WEBVTT 1 00:00:00.000 --> 00:00:04.340 I think that's why in a lot of ways General Entrepreneurship is about being a jack of all trades master of none. 2 00:00:04.340 --> 00:00:10.960 Which is that you have to know enough to be dangerous, you have to know enough to recognize what the true constraint is at a macro level 3 00:00:10.960 --> 00:00:14.240 and recognize what has to happen to de-constraining it. 4 00:00:17.400 --> 00:00:22.360 Welcome to the game where we talk about how to sell more stuff to more people in more ways and build businesses worth owning. 5 00:00:22.360 --> 00:00:25.060 I'm trying to build a billion dollar thing with acquisition.com. 6 00:00:25.060 --> 00:00:29.260 I always wish Basos, Musk, and Buffett had documented their journey, so I'm doing it for the rest of us. 7 00:00:29.260 --> 00:00:30.260 Please share and enjoy. 8 00:00:32.660 --> 00:00:42.440 Over the last three years, I've invested in 22 companies, either as majority owner where I took over control of the business or a minority owner where I just assisted in the growth of the business. 9 00:00:42.440 --> 00:00:47.520 And each of these businesses are doing over a million dollars a year in profit, so not top line, but bottom line. 10 00:00:47.520 --> 00:00:59.240 And I want to share with you the lessons that I've learned in investing and growing those companies and some of the mistakes I've made so that you can make better decisions in investing and growing in your business or investing and growing in other people's. 11 00:00:59.660 --> 00:01:07.580 And if you have any interest in becoming a portfolio company, I'm going to give you a checklist in the next part that will help you make your application as good as possible. 12 00:01:07.580 --> 00:01:09.740 So they have the high-slick that I've actually making that happen. 13 00:01:09.740 --> 00:01:14.700 And at the very least, you'll probably learn a lot from the checklist itself that you could apply to your own business even if you weren't interested in that. 14 00:01:14.700 --> 00:01:17.100 And so either way, which they end up walking through. 15 00:01:17.100 --> 00:01:24.460 So the entire theory behind acquisition.com was that we take something old and something new and there's a lot of magic between the two of those things. 16 00:01:24.560 --> 00:01:28.820 And so for us, something old is investing and something new is social media. 17 00:01:28.820 --> 00:01:39.320 And so it was my theory, and it continues to be my thesis that I'm proving out, is that you can generate high quality deal flow, proprietary deal flow, meaning just for us from social media. 18 00:01:39.320 --> 00:01:45.320 And so a lot of people have built businesses around building an audience and then they sell stuff to that audience. 19 00:01:45.580 --> 00:01:56.780 I had a theory that I could build a very large audience of specifically business owners and actually only work with a tiny, tiny percentage and still have it make economic sense to the whole. 20 00:01:56.780 --> 00:02:07.820 And the benefit of that is it allowed me to build a brand based on a lot more goodwill than anyone else could because I would be giving to 99.99% but still able to make it make economic sense. 21 00:02:07.820 --> 00:02:15.480 And so one of the big misnomers out there is that like Alex is some sort of like giving saint, it's not that at all like this is just a business strategy that's different. 22 00:02:15.480 --> 00:02:31.080 And so rather than trying to sell to everyone, it's really just can I make deals with a couple of really good companies that they find out about me through my content and so just to give you a bit of context right now, we get about 2000 companies per month that inbound apply to work with us. 23 00:02:31.080 --> 00:02:37.080 And some people might find that as disheartening if you want to do a partnership, but I'll walk you through kind of like through the funnel. 24 00:02:37.080 --> 00:02:44.580 So basically, you know, right off the bat, half of the people don't qualify because as of current, we only work with us in Canada. 25 00:02:44.580 --> 00:02:48.780 We also work with international companies who are willing to convert to the US. 26 00:02:48.780 --> 00:02:53.380 So if you're willing to have a US corp kind of be the hold co for your foreign corp, that works too. 27 00:02:53.380 --> 00:02:56.580 But half the businesses are not in that in that bucket. 28 00:02:56.680 --> 00:03:05.880 The next is qualifier is just size a lot, you know, a lot of the companies that apply are, you know, zero two million dollars a year in top line and that doesn't really work for us. 29 00:03:05.880 --> 00:03:09.180 And so our minimum minimum is one million. 30 00:03:09.180 --> 00:03:19.680 And so someone's like, I'm at 900,000 do I qualify the answer is no because that's the minimum like it's already low, but we're willing to look at it because sometimes there's some really promising entrepreneurs and founders that have companies. 31 00:03:19.680 --> 00:03:27.680 And it's a million dollars in profit, but right now I can probably look at the median profits probably about four ish of the companies in our portfolio. 32 00:03:27.680 --> 00:03:34.680 Just to give you a little bit of reference to size, the largest company is about 20 million dollars in profit and the smallest one is probably like one and a half. 33 00:03:34.680 --> 00:03:40.180 And so that just gives you a range of the size companies and the biggest companies we have in the portfolio didn't start that way. 34 00:03:40.180 --> 00:03:46.680 And so that's why we're okay taking on a company that's doing three million, five million, eight million because we feel confident we can help them get to a lot bigger than that. 35 00:03:46.680 --> 00:03:51.680 Now, the thing about investing in general is that it's not a game of quantity. 