Every Business Solves Problems
A framework for evaluating business quality before examining a single financial metric.
Every durable business exists because it removes a friction that the market cannot or will not solve on its own.
Before examining a single financial metric, an analyst must answer a more fundamental question: does this company solve a real problem, for a real customer, in a way that is genuinely difficult to replicate? If the answer is uncertain, the financial analysis that follows is built on sand.
1. Problem & Solution
The starting point of any research process is identifying the specific friction the business resolves. This is not a marketing exercise — it is a structural audit. A genuine problem produces a customer who needs the solution, but a manufactured problem produces a customer who can walk away.
Research Workflow
Market Friction — The Problem
A specific, persistent inefficiency the market will not resolve on its own.
The Solution — Product or Service
Does it meaningfully remove the friction — and can it do so at scale?
Validate the friction
Specific & persistent friction? Addressable at scale? Market won't self-resolve?
Validate the product
Fully removes the friction? Repeatable cost structure? Scalable without linear cost?
Defining the Problem
A well-defined problem is specific and persistent. The analyst must distinguish between a genuine structural inefficiency and a temporary inconvenience that the market could easily route around.
Specificity: Is the problem clearly scoped — a systemic inefficiency, a lack of access, a dangerous complexity — rather than a vague discomfort?
Persistence: Has this friction existed for years, or is it a product of a passing trend? Durable problems produce durable businesses.
Addressable Scale: How many customers face this friction, and how severely? The size of the problem sets the ceiling on the size of the business.
Evaluating the Solution
Once the problem is validated, the product or service must be examined on its own merits. Effectiveness and cost efficiency together determine whether unit economics can ever reach a sustainable level.
Effectiveness: Does the solution meaningfully reduce the friction, or does it merely shift it? Partial solutions attract competition from more complete alternatives.
Cost of Goods / Service: How is the product created, and what are the structural input costs? Is the production process repeatable without linear cost increases?
Scalability: Can the business serve ten times its current customer base without ten times the operational cost? This is the defining trait of a high-quality business model.
2. Market Position & Customer Dynamics
Identifying a real problem is necessary, but not sufficient. The analyst must then understand who the customer is and how strongly they depend on the solution. The same product can be a "need-to-have" for one customer segment and purely discretionary for another — and that distinction determines resilience through economic cycles.
Need-to-Have Essential
Integrated into the customer's daily operations. Removing it would cause immediate, tangible disruption.
- Highly recurring revenue
- Costly to switch away from
- Resilient through recessions
e.g. Enterprise payroll software
Nice-to-Have Discretionary
Adds value but not embedded in critical workflow. Among the first expenditures paused when budgets tighten.
- Macro-sensitive revenue
- Higher churn in downturns
- Growth depends on marketing
e.g. Premium loyalty software for retail
Target Client Profile: Who is the buyer? Their demographic, industry, and financial profile determine both the ceiling on pricing power and the floor on churn risk.
Value Proposition: Identify the specific reason the customer is willing to pay. Is the value derived from saving time, reducing risk, increasing revenue, or satisfying a desire? Clarity here sharpens every downstream assumption.
Switching Cost Assessment: How difficult is it for the customer to migrate to a competitor? High switching costs extend customer lifetime and dampen competitive displacement risk.
3. The Competitive Moat
A business that solves a problem well will attract competitors. The moat is what determines whether the business can sustain its economics once those competitors arrive. Without a durable advantage, even a great product will eventually be forced to compete solely on price, killing its profit potential.
Switching Costs
When it is painful for a customer to leave — due to data migration, retraining, or workflow disruption — the incumbent retains pricing power even when outcompeted on features.
Brand Power
A brand is a moat when it commands a price premium that rational unit economics alone cannot justify — trust or prestige that competitors cannot purchase.
Network Effects
The product becomes more valuable as more users adopt it, creating a self-reinforcing advantage where the largest platform is often the only rational choice.
Operational Efficiency
Proprietary technology, superior logistics, or structural cost advantages that allow the business to serve customers at a lower cost than any competitor.
The Moat Illusion: A period of high returns on capital is not, by itself, evidence of a moat. It may simply reflect a temporary window before competition arrives. The test is whether those returns are still intact five years after a well-funded competitor enters the market.
4. Investment Logic
The final step is not a calculation — it is a judgment. After mapping the problem, the customer, and the moat, the analyst must reach a clear, defensible conclusion about whether this business deserves long-term capital allocation. If the answer requires extensive qualifications, the answer is probably no.
- Understandability Test: Can you explain this business, its customer, its advantage, and its path to compounding value — in plain language, without jargon? If not, the analysis is incomplete.
- Durability Test: Is the problem this business solves likely to persist for the next ten years? Is the moat likely to hold against the next wave of competition and technology?
- Allocation Rationale: Based on the quality of the problem, the necessity of the solution, and the strength of the moat, is this a business worth committing capital to at the current price? The answer to this question is the starting point — not the conclusion — of valuation.