 11
One of the lessons I learnt about investing early on from my mentor Sir Rodney was to watch the J curve. I hope I can pass this lesson on today to Entrepreneurs and would be investors.
Most start ups plan follow a J curve type profit profile. If you draw the letter J at a slant you will see what I mean. With the J being made of a U and a I. The ‘U’ phase represents the start up phase when you make losses and the I phase is the profit phase!
As Sir Rodney says
“companies tend to be very good at sticking to the U phase of the plan, but not so good at the I phase!”
These words have certainly been my conclusion from the investments I have made to date.
As an investor you must expect this in a start up situation. The valuation of a company will depend to a very large extent to where they are on this J curve. What annoys me are investors who want to invest at a valuation which places the business at a different place to where they are. Recently I had two would be investors waste a lot of time by suggesting they would be investing in a business and then they backed away because they felt it was still at the risky phase - yes it was and the valuation reflected that! You are not going to get a potential of ten times your money without a high level of risk!
As an investor, I expect the management of a business to act with real parsimony during the U phase. If things are going worse than expected and they need to raise more money (this does happen) I also expect them to show moral leadership. Are they offering to take pay cuts? (Temporarily at least) - are they increasing the amount of money they will put into the business? (Either themselves or from their friends and family) Are they coming up with some real cost cutting measures? (Without damaging the core of the business). These are important questions that need to be asked by the board and investors.
I think of the two stages in very stark terms.
- In the U phase you are spending my money.
- In the I phase you are spending the companies.
You need to keep investors informed whilst you are losing money (as will have been planned). We hate surprises (good and bad). A good surprise is of course good - but it still reflects badly on management!
This advice might sound obvious but get to the I phase as soon as you can.
U is not my friend, I is!
Hi and welcome to my blog. 
Aug 12 at 10:06
Hi,
The J curve explanation is great - would you say then that a company should do all it can to the ‘I’ part without giving away equity, as the company value will be so much more when it does reach the ‘I’ section?
Is there are any basic figure one could apply to the valuation of a company once it does it hit the ‘I’ section - i.e. it would at least double the value - or …?
Thanks for all the good advice - am following each day!
Brayley