maybe you’re tired of taking shots in the dark.
You can pay a venture capital firm to throw a bunch of money at new companies and see what sticks. Or, if that seems risky, you can pay a private equity group to buy existing companies, perform financial arbitrage, and hope their wizadary can polish an OK company into something of value.
But either way, you’re paying for shots in the dark.
you’re not the only one.
Plenty of successful people invest this way because it works. If they throw enough money at enough deals, eventually a few will pan out. But most will slowly simmer into oblivion. We’ve invested this way ourselves and found the results to be less than desirable. Which got us thinking: rather than shelling out wads of cash upfront in order to learn the real strength of the business, what if we could get an inside look first? What if we deployed cash only after a company had demonstrated its true potential?
An idea that Makes money managers sweat
what if your money manager had to risk his own funds before bringing you in on the deal?
We’re not sweating. We believe that’s how investing ought to be done.
The
downstream
test
To vet prospective companies for investors, part of our process includes using up to $250k of our own resources to run a full-stack live market test.
We work directly with founders and their teams on a multi-month project that helps them clarify their purpose, acquire new customers, and re-engage former customers. This gives us a clear, first-hand understanding of how the company thinks, how the management team works, and how the customers respond.
From there, we let the data do the talking. If the market test shows the company has what it takes to sustainably grow for the long term, we invite our investors to participate.
No tricky finance or guru magic
The true value of a business lies in how effectively it turns prospective customers into lifelong raving fans. So that’s what we test for.
It’s a simple model we developed for measuring the strength of the relationship between the company and its customers.
Sounds nice,
but does it work?
Everyone says you need talented teams, innovative products, inexpensive financing, savvy marketing, – the list goes on.
But if you’ve been around for a while, you know those things are terrible predictors of sustainable long term growth. Take Chipotle and Qdoba, for example. Both companies make and distribute burritos. Both started in Colorado in the mid 1990s. Both started with talented teams, the same access to financing, the same access to consultants and marketing agencies, the same style of production. Their restaurant layouts and build-your-own-burrito menus have always been strikingly similar.
Yet today, each Chipotle location is worth $14 million**, while each Qdoba location is worth a mere $740,000.***
The differentiating factor? The quality of the relationship with the customer. It’s why, as of the time of this writing, trusty Toyota is worth $182 billion more than built-tough Ford. It’s why Nike is $149 billion faster on its feet than Adidas. It’s the reason Southwest is $24 billion more fun to fly than Spirit Airlines.
Companies like Chipotle, Toyota, Nike, and Southwest Airlines grow year in and year out despite changing economic conditions, changing trends, and fierce competition. All because they do one thing remarkably well: turning first time customers into lifelong raving fans.
**Chipotle’s Market Cap divided by the Number of stores as of 3-11-21
***Q’doba Market Cap divided by the number of stores as of 3-11-21