One of the things I find myself thinking a lot when looking at investing — whether resources to a project at Transcriptic, helping with diligence on other companies, or just my time in some idea — is “that sounds great and totally reasonable, but is it true?” The trueness of good sounding explanations in the absence of fundamental math is both surprisingly underrated and hard to determine. For many things, you just have to wait and find out, so doing it as efficiently as possible is often how the needle gets moved.
I was talking to a friend at a mutual fund who was spending an enormous amount of time building a spreadsheet model of a very narrow niche in a large industry. I asked what the most complicated part of the project was and she said, “it has to be true.” She didn’t immediately trust any statistics or research reports she found on the topic. Often reports disagreed with each other. She’d look at the totality of the data, figure out who she could call to ask disambiguating questions, and try and triangulate the true numbers. It was surprising how even the companies and governments in question often didn’t even know what the true numbers were for their own stuff.
Way too often do you see startups do some Googling, find a sufficiently large number with a B at the end and throw it in a deck as their market size. I can count on one hand the number of times I’ve seen fundraising decks with thoughtful, likely true, breakdowns of markets and where the company fits. For the opportunity overall — is it really there? It’s easy to get excited about an idea you’ve had especially after some positive reinforcement from contacts that already know you. But is it true?
The movie The Big Short stands out in my mind as an awesome example of research: what do you do when you have these instruments that seem like they can’t possibly work, but everyone else thinks you’re crazy? Go door to door talking to the owners and the brokers who wrote the loans. When you discover that someone with poor credit has bought multiple houses on adjustable rate loans in the name of their dog, you can be pretty sure it’s true.
Research is really hard to do but I’ve come to believe that as much as 50% of being better than your competition is having better information. Invest in it! It’s not easy, but too many people trust numbers they find in research reports and a vague belief in economic efficiency because they don’t understand the details, so doing better than that is a differentiating advantage.