Identify a Market Opportunity (1st principles of investing)

Consistency is critical in our business. 

When it comes to investment analysis, this “First Principle” – “What primary market opportunity is the issuer pursuing?” – is the first question successful investors apply in their consistent approach to company analyses.  

Identifying the fundamental rationale for an enterprise is central to helping retain your focus on the ball.  It’s what we consider first before bringing an offering to you to consider. 

In this series of articles on First Principles, we show you how to easily define the basic elements of a business’s inherent value proposition.   

  • What is the market opportunity?
  • What are the challenges that a business must overcome in order to capture the value of that market opportunity?
  • What solution(s) does the business have to overcome those challenges, to ultimately capture the value of that market opportunity?

An investment, generally, is tied to a fundamental opportunity in the market. For example, people need to eat, so there’s a market opportunity for a farmer to grow food.  We’ve been in conversations with issuers too frequently who, when we asked, couldn’t immediately explain what need their product answers for the customer. 

Now, identifying the fundamental opportunity may seem overly simplistic, but that’s the nature of a First Principles-based analysis.   

Sometimes, Carofin is approached by an entrepreneur with a solution looking for a problem.  We see many cases where some entrepreneur or technologist has come up with what seems to be a great idea, but it’s not clear what opportunity it addresses.  An early stage company  with limited resources  must always be laser-focused on a single opportunity presented in the marketplace.  Such a focus helps prioritize all other decisions, such as product development, employee hiring, capital expenditure, etc.

Consider, too, these additional aspects: 

  • Why does the opportunity exist?
  • How urgent is the need to address it?
  • Who does the opportunity most affect (i.e., who is the customer)?

Please be on the lookout for the next two factors in our First Principles rubric, The Challenge and The Solution.  





In the interest of accessibility, here are some terms that any investor should be familiary with.