36 00:03:51.680 --> 00:03:58.680 And so that might seem counter to like my my advertising strategy of of making content because we get so much inbound deal flow. 37 00:03:58.680 --> 00:04:02.680 But if you think about it like if you invest in one Facebook, you only need one Facebook. 38 00:04:02.680 --> 00:04:09.680 I don't need 11 other side hustles like it would be better for me to just invest in fewer high quality companies, which is why for us it's a definite quality over quantity game. 39 00:04:09.680 --> 00:04:14.680 And so you might hear 22 companies over three years and be like, oh, that's a lot. 40 00:04:14.680 --> 00:04:22.680 But as we've gotten better and better, we actually have done, we've been doing fewer and fewer deals despite having more and more deal flow. 41 00:04:22.680 --> 00:04:27.680 And so just to give you a little bit of context over the last, I think since November, I think we've done three deals. 42 00:04:27.680 --> 00:04:32.680 And so our rate of deal doing has gone down, our quality of business has gone up. 43 00:04:32.680 --> 00:04:35.680 And it's not that the businesses earlier weren't as good. 44 00:04:35.680 --> 00:04:37.680 It's more that the ones we do now are better fits. 45 00:04:37.680 --> 00:04:41.680 And so we've just learned more about how to identify those, which is the point of this. 46 00:04:41.680 --> 00:04:46.680 Now, how acquisition.com deals work is that it really depends on the founder. 47 00:04:46.680 --> 00:04:51.680 And so for us at a baseline economics level, like it has to make economics sense. 48 00:04:51.680 --> 00:04:56.680 Like we have to buy into a business for a certain established price that we feel is reasonable. 49 00:04:56.680 --> 00:04:59.680 And we see that there's a significant amount of upside for us in the founder. 50 00:04:59.680 --> 00:05:03.680 And the founder feels like that we can add significantly more value than they could accomplish on their own. 51 00:05:03.680 --> 00:05:05.680 Like that's the basics, right? 52 00:05:05.680 --> 00:05:09.680 In terms of deal structures for us, I have kind of two buckets. 53 00:05:09.680 --> 00:05:14.680 Even I've got passive investments. I don't consider anything that's passive in the acquisition.com portfolio. 54 00:05:14.680 --> 00:05:19.680 And so like there's a variety of like tech companies and kind of like angel checks, which is very small checks. 55 00:05:19.680 --> 00:05:24.680 You do for lots of companies that I have invested in, but I don't consider those part of my main game. 56 00:05:24.680 --> 00:05:27.680 Those are just some like businesses that I thought were really interesting. 57 00:05:27.680 --> 00:05:29.680 And I was willing to take a small bet on them. 58 00:05:29.680 --> 00:05:36.680 But the my bread and butter where I make the vast majority of my wealth is in me writing checks that I actively work in. 59 00:05:36.680 --> 00:05:38.680 And that is what acquisition.com is about. 60 00:05:38.680 --> 00:05:40.680 So this is an active portfolio. 61 00:05:40.680 --> 00:05:43.680 And so there's really kind of two types of investors. 62 00:05:43.680 --> 00:05:45.680 Again, this is a continuum. It's not binary. 63 00:05:45.680 --> 00:05:53.680 But on one extreme, you've got pure bettors, which is you could have one guy looking at a zillion screens making bets. 64 00:05:53.680 --> 00:05:57.680 And you can make bets in the micro, which is like the whole day trading thing, which I think is more of a job than actually investing. 65 00:05:57.680 --> 00:05:59.680 But we'll get in that today. 66 00:05:59.680 --> 00:06:05.680 Or on the other extreme, you've got Warren Buffett, who is just making one, you know, or two concerted bets over a year. 67 00:06:05.680 --> 00:06:10.680 And that's his bet betting that this value is underpriced and it will go up over the long call. 68 00:06:10.680 --> 00:06:14.680 On the other extreme, you've got like turnaround specialists. 69 00:06:14.680 --> 00:06:17.680 So people who buy like distressed assets or people who do roll ups. 70 00:06:17.680 --> 00:06:23.680 That's a private equity play for familiar with that, which is like I go by 20 different dental offices that are all doing a million dollars in profit. 71 00:06:23.680 --> 00:06:27.680 I roll them together under one flag and I sell a 20 million dollar EBITDA. 72 00:06:27.680 --> 00:06:35.680 So profit per year business, which gives you multiple kind of step ups in the multiple that you can achieve and how much money you make, right? 73 00:06:35.680 --> 00:06:37.680 And so that's like super, super active. 74 00:06:37.680 --> 00:06:41.680 And so we are, if we're looking at this continuum, way more on this side. 75 00:06:41.680 --> 00:06:44.680 We are active investors. We have a huge team at HoldCo. 76 00:06:44.680 --> 00:06:48.680 We have more people at HoldCo than we have actual companies in the portfolio for context. 77 00:06:49.680 --> 00:06:57.680 And so we are very much directly guiding the strategy and the implementation and even recruiting for key roles to grow the companies. 78 00:06:57.680 --> 00:07:04.680 And this is more or less why I think our rate of investing has gotten to a nice steady cadence. 