Quantitative Analysis Limits Edge

Jeremy Giffon shares insights about the limitations of quantitative analysis in deal evaluation, drawing from his experience at Tiny. He argues that relying heavily on numerical analysis can actually be counterproductive and explains why qualitative assessment often yields better results.

Key Points:

• Quantitative Analysis Limitations:

  • More numerical analysis leads to commoditization of your deal evaluation
  • Everyone can do basic quantitative analysis, so it doesn't provide a competitive edge
  • The real edge in quantitative work comes from advanced players (Two Sigma, Jane Street, MIT PhDs)

• Problems with Traditional Financial Modeling:

  • Models often miss the magnitude of potential outcomes
  • Example: Facebook IPO analysis by Barclays
    • Used standard 3% terminal growth rate
    • Predicted $200B valuation
    • Reality: Grew 30% annually, became $2T company
    • Was off by an order of magnitude

• Better Approach to Deal Analysis:

  • Focus on first principles thinking
  • Ask fundamental questions like "what percentage of the planet could use this?"
  • Look for basic, obvious indicators of business potential
  • Consider day-one operational improvements and immediate leverage points

• Deal Evaluation Framework:

  • Focus on simple metrics: revenue, earnings, immediate improvement opportunities
  • Ask "would you pay X for this?" at different price points
  • Look for no-brainer prices rather than trying to be smarter than everyone else
  • Target 20-30% annual cash return as baseline, with additional upside potential