First Principles (#2): What Opportunity is being pursued?

Consistency is critical in our business.

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

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.

An investment, generally, is tied to a fundamental societal need (food, clothing, shelter, security, healthcare, etc.) and should jump off the page.  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 business opportunity.  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)?

We hope this discussion helps you better evaluate investments you may be considering. 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.