Outside of investing, I occasionally enjoy listening to hip hop music. A shared trait between the two trades is a maniacal focus on “the things that matter”. In hip hop it’s almost always cash and in investing it’s return on investment. Hip hop artists and investors alike casually drop catchy phrases to reinforce this philosophy. Two of my favorite lines are “If it don’t make dollars it don’t make sense” and “No one ever made money doing spreadsheets.” The first line is from a famous 90s diss track “Dollaz & Sense” by DJ Quick. The second is from a mentor from one of my old jobs. From these two lines, you could logically (maybe with a leap) conclude that spreadsheets don’t make dollars so they don’t make sense. Not so fast.
I was reviewing a model of a chocolate company where revenue growth was driven by tons of chocolate sold. The model predicted that during its first year of operation, the company would sell 50 tons of chocolate at Whole Foods stores in the US. In this case, assuming average size of 85g for a chocolate bar, this would translate to ~600,000 units. Whole Foods has ~430 stores, which implies a velocity – number of units sold per store per week – of ~26. This plan doesn’t make sense for a few reasons: The average velocity for chocolate bars in natural grocery is meaningfully lower than 26; Acquiring shelf space with a major retailer could be a long and arduous process; It is unrealistic to expect a new brand to “go from 0 – 100 real quick” and achieve full national distribution in just one year…Maybe DJ Quick had it upside down and really meant to say, “If it don’t make sense it “won’t” make dollars.”
My example provides a rational rebuttal to DJ Quick, but one could argue that this exercise is so simple and can be performed on the back of a napkin instead. A few more comprehensive ways I have used spreadsheets include:
- Forming of perspective for an entrepreneur’s understanding of the industry and that particular opportunity by systematically testing the facts behind her/his assumptions. Assuming a 100% penetration and outlier sell-through rates in a short time demonstrates a lack of appreciation for industry complexities. However, if an entrepreneur produces a spreadsheet with purchase orders from each buyer that slightly improves credibility.
- Building of scenarios to assess the difficulty (or ease) of our fund to achieve its economic hurdle rate, usually by comparing management’s assumptions with industry benchmarks and assessing cost of the strategic plan under different economic realities.
- Learning and measurement of new market opportunities, especially where an entrepreneur is proposing an innovative approach to business fundamentals – sourcing, manufacturing, distribution, pricing etc. – that potentially increases expected return on investment.
In general, it might be true that nobody makes money doing spreadsheets, but I would posit that some investors and entrepreneurs who didn’t do their spreadsheets lost money and time from investing in schemes that didn’t make sense.