Growth (Part 4): Growth and Management Credibility
aswathdamodaran.substack.com
If you buy a growth company, the bulk of the value that you attach to the company comes from its growth assets. For these growth assets to be valuable, though, not only do you need high growth potential, but the company has to be able to scale up its growth while ensuring that it generates returns that exceed its cost of capital, while delivering this growth. That is tough to do, and it should come as no surprise that most young, growth companies do not make it through these tests. Investors who are able to look at a large group of young, growth companies, and separate those that will survive from those that will not, will see immense payoffs. But can this be done? Those who are firmly in the value investing school argue that this is the impossible dream and that there is too much uncertainty in this process and too many variables that cannot be controlled for this strategy to work. However, if this were true, how do we explain the success of some venture capitalists and growth fund managers? Are they just lucky? I don't think so. In fact, these investors share a characteristic: they are excellent judges of management at companies, since so much of the value at young growth companies comes from trusting managers to make the right choices and to follow through. Here are some of the dimensions on which managers of young, growth companies should be judged:
Growth (Part 4): Growth and Management Credibility
Growth (Part 4): Growth and Management…
Growth (Part 4): Growth and Management Credibility
If you buy a growth company, the bulk of the value that you attach to the company comes from its growth assets. For these growth assets to be valuable, though, not only do you need high growth potential, but the company has to be able to scale up its growth while ensuring that it generates returns that exceed its cost of capital, while delivering this growth. That is tough to do, and it should come as no surprise that most young, growth companies do not make it through these tests. Investors who are able to look at a large group of young, growth companies, and separate those that will survive from those that will not, will see immense payoffs. But can this be done? Those who are firmly in the value investing school argue that this is the impossible dream and that there is too much uncertainty in this process and too many variables that cannot be controlled for this strategy to work. However, if this were true, how do we explain the success of some venture capitalists and growth fund managers? Are they just lucky? I don't think so. In fact, these investors share a characteristic: they are excellent judges of management at companies, since so much of the value at young growth companies comes from trusting managers to make the right choices and to follow through. Here are some of the dimensions on which managers of young, growth companies should be judged: