Getting the ‘Why’ When Making a Private Investment

Many years ago, I was asked to finance a start-up company that wanted to create a cigar vending machine business for sports arenas.  I quickly passed.  Didn’t get it.  Couldn’t see why the world needed it.

I’ve yet to see one at a ball game, so maybe I called that one right.  I wish I did every time.


Getting It Should be Easy

When an entrepreneur says to me, “You get it,” it always strikes me as odd – as though the basic economic driver for their business – its why – is some secret that only a select few can grasp.  Really it should be as plain as day to anybody!

If you’re considering a private investment, whether venture capital or lending money to a business, you should easily get it – to understand why its customers are (or will) buy its products.  If you can’t, you ought to move on to the next opportunity.


Why The “Why” Matters

Why is a powerful question.  Much more so than what because it leads to much greater insight, to the essence of things.  It creates context and relevance for all the whats and then, for investors, guides further due diligence for a given potential investment.

A business needs a compelling Why and to communicate it effectively, both internally and externally.

Among the most popular TED Talk presentations on YouTube is Simeon Sinek’s “How great leaders inspire action” where he highlights the power of communicating the underlying why within any enterprise to drive achievement.  He explains that sharing the vision with employees inspires them to do their best work.  Prospective investors … take note.

His message is so powerful because each of us instinctively wants to understand things, at least we did when we were very young.  By age 3 or 4, children naturally begin to ask why.  The challenge for investors is to apply this innate form of curiosity to deals.

An investor presentation dominated by whats will leave you trying to piece together the disparate elements of a business plan.  This contrasts with one guided by whys which leads to a fundamental grasp of the business supporting the investment.


Following Bell Cows

The Bell Cow

In farming, the “bell cow” is the one that naturally leads the herd, so a farmer puts a bell around its neck to know where the herd is.  With investments, there is a similar phenomenon … the “lead investor.”

Often, like a herd of cattle, we follow another investor’s lead when deciding whether to participate in an investment.  If that investor has sector experience and a solid investing track record, this approach certainly has its merits and saves us a lot of effort.  Nevertheless, I’ve found that the best questions are generally the most basic, and someone who isn’t already familiar with a given industry is less inclined to make inaccurate assumptions.

However, based on my 30 years of venture experience, I’d argue that investors should still at least understand an investment’s whys or they’ll be relegating themselves to blind faith in their bell cow.


Not All Whys are the Same

There are many reasons for starting a business.

Consider the power of the passionate why: where some very personal reasons underpin the creation of the company.

For example, putting a stop to injuries and deaths of children resulting from the hanging cords of window coverings was the impetus ten years ago for one of our North Carolina clients.  They now develop patented products which eliminate this risk, and their sales are growing rapidly.  Further, the U.S. Consumer Product Safety Commission recently issued an industry-wide ruling eliminating hanging cords.  An altruistic, meaningful why doesn’t always ensure financial success, but it’s a good place to start your analysis when probing for an entrepreneur’s conviction.

For-profit businesses, and the investment opportunities they generate, however, won’t make it unless they can consistently deliver products which satisfy customers.

So, focus early on the why involving target customers – the business opportunity it represents, and underlying customer motivations.  Is it an urgent “need” – like a medical device which offers a diagnostic tool for early detection of a deadly disease – or a “want,” such as the latest fashion fad being promoted on TikTok?


Getting to The Why … Quickly

Pitches by company founders usually start with a review of their backgrounds and the size of the business opportunity.  Entrepreneurs naturally want to tell you their story in their own way.  You can ride along with their presentation, but you’ll probably waste time doing so and not sufficiently vet the company’s key business driver – sales.  I did for years.

These days after pleasantries, I redirect presenters to start with their why, particularly their customer-related why.  If I’m still interested, we can move to their prepared material.  Then, even if they can’t convincingly connect the dots between their why and their whats (how to make sales), I’ve at least gotten to those whats that are critical to the investment’s success.  At that point, I’m in a position to make the decision whether to spend more time on it.

If this approach seems basic … it is.  But none of the whats matters if there isn’t a fundamentally sound why.

You have unlimited investment choices.  If you’re going to put your money to work in a private transaction, you need to get the opportunity’s why efficiently and then drill deeper into those which are, fundamentally, best positioned to succeed.

This approach still won’t guarantee you “smoke one” out of the park, but I believe it will greatly improve your batting average.

If you are interested in direct private investments, I invite you to look here.

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