Where do investors start in their private investment analysis … even before conducting due diligence? At the most basic level — First Principles, “the first basis from which a thing is known.”
First credited to Aristotle and commonly applied in scientific analysis, First Principles is an approach for identifying the most fundamental considerations when evaluating a problem (or opportunity) and then identifying the optimal response. First Principles is now also used by leading investors (Charles Munger, Carl Icahn) and entrepreneurs (Elon Musk) in their financial analysis. It poses three simple questions that are essential to better understanding an investment opportunity.
1. The Opportunity — What is the business opportunity being pursued?
2. The Challenge — Which challenges is any business likely to face as it pursues this opportunity?
3. The Solution — What is the most logical approach to the opportunity, does it adequately address these challenges and is the company on the right path?
Once the investor understands these fundamental points, follow-on due diligence becomes both better organized and more enlightening.
First Principles guides Carofin in its initial understanding of prospective Issuers of private debt, venture capital and private equity.