79 00:07:04.680 --> 00:07:08.680 Because obviously in the beginning you have more people than you have companies, so then your rate goes up. 80 00:07:08.680 --> 00:07:17.680 But then as we feel like we get into a nice rhythm of how we can onboard a company over a half a year to a year and get key players in place, identify the constraints, 81 00:07:17.680 --> 00:07:20.680 figure out the plans that we're going to do, implement those people, et cetera, et cetera. 82 00:07:20.680 --> 00:07:22.680 Now we've got kind of like a nice rhythm. 83 00:07:22.680 --> 00:07:26.680 And so for us, the deals obviously depend on how much we're investing in the business. 84 00:07:26.680 --> 00:07:32.680 So I currently don't do any deals for less than a third of a company that we're actively invested in. 85 00:07:32.680 --> 00:07:34.680 And so the majority of them are greater than that. 86 00:07:34.680 --> 00:07:39.680 So I would say of the last four deals we did, three of them were 49% and one was 40. 87 00:07:39.680 --> 00:07:43.680 And so that's just give you a little bit of context on how we structure the deals. 88 00:07:43.680 --> 00:07:45.680 We actually asked Hunter one of them was 51. 89 00:07:45.680 --> 00:07:49.680 And so just to give you a range, now we obviously have more investments to that. 90 00:07:49.680 --> 00:07:51.680 But we're very actively involved in them. 91 00:07:51.680 --> 00:08:00.680 And it's because I couldn't take a minority position of like 10% in a business and make it make economic sense for the amount of actual resources I'm pouring into the business. 92 00:08:00.680 --> 00:08:12.680 So let's say for example that I invest a million dollars a year in basically payroll of work, of consultants and recruiting and things like that that will install into a company. 93 00:08:12.680 --> 00:08:16.680 Like doing a full CRM, implementation, et cetera. 94 00:08:16.680 --> 00:08:19.680 Over the next five years it's five million dollars I'm investing into a business. 95 00:08:19.680 --> 00:08:29.680 If I then also have to buy into the business, right, then that business would have to be really, really big in order for it to make financial sense. 96 00:08:29.680 --> 00:08:31.680 And that's not really the target of what we have. 97 00:08:31.680 --> 00:08:39.680 And so for us to invest those kind of resources, we tend to get a disproportionate or a proportional share of the companies that we're investing in. 98 00:08:39.680 --> 00:08:46.680 Now the good news is though that I think every company we have is over what I would consider the free line. 99 00:08:46.680 --> 00:08:57.680 Meaning not only do they get compensated for the equity that we bought into, but their remaining share is already worth more than the whole was prior. 100 00:08:57.680 --> 00:09:03.680 And so for me that's always the big, you know, the big objective is like, okay, how do I grow the pie so that everybody wins? 101 00:09:03.680 --> 00:09:10.680 And you know, I made a quote about this, but I think it's really true is that like my goal with every company because my reputation matters to me. 102 00:09:10.680 --> 00:09:16.680 I mean, my reputation is why everything is happening in my life is that every deal that someone does with me is the best deal they've ever done in their life. 103 00:09:16.680 --> 00:09:19.680 And so part of that is leaving some meat on the bone, if you will. 104 00:09:19.680 --> 00:09:24.680 I mean, if you think about the amount of, you know, if I were like sell something in my audience, like there's a lot of meat on the bone there. 105 00:09:24.680 --> 00:09:30.680 But I'd always rather be, you know, 49 on the table and give 75 so that everyone wins. 106 00:09:30.680 --> 00:09:34.680 And that's, that's just kind of like more of a life motto. 107 00:09:34.680 --> 00:09:39.680 And I'm going to walk you through a bunch of the lessons I have from the 22 companies that we've invested in bought. 108 00:09:39.680 --> 00:09:45.680 But before I do, I want to give you a little bit of context because otherwise you'll be going in blind and not understanding like how the whole thing works. 109 00:09:45.680 --> 00:09:56.680 And we've done deals across e-commerce, brick-and-mortar chains, consumer services, business services, SaaS, so software companies, sales organizations, and anything else you can really think of. 110 00:09:56.680 --> 00:10:03.680 So we're more generalists when it comes to business because what we have realized is that our specific niche is more size of company. 111 00:10:03.680 --> 00:10:12.680 And so companies that are going through, going from 500-ish, a million a month, to multiple millions a month, they all encounter the same problems. 112 00:10:12.680 --> 00:10:16.680 And so that's where our playbooks are really effective to just quickly debotonic them. 113 00:10:16.680 --> 00:10:20.680 And, you know, I'm transparently, this is why I do this. 114 00:10:20.680 --> 00:10:25.680 And by percentage, the greatest amount of enterprise values unlocked in that jump. 115 00:10:25.680 --> 00:10:35.680 And so for me, that's where I get my huge return is because most businesses that are at two, three, four million dollars in profit. 116 00:10:35.680 --> 00:10:41.680 As much as headlines will tell you that companies sell for 20 times earnings, that's publicly traded companies. 117 00:10:41.680 --> 00:10:46.680 And there's a number of things that those companies have that companies below $5 million don't have. 118 00:10:46.680 --> 00:10:57.680 Because if you look at biz by sell, they publish their stats publicly, which the actual media transaction for small businesses is 2.28 to 2.53 times. 