The Limiting Reagent

I got my undergraduate degree from Duke in biology and chemistry. While I occasionally use those lessons in my present day role, many of the concepts show up in new forms.

One chemistry term that finds a way into my investing framework is the limiting reagent. In a chemical reaction, the limiting reagent is the ingredient / reactant that is completely consumed first. The amount of final product formed is therefore limited by when this ingredient runs out as the reactions stop.

When I am looking at a company I am trying to figure out the most important limiting reagent. What is the resource that is limiting a company from growth? Is it market size? Product value? Team?

Once we have a grasp on the limiting reagent then it is important to understand if the company is actively addressing that issue. So often we will see a company putting resources towards an issue that isn’t the blocker. I’ve heard this somewhere else: “growth is removing barriers” and it feels so spot on and simple. In the energy and industrial markets there are many companies that build out incredible …. but ancillary… features and channels. Only the best companies that focus on the evolving limiting reagent truly succeed.