Let me explain.
My house was built in 1942 and I think I am the fourth owner of this “magnificent” structure, a big brick colonial with an addition that someone built back in the 70’s (linoleum on the floor, 70’s colors, the whole bit). In the time I’ve owned the house, I’ve found some "quirks" that quite simply, befuddle me, such as:
- strange wiring choices where two outlets 3 feet from each other are on completely different circuits, not to mention the junction box that looks like 3 octopi fighting over a bowl of spaghetti,
- massive steel girders running horizontally across the basement (i.e., load-bearing joists), supporting the entire house.
- a roof with weird angles and a part that sort of juts out 2 feet and runs partway along the back of the house between the first and second stories.
Look, I know that old houses are quirky. A hundred times, I’ve stood in my front lawn, arms crossed, brow furrowed, just looking at the house. Passers by (dog walkers, neighbors, FedEx drivers) have literally stopped to ask what I was doing, to which I generally reply, “trying to figure out this house.”
It’s true, when you look at the house from the yard, you can sort of see why someone would run wire from here to there (laziness and poor planning aside) or why the dining room ceiling leaked where two roof sections met, having nothing to do with the bathroom directly above it, which would be the obvious culprit and thankfully i didn't rip apart that floor looking for a leaky pipe.
One day, I met the second owner of the house, wonderful man who still lives in town. I figured he had some insight into what was done back in the day and why so I picked his brain.
The first thing I asked was “what does that light switch outside the first-floor bathroom do? It has nothing to do with that bathroom because THAT switch is by the basement door?” He didn’t remember but I have since figured out that that particular switch governs the lamppost in the front yard, 50 feet away (OF COURSE it does).
The second thing I asked was why in the heck there was so much steel in the basement. As I said, the house was built in 1942, and according to the history books I've read, there was a pretty big war going on and they needed every scrap of metal to make battleships and tanks. The answer surprised me. He told me that the original owners had the house built and planned to have thick marble floors over the entire first floor (YUK!) and the steel was necessary to support the weight. They changed their mind and put in the wide-plank dark walnut floors that my wife absolutely loves – but once the steel was in, it was in for good. So that one worked out OK. You could put a mountain on top of my house and these beams would hold it.
Sometimes you have to hear the story to understand what happened and why. I’ve done analyses for companies where something just looked “off” or maybe I was having trouble seeing where this company was going. I’ve had things like:
- Why did cost of goods sold suddenly drop like a stone, doubling gross margin almost overnight?
- Why is working capital so high and will it stay this way or is this just a blip?
- Why is the product mix suddenly upside-down but the overall revenue number almost exactly the same as before?
The answer to the first one was that the company, a shoe company, had their soles manufactured in China. When they were a tiny little company, they would only order soles twice a year. This meant that the manufacturer would put their molds on its machines, crank out a bunch of soles, ship the soles and then put different molds on the machines to make someone else’s soles for 6 months until they switched back to our guys. When our company got big enough to order soles every month, the manufacturer could devote a machine entirely to them and run it all year – no changing, no retooling necessary. That’s a big cost savings. Voila!
In the second case, the company had a big new customer (whose name rhymes with “BalMart”). When you have these guys as a customer, it’s no picnic at the beach. Working with them is like wrestling a bear, and when you've finished wrestling that bear, they bring in a new bear to beat you up some more. Our little company had to have 6 months of inventory on hand at all times to satisfy their contract. Why? Who knows – just in case they want a boatload of product right away I guess but there’s your answer and Bob’s your uncle.
The third one was really simple. After a little detective work, I figured out that the former CFO was cooking the books. So I raised the issue to the brand new CEO and it resulted in what I'd call a “very uncomfortable board conversation.” Q.E.D.
So, it’s not just the numbers in the financials, or what you think you know about another company that looks to be similar. Heck, for an early-stage company, the only thing it has is a story. So you have to know the story of THIS company - that’s what will tell you where the company is going; you already know where it’s been.
As the song says, "if you knew my story, you'd have a good story to tell."
Well that’s all I have to say about that. Here are some words of wisdom from people who aren’t me:
- “If you burn your neighbor’s house down, it doesn't make your house look any better.” – Coach Lou Holtz
- “Tomorrow belongs to those who can hear it coming” – David Bowie
- "Electricity is really just organized lightning" - George Carlin
Be good and be well.