119 00:10:57.680 --> 00:11:00.680 And with 80 to 90% of those having seller finance notes. 120 00:11:01.680 --> 00:11:06.680 So how is that? How do you have two-ish X and 20-ish X on polar extremes? 121 00:11:06.680 --> 00:11:09.680 And it's like, well, that's where the enterprise value gets built up. 122 00:11:09.680 --> 00:11:20.680 And the nice news is that getting a company from three-ish to, let's say, $8 million in profit can sometimes take a company from almost in uninvestable. 123 00:11:20.680 --> 00:11:27.680 Like, it's not really sellable in a clean transaction to a $50, $80 million exit. 124 00:11:28.680 --> 00:11:34.680 And so that little step up is where we focus all of our attention because that's where the by percentage the grace amount of enterprise value is created. 125 00:11:34.680 --> 00:11:37.680 And I'm not going to publicly tell you the names of the companies. 126 00:11:37.680 --> 00:11:40.680 And the reason for that is actually to protect the businesses. 127 00:11:40.680 --> 00:11:41.680 And let me explain. 128 00:11:41.680 --> 00:11:48.680 So if I pump a company, what would happen is that, well, some of the companies literally couldn't handle all of y'all and I appreciate you. 129 00:11:48.680 --> 00:11:53.680 But if I were to pump the company, what happens is that I now become tied to that company's success. 130 00:11:53.680 --> 00:11:59.680 And so a future requires, somebody wants to buy that company, would then mean that Uncle Alex has to go with the deal. 131 00:11:59.680 --> 00:12:01.680 And that's not why I invest is to get myself another job. 132 00:12:01.680 --> 00:12:02.680 That's not the point. 133 00:12:02.680 --> 00:12:10.680 And so the idea is that I need to grow them independent of my influence so that they can on their own grow their own enterprise value, 134 00:12:10.680 --> 00:12:13.680 which is ultimately the goal of most entrepreneurs, not to be relying on me. 135 00:12:13.680 --> 00:12:14.680 And so you're a couple quick hitting facts. 136 00:12:14.680 --> 00:12:19.680 Number one is, on average, we increase top line by 80% within the first 12 months. 137 00:12:19.680 --> 00:12:23.680 We increase profit by 3.01x within the first 12 months. 138 00:12:23.680 --> 00:12:28.680 We increase top line revenue by 1.8x within the first 24 months. 139 00:12:28.680 --> 00:12:33.680 And then within the same first 24 months, we increase profit by, on average, 4.7x. 140 00:12:33.680 --> 00:12:35.680 So we're pretty good at this. 141 00:12:35.680 --> 00:12:40.680 Somebody happy to identify the types of businesses I look for so that you can look for those types of businesses too. 142 00:12:40.680 --> 00:12:45.680 So number one is, I look for, at least for me, a minimum of a million dollars in EBITDA, 143 00:12:45.680 --> 00:12:53.680 if the company has what we call transferable value, meaning if you own, let's say, you know, five candy stores, 144 00:12:53.680 --> 00:12:59.680 and all five candy stores do $200,000 a year in profit, then that would be something that I might be interested in, 145 00:12:59.680 --> 00:13:03.680 as long as it's not your face, that's the reason that they're doing, which most local businesses is not the case. 146 00:13:03.680 --> 00:13:07.680 Or if you own an accounting firm that was doing a million dollars a year in profit, 147 00:13:07.680 --> 00:13:11.680 and it's not based again on your face, then it would be something that I would be okay with. 148 00:13:11.680 --> 00:13:18.680 If it is a personality brand or based on a creator or a rounder creator, which I get probably disproportionate amount of because I am this way, 149 00:13:18.680 --> 00:13:22.680 then the minimum mind is $2 million a year in profit. 150 00:13:22.680 --> 00:13:26.680 And again, the reason there is that there is actually less transferable value in that business, 151 00:13:26.680 --> 00:13:30.680 and there's actually more work that has to get done to remove the face of the founder so that there is enterprise value. 152 00:13:30.680 --> 00:13:34.680 So like, for example, Jim launch, I know this story because I lived that story. 153 00:13:34.680 --> 00:13:43.680 So I built Jim launch around my face, and then it took me 24 months to transition from Alex's, you know, Jim licensing business to 154 00:13:43.680 --> 00:13:51.680 Jim launch a suite of consultants who understand how to implement a very specific set of playbooks into this type of Jim, which is micro Jim, 155 00:13:51.680 --> 00:13:53.680 and get this very reliable outcome. 156 00:13:54.680 --> 00:13:59.680 So it took 24 months for me to do that, and then, and here's the crazy part, is that the company went from, again, 157 00:13:59.680 --> 00:14:04.680 almost uninvestable or valueless despite the fact that it made a lot of money into something that had transferable value 158 00:14:04.680 --> 00:14:08.680 that someone could compensate me for, which is ultimately all we were able to sell it for just under $50 million. 159 00:14:08.680 --> 00:14:11.680 And so that's the quantitative side of it. 160 00:14:11.680 --> 00:14:14.680 The qualitative side of it is two pieces. 161 00:14:14.680 --> 00:14:19.680 One is that you want to have product market fit, and so that means that the person is still not trying to figure out what they want to sell. 162 00:14:19.680 --> 00:14:24.680 The reason I published my first book 100 million dollar offers is because I want to make sure people knew what to sell, right, and make really good offers. 163 00:14:24.680 --> 00:14:31.680 Because once you get that right, then you can usually quickly skyrocket above $1 to $3 million in profit per year, and then it's much more interesting for us. 164 00:14:31.680 --> 00:14:39.680 We don't want to incur that cost of trial and error and iteration because it's just, it's not that we don't think we could figure it out. 165 00:14:39.680 --> 00:14:44.680 It's just not worth the time. I'd rather work with companies that already have that and then scale it. 166 00:14:44.680 --> 00:14:52.680 On the soft side, then the other piece I don't want to say was the other piece is growth in cash flow, right, which is we want to make sure the company is growing. 167 00:14:52.680 --> 00:14:57.680 We don't want to catch a falling knife, which is a saying in the investment world, unless it's very specific set of circumstances. 168 00:14:57.680 --> 00:15:01.680 One of the, ironically, the biggest thing we have actually had cut. 169 00:15:01.680 --> 00:15:10.680 It was like down 70% when we started organ with them and then it doubled from their all-time top, which is a massive job, which is awesome. 170 00:15:10.680 --> 00:15:17.680 But that was a curculean amount of effort over 12 months to really reverse the nose dive into something awesome. 171 00:15:17.680 --> 00:15:19.680 The next one is just return on capital or cash flow. 172 00:15:19.680 --> 00:15:23.680 What that means is there are some companies that don't have a lot of capital expenses. 173 00:15:23.680 --> 00:15:28.680 If you're an accounting firm and you generate profits, you don't have to buy heavy equipment to increase your capacity. 174 00:15:28.680 --> 00:15:39.680 Whereas there are some businesses like a brick and mortar chain, for example, that once you max out your 20 locations to get to 30, you need to buy or lease or build out 10 more locations. 175 00:15:39.680 --> 00:15:41.680 There's capital expense that has to go out. 176 00:15:41.680 --> 00:15:46.680 Not to say that's bad. We have two very, very large brick and mortar chains that are awesome. 177 00:15:46.680 --> 00:15:56.680 But we like to trade off how many of those we're going to do because these ones don't spit off cash flow because we actively reinvest the money into growing it because we get higher returns on it. 178 00:15:56.680 --> 00:16:02.680 And then there are some companies that we actively bring the money back into whole coast so we can redeploy it into another asset that's going to increase in value. 179 00:16:02.680 --> 00:16:06.680 So I just went over to some of the specific criteria that we look at to pick companies. 180 00:16:06.680 --> 00:16:10.680 And now I want to talk about the specific process that we go about picking them in general. 181 00:16:10.680 --> 00:16:15.680 Okay. So we just talked about the criteria that we look for in order to provide value. 182 00:16:15.680 --> 00:16:18.680 And now let's talk about the actual process of providing value. 183 00:16:18.680 --> 00:16:27.680 So with broad brushstrokes, we follow a what, who, how, framework, which basically is what is the biggest what that we need to do to grow this business? 184 00:16:27.680 --> 00:16:36.680 Is it do we need to 5x the sales team? Is it we need to 5x the adspan? Is it do we need to make five times the content? Is that we need to cut churn by 5x? 185 00:16:36.680 --> 00:16:41.680 Or do we need to completely reconfigure the pricing mix or the product suite? 186 00:16:41.680 --> 00:16:47.680 Like there's a number of different things that we might identify as the biggest issue that will grow the business or the biggest lever. 187 00:16:47.680 --> 00:16:53.680 Once we have identified that what then comes down to the who, right, which is who's actually do this implementation? 188 00:16:53.680 --> 00:17:00.680 One of the biggest things, especially at companies of the size, is that you typically have a founder who sometimes has one or two helping hands, 189 00:17:00.680 --> 00:17:03.680 but they don't actually have a full leadership team or full leadership suite. 190 00:17:03.680 --> 00:17:12.680 And so this is usually a very painful time for most businesses when they're at 300, 500 million dollars a month because they are still, 191 00:17:12.680 --> 00:17:17.680 they're in this in-between place of like they're still having to do some of the things they're good at. 192 00:17:17.680 --> 00:17:23.680 They've given away stuff that they suck at, but then they're still trying to keep strategy, but then there's problems so they have to jump back in. 193 00:17:23.680 --> 00:17:27.680 And they can never really feel like they're getting their head above water because like right as they fix one thing, something else breaks. 194 00:17:27.680 --> 00:17:29.680 It's kind of this like continuous cycle. 195 00:17:29.680 --> 00:17:35.680 And that is the symptom the core issue is personnel is that they don't have enough talent. 196 00:17:35.680 --> 00:17:41.680 And so the easiest way to envision this if this is you or if somebody you know is think about your best employee. 197 00:17:41.680 --> 00:17:44.680 All right, imagine if you had six of them. 198 00:17:44.680 --> 00:17:47.680 How much more money would you make? Probably a lot more money. 199 00:17:47.680 --> 00:17:49.680 Well, that's kind of the idea. 200 00:17:49.680 --> 00:17:54.680 So for example, I was talking to a really cool like tech enabled service yesterday. 201 00:17:54.680 --> 00:17:56.680 We're moving forward to invest in. 202 00:17:56.680 --> 00:18:04.680 And this founder has tons of hustle, great guy, and he has homegrown all of his talent, meaning he has actively recruited people into base roles. 203 00:18:04.680 --> 00:18:10.680 And as the company has grown, he's promoted people from within, which is not a bad ideology overall. 204 00:18:10.680 --> 00:18:21.680 But here's the catch if everybody that you brought into your company has been at base level or maybe one level above that and you have taught them what you did to build that function or build that role. 205 00:18:21.680 --> 00:18:27.680 It means that the entirety of the knowledge and the entire company is from one person's brain. 206 00:18:27.680 --> 00:18:30.680 And so if you think about this here, I'll give you my little triangle. 207 00:18:30.680 --> 00:18:42.680 So if you think about how a company grows, I'll tell you one of the big beliefs that I've learned is that the peak of the company is based on how much how many brains there are at the top that no different knowledge. 208 00:18:42.680 --> 00:18:50.680 So if you've got a company that has one brain, it's like that's how big the company is now if you have four brains at the top, the company is way, way, way bigger. 209 00:18:50.680 --> 00:18:55.680 And so it's almost like a Christmas tree of dissemination of knowledge at scale. 210 00:18:55.680 --> 00:19:11.680 And so like if you don't like and this should make sense because if you want to get to a hundred million dollars a year, for example, well, you're not going to die and then be reborn and then live the next 20 years as a CFO in order to know how to run the finances of that company. 211 00:19:11.680 --> 00:19:19.680 And you're not going to die and then be reborn and then do 10 years of product so that you know how to build something that's sticky and that people want to keep buying and renew on. 212 00:19:19.680 --> 00:19:22.680 And you're not going to die and be reborn and learn how to market and sell et cetera. 213 00:19:22.680 --> 00:19:29.680 And so most of the times the founder has a strength or two that has gotten them to this point and then there's huge deficiencies in the business. 214 00:19:29.680 --> 00:19:35.680 And so one of the big misnomers about growing a business is that people say double down in your strengths with is absolutely true for the individual. 215 00:19:35.680 --> 00:19:38.680 But the business needs to be balanced. 216 00:19:38.680 --> 00:19:45.680 And so that's the push and pull that people that people missing context is that even though you may be really good at sales and marketing. 217 00:19:45.680 --> 00:19:56.680 For example, your business in order to get to the next level still needs to have an exceptional product still needs to have a financial function and HR function and IT function so you can track data. 218 00:19:56.680 --> 00:20:05.680 And so we talk about the what and then we've got the who and now we've got the how, which is like the actual rubber meets the road, hands meeting the machine, getting the stuff done. 219 00:20:06.680 --> 00:20:15.680 And so we have all the playbooks that we've used to grow each of the companies that I founded myself to multiple millions of dollars a month each that we implement within each of these companies. 220 00:20:15.680 --> 00:20:28.680 So whether that's how to onboard somebody properly as an employee or how to onboard somebody properly as a customer as a customer or at what points do we make ascension offers in order to upgrade people and how should we structure those offers and how do we monetize them. 221 00:20:28.680 --> 00:20:36.680 And if we're making content like what is the ratio between how many times we give versus how many times we ask that times a million across all the different functions. 222 00:20:36.680 --> 00:20:49.680 And so to give you a little bit of context, we at hold co for us have what we call smis or subject matter experts. So we've got directors of marketing and then we've directors of sales who can build up sales teams and stand up sales departments. 223 00:20:49.680 --> 00:20:57.680 And then we've got directors of customer success who can lead the results and the experience for every client, whether it's physical products software or services, right. 224 00:20:57.680 --> 00:21:15.680 And then down the line, IT, finance, legal, et cetera, so that we can ultimately build the whole business because the big problem with what I would consider single solution thinkers is that if all you know, for example, how to do is build sales teams, then you think that the problem of every business is that they need to build a better sales team. 225 00:21:15.680 --> 00:21:28.680 If you really know content, then you think that the only thing to do for the business is to make more content. And if you really know finance, you think you need to restructure finance and do some sort of financial engineering in order to grow the business. 226 00:21:28.680 --> 00:21:35.680 And in my experience, it's been wrong. And I think that's why in a lot of ways general entrepreneurship is about being a jack of all trades master of none. 227 00:21:35.680 --> 00:21:45.680 Which is that you have to know enough to be dangerous. You have to know enough to recognize what the true constraint is at a macro level and recognize what has to happen to deconstrain it. 228 00:21:45.680 --> 00:21:53.680 But you specifically, I don't like, I'm not the best copyrighted in the world, but I'm decent enough that it was no longer the constraint of my paid ads. 229 00:21:53.680 --> 00:22:03.680 Or like, I get a lot of credit for being good at sales, but I'm not the best salesman in the world. I'm the best sales trainer in the world. I know enough about sales to make sure that the fundamentals are done at scale. 230 00:22:03.680 --> 00:22:13.680 And so one of the interesting things is, I mean, you know, I talked to all of our directors within Holko, and it's cool that they have learned a really cool lesson I'm going to share with you. 231 00:22:14.680 --> 00:22:25.680 Which is, you would be amazed at how much growth can happen when all you do is the fundamentals in every single department, like really taking this in. 232 00:22:25.680 --> 00:22:32.680 A lot of people want to make things fancy. And I have this little saying, fancy fails, simple scales. 233 00:22:32.680 --> 00:22:46.680 And the whole idea there is that like, you don't need a 17 pixel retargeting ultra campaign. Like, if you nail the hook, you have a good offer and a clear call to action for the vast majority of businesses, that's all you need to do to run ads. 234 00:22:46.680 --> 00:22:53.680 And it's also the same thing that you need to do if you're going to run a cold call campaign. And it's the same thing you need to do if you're going to run a right hook into your audience from content. 235 00:22:53.680 --> 00:22:59.680 Like, as long as you have those fundamentals in place, you'll get 80% of the gains. 236 00:23:00.680 --> 00:23:13.680 Hey guys, love that you're listening to the podcast. If you ever want to have the video version of this, which usually has more facts, more visuals, more graphs, you know, drawn out stuff, sometimes it can help hit the brain centers in different ways. 237 00:23:13.680 --> 00:23:20.680 You can check out my YouTube channel. It's absolutely free to check that out if that's what you are into. And if not, keep enjoying the show. 238 00:23:21.680 --> 00:23:32.680 And so understanding what those core pieces are at scale across the departments is the responsibility of the entrepreneur and then going deep into the implementation is the responsive to the experts. And so that's why we have experts. 239 00:23:32.680 --> 00:23:48.680 We bring in the person who's going to be underneath of that CS person, for example, to cut sure and fix pricing, drive profit in the business. And then we copy and paste that knowledge into the new person. And then that's how we can scale the value of the enterprise itself without needing acquisition.com. 240 00:23:49.680 --> 00:24:07.680 And so like top to bottom, if you think about a customer journey, right. So we're going to start with how do we generate demand, right. And whether that's cold calls, cold emails, making content, running ads, having affiliate network, having a really strong referral program, having agencies that we partner with across different platforms, or simply like scaling the employees to do more of the stuff we're already doing. 241 00:24:07.680 --> 00:24:26.680 All of those are things that we will do to generate more demand. Once we have demand, it's about converting that demand. And so then all of that comes into the sales function. Now that could be sales scripts, it could be video sales letters, it could be written sales letters, it could be webinars that we do on a weekly basis, it could be live events that we do conversions from like all of these are different selling mechanisms and we have companies that literally do all of them. 242 00:24:26.680 --> 00:24:45.680 Right. And so again, I am not a master at any of them. I'm pretty good at it. I know when it's right. And then I can move on from that. And then from that point, the next thing you move on to is customer success or product, right, which is somebody to make sure that all the eyes are being dotted, the teas are being crossed that people have an exceptional experience and making sure that we maximize revenue in the back. 243 00:24:45.680 --> 00:25:04.680 And a lot of people think it's like customer service, which is not the right perspective in my opinion. And the whole customer success industry really only started 20 years ago, like it's actually still a relatively new function. And the reason that the salaries in that department or skyrocketing is because they are unlocking so much value for businesses, if you know what you're doing. 244 00:25:04.680 --> 00:25:22.680 And so for example, if you have a company or you have a product that has a hundred dollar price point and it goes from 10% turn monthly to 3% turn monthly, you tripled the value of the customer. And there's very few other things that you can do to triple the value of the customer. And so that is why mastering the CS function is so valuable. 245 00:25:22.680 --> 00:25:35.680 From there, we have the data function, which is really what IT is and that sounds really lame. But if you want to get to a really big company, you have to be able to make smart decisions. And if you don't have data, it's really hard to make smart decisions. 246 00:25:35.680 --> 00:25:43.680 On the flip side, if you have really amazing data, it's really easy to look smart because you just make comments as decisions based on the data you're presented. 247 00:25:43.680 --> 00:25:55.680 And so getting that implementation in place is one of the key things that we help with for companies to go from like in between different Google sheets and like hodgepodging on one CRM and two other tools, two having it all centralized so that we can track everything in real time from click to close. 248 00:25:55.680 --> 00:26:07.680 Beyond that, you didn't have to walk your backside, which for me is a function of legal finance HR, right. And so you've got the legal, which we still like we don't get in house legal for the portfolio companies. 249 00:26:08.680 --> 00:26:15.680 We have that so that we can help them and then it saves them money provides more value, the finance function so that they can actually do a big transaction later on. 250 00:26:15.680 --> 00:26:20.680 So like if you a big part of the reason that small companies can't get big multiples is that they don't have clean financials, right. 251 00:26:20.680 --> 00:26:26.680 They're still doing cash accounting. They don't have their dot accounting based on a cruel and they don't have someone you can actually give them cash forecast. I'll give you an example of this. 252 00:26:26.680 --> 00:26:35.680 So one of our portfolio companies was growing like a rocket and all of a sudden they pretty much they basically plateaued at around two million bucks a month for like six months. 253 00:26:36.680 --> 00:26:48.680 And the problem that the founder was was vocalizing was that he was like I just don't know how many more how much more I should be investing in these new things based on our cash flow. 254 00:26:48.680 --> 00:26:56.680 And so you kept going he's like am I doing too much am I doing too little I feel like the cash is so lumpy and volatile because I was the nature of the business had extended payment terms. 255 00:26:56.680 --> 00:27:03.680 And so I remember pulling the side and saying I want you to remember this feeling because the feeling that you have is that you don't have a finance function. 256 00:27:03.680 --> 00:27:09.680 And so he knew sales you knew marketing he knew customer success but the feeling he had was a lack of data around money. 257 00:27:09.680 --> 00:27:21.680 And so he kept he didn't know how to put his finger on it but I have been there because I had a impromptu 9.2 million dollar tax bill that came up when you're why because I and I'll tell you I like I live these mistakes. 258 00:27:21.680 --> 00:27:29.680 I hired somebody frontline promoted promoted promoted until they were director of finance without ever having that experience we sent them to a conference that I paid for. 259 00:27:29.680 --> 00:27:42.680 And then at the conference Friday afternoon she emails Layla and says by the way I just learned that after a certain after over certain size you can't pay your taxes the end of the year you need to pay them quarterly. 260 00:27:42.680 --> 00:27:48.680 And we hadn't we had been not paying taxes for that year because that was what we had done the year before but we had grown a lot. 261 00:27:48.680 --> 00:28:00.680 And so if you've heard me say that I had that 17 million dollar by second year at gym lunch was 17 million dollars in profit well I had 9 million dollars in taxes that was due at the end of q1 of that next year. 262 00:28:00.680 --> 00:28:07.680 And so I actually had q1 because I had to pay quarterly plus the five quarters or the four quarters before that all do. 263 00:28:07.680 --> 00:28:17.680 And when she emailed me she said it's due Monday and so she's like you might have to move some stuff around and so you know we called her up and she's like I'm busy with the conference I was like this is one where you can step out of the conference that I paid for. 264 00:28:17.680 --> 00:28:26.680 And so obviously stepped out we talked about it and I wrote a 9.2 million dollar check that next Monday and so again I know what that failure feels like. 265 00:28:26.680 --> 00:28:36.680 And then finally from the HR perspective there's two kind of sides to HR right you've got like the benefits payroll compensation you know incentives ish side of HR. 266 00:28:36.680 --> 00:28:46.680 And then what I would consider the most value added if not that incentives and comp aren't valuable they are but in terms of driving enterprise value it's actually the recruiting and head hunting side. 267 00:28:46.680 --> 00:28:54.680 Because what we have also learned in this process is that you don't actually grow companies you build people who build companies. 268 00:28:54.680 --> 00:29:05.680 And that is a key piece that took me way too long to understand like the reason that gym lunch became a very valuable thing was because I found valuable people to then run and grow the company on my behalf. 269 00:29:05.680 --> 00:29:09.680 And until you get to that point you don't own enterprise the enterprise owns you. 270 00:29:10.680 --> 00:29:25.680 And so for us we take a lot of entrepreneurs from that level to being owned by their enterprise the genius with a thousand hands just one person who's got all their brain plugged into everybody still like managing chaos even if it's super profitable to transferring that into an asset that they own that sits on their balance sheet that grows tax free. 271 00:29:25.680 --> 00:29:37.680 In the last discipline I'll consider and this is probably the one where Laila and I contribute the most to is and I feel even we're throwing myself in this is probably more Laila is leadership right and because if you think about this from a meta skill perspective. 272 00:29:37.680 --> 00:29:48.680 Like leadership sits on top of all of these things both on the org chart and also in terms of priority because from a first principles thinking perspective if every if anyone in the world would work for you. 273 00:29:48.680 --> 00:30:01.680 Then all you have to do is master that skill and then you can get every other skill so that skill of leading people of attