Angel Investing, Entrepreneurship & Learning

Last week, I had the chance to help judge the BYU Idea Competition. There were 10 judges analyzing around 140 business concepts and ideas. While there were some ideas that were a little wacky and others that were not very feasible, I was very impressed with most of the ideas that were presented. Our goal was not to select a winner or even decide if they are “fundable” ideas, but to decide if they are good ideas or not.

Some might say that a “good idea” and a “fundable idea” are synonymous, but I disagree. One of the main reasons that they aren’t the same is because a lot of really good ideas are not scalable. Let me explain…

When investors are analyzing an investment opportunity, they will traditionally look to see if the company will grow very rapidly in the first five to seven years, providing an opportunity for the investors to exit with a high-multiple return on investment. When I say “high-multiple ROI,” we’re talking 10-30 times their money (so if you’re looking for $500k, they are hoping for returns of $5M or more).

There are other businesses that are very good ideas, but don’t pass the “scalability test.” Most investors refer to these ideas as lifestyle businesses. Examples of lifestyle businesses may include: restaurants, real estate, local mom & pop shops, and other human-intense opportunities (i.e. consulting, etc.). These businesses can be very successful and provide a very good living for their founders, but aren’t necessarily good investment opportunities.