It Don't Mean a Thing if It Ain't Got That Swing
Motivating long run capital in a period of uncertainty
Investors of all types, including, and maybe especially those of us dedicated to impact investing, seem to be suffering a hangover from misplaced exuberance for recently hot markets. High expectations for both the broader economy and specific policy have disappointed, and many investors are now wondering how to motivate capital in an environment that’s both volatile and increasingly tenuous.
After more than three decades of experience in the markets, I still believe that what motivates capital today remains the same as it ever was: a good idea and strong execution. Investors are drawn first to a good idea. Yes, that sounds trite. It’s also true, and it’s not as obvious or simple as it might seem. A good investment idea almost always solves a challenge, and the larger the market, the more interesting the idea. Hindsight sometimes makes the solution seem obvious, but to identify the idea you’ve got to possess domain expertise, industry foresight, and (usually) experienced judgment. How many times have we all looked at a great idea and said to ourselves, “I wish I had thought of that.” Well, we didn’t think of those ideas because we couldn’t have—we weren’t sufficiently exposed to the drivers of the idea.
Less glamorous but equally important is execution. Exceptional execution. As an early mentor taught me, a good idea without proper execution is just a passing thought (this same wise person also said that a commitment without a deadline is meaningless). Or, as Jamie Dimon put it: “I’d rather have first rate execution and second rate strategy than a brilliant idea and mediocre management.”
Understanding those two things, the strength of the idea and the capability of the management team, will take an investor up to the critical moment of decision. And that moment of decision is the one where you understand that you may have identified a good investment. But that’s not enough. Judgement is the necessary input you can’t teach in business school. As investors, it’s not enough to run the numbers, it’s also our job to distinguish the business pitch from the business itself, to separate the noisy trend from the operating reality. That’s the magic of a strong investment: It stands up to cold, hard analyses and compels you to take risk—to place your capital in someone else’s hands. Spreadsheets only go so far because, as Duke Ellington wrote, “It don’t mean a thing if it ain’t got that swing.”
The lesson every investor has learned (sometimes the hard way) is that a successful business is a combination of strategy, tactics, execution . . . and a whiff of magic you can’t put on paper. They are all important, but in a bullish environment, many investors forgo the first three in lieu of the last; they forget (or never knew) that the swing comes after the hard work, not before. It seems obvious, but the fact is that hours of practice and months of team building have made it possible for the audience and investors to have their “oh yeah” moment.
After learning that lesson, the key then, is to be able to distinguish between authentic “swing” and noisy excitement. And this is why, to be honest, many people trying to raise capital today are frustrated. Over recent markets, many businesses got funding on swing alone. Sometimes the swing was the catchy beat from a company that convinced investors you could identify dozens of diseases by analyzing a single drop of blood. Other times it’s a management team’s wild horn solos that convinced investors a bunch of 24-year-olds in Bermuda were capable of running a financial services company managing millions of transactions and billions of dollars in Bitcoin. Then there are the moments when a swinging dance floor is mistaken for the actual swing—ask anyone at the country club who invested with Bernie Madoff.
Unfortunately, there are also situations where the music is of a genre people don’t love, which leads them to ignore or discard a rational opportunity. Many investors today are convinced alternative energy is a poor idea, just because they don’t like the players in the band. Similarly, certain forms of community-based small business lending, which have been around for as long as lending has existed, get pressured because investors have a certain idea about who listens to that kind of music and who doesn’t.
How, then, do you ignore the racket and get over your own biases so you can invest in what works? Start with the basics: identify good ideas, make sure the management team is capable, and figure out the “swing factor.” Ask yourself—and this is often the most important step of all—if you’re confusing “exciting” or “cool” with “good” or “solid.” Remember, exciting is fun, but boring can be lucrative. It’s just…boring, and therefore something many people are willing to overlook.
Which brings us to what’s at the heart of motivating capital (and this piece): separating the swing from the noise in the crowd. If you’re raising capital, be absolutely sure whether or not the idea can work in the current environment. Pressure-test it by asking: Are consumers prepared to pay for the service at this higher price point? Can I fund it when my cost of capital is 6% and not 2%? Can I make up the lost margin when tax subsidies disappear? If you are managing an investment fund focused on finding new ideas, you’ve got to ask those same questions across the marketplace. Sure, investors want to hear the swing, but they also want to check out the quality of the band, and their instruments. If that all seems harmonious, then you’ve probably got a hit.
My practical and highly intuitive Midwestern mother might have said, “Don’t overthink it —it’s just a good idea, isn’t it?” My response to her would have been “Yes, Ma, it seems like a good idea…because you always did overthink it.”
