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Why human needs drive all business
To Be Human
Humans live lives.
Every one of those lives is unique.
Yet they all involve the same basic kinds of activities.
Eat.
Sleep.
Work.
Play.
Rest.
Socialize.
Communicate.
All of us engage in this basic set of activities and behaviors.
However different they may be from culture to culture and generation to generation, they play a central part in what it means to be human.
Many of these activities consume.
In the third quarter of 2023 that consumption was worth $27.6 trillion.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
Humans are limited, which creates a host of problems.
We spend our money to solve those problems.
Every problem exists within a layered web of other connected problems and solutions. We call each layer a “market.”
In Q3 last year, the US GDP was worth about $27 trillion, which breaks down into many smaller markets that serve different and specific human needs.
Understanding the size and scope of human needs around a specific type of problem empowers investors to evaluate an investment opportunity.
Limited
You and I share an inherent problem.
We are limited.
No matter how well-educated we may be, we really don’t know that much.
We have only 24 hours available to us each day.
Our bodies can’t function without food, rest, and shelter.
As a result, we must rely on others to accomplish the daily activities of life.
How does that reliance reveal itself?
By the way we spend our money.
Consumer
We have lives to live, so every day we spend money (which, by the way, we earn by working to help solve the needs of others) to consume food, lodging, infrastructure, entertainment, travel, technology, and more.
Humans stand at the end of society’s value chain.
We are the “end user” or “consumer.”
I believe this inherent human need to consume to live is the fundamental problem that the business world aims to solve on a perpetual basis.
Markets
Every business contributes to solving a “smaller” problem derived from this larger core problem of human need.
Last week I mentioned that I think about “markets” as layered collections of connected problems and solutions.
The layers of those markets are defined by human needs.
I think it’s important for investors to consider this macro reality when evaluating an investment opportunity, and in particular when trying to understand the problem the company is solving, why it’s a problem, how it fits into the overall economic system, and the total size of that market.
As an example, let’s look at how the US Bureau of Economic Analysis thinks about markets at a high level, double-click on the transportation market specifically, and consider implications for a ground mobility tech startup.
$27.6 Trillion
Below is a snapshot of value-added US Q3 gross domestic product (GDP) data I pulled from the Bureau of Economic Analysis (BEA), sorted by size. (Note: I’ve used value-added GDP, which captures the delta between gross output and cost of any intermediate inputs. Another valid way to run this analysis would be to use gross output by industry.)
As we can see, there are 14 broad “markets” or “industries” that compose the $24.5 trillion in private industry and two that make up the $3.1 trillion government sector.
The BEA has developed formal definitions for each of these markets.
Next to those, I’ve come up with a simple translation to what I think is the basic human need associated with each industry. These are oversimplifications, but I hope this illustrates my point.
Transportation
Last month I enjoyed the benefits of air, rail, water, and ground transportation. Let’s examine the ground transportation market - how big is it in the US?
According to the BEA dataset from Q3, transportation and warehousing represented about 3% of US GDP, or $963 billion.
The ground transportation market specifically was $67 billion, or $268 billion annualized (multiplied by 4), representing 7% of the total transportation market.
What this Means for Evaluating a Mobility Tech Startup
All these high-level concepts are interesting, but how do they apply in real-world scenarios?
Let’s say I’m evaluating an investment opportunity in a mobility tech startup.
I’ve figured out that the problem they’re focused on is related to the pain of getting from point A to point B via ground transportation in a busy city during heavy traffic.
They’ve developed some slick new device to make the experience quicker and easier for consumers.
How big do they tell me their total addressable market (TAM) is? $100 billion.
Sounds like a compelling opportunity.
But the macro data I just reviewed suggests the entire mobility market in the US is worth about $270B on an annualized basis.
Do I believe this small company can ever reasonably grow to address 37% of that market?
Since I’m familiar with the overall market data, and understand that human need fundamentally drives these problems, I can wrestle with questions like this more easily as part of my decision-making process.
Final Thoughts
As I’ve reflected on problems, where they come from, and how markets form and grow, I’ve been struck by the powerful force of human need for driving economies. Humans stand at the end of the value chain, and startup investors do well to understand and consider this when exploring new opportunities.
What do you think?
How do you think about markets and the impact of human demand?
Weekly Observations: 3 Lessons Learned
Not being in charge is deeply restful.🧘♂️My wife planned our entire vacation (which she loves doing). She handled the details for every hotel, train, bus, flight, and more. Besides being incredibly grateful for my bride’s skillset, I found that the simple reality of having someone else be “in charge” was incredibly restful for me. I was able to just “go with the flow” and enjoy. So much of my day-to-day is characterized by decision-making that it was wonderful to not be required to do so for a few days.
Just because a company is doing well does not mean it’s ready for investment.💰This week we evaluated a strong, compelling company with meaningful traction and exciting growth prospects. Very investable. But they weren’t ready to pitch - they had not yet finalized the mechanics of their raise, the “pitch” needed some work, and the company structure was unclear. With a little work, they’ll be in a great position, but my takeaway is that being investment-ready goes beyond simply having a strong, growing, investable company.
Values resonate differently with each team member.🌟At this month’s staff meeting, we reviewed PitchFact’s 5 core values: eager execution, highest standard, transparent together, rest well, and lean in. I consider them all equally important, but realized that they resonate differently with each person. For example, one team member mentioned that “lean in” is super important to them, another highlighted “eager execution,” and two mentioned that “rest well” stood out to them.
Weekly Links: 3 Things I Found Interesting
Thanks for reading, have a great week.
-Andrew
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P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.
How did I do this week?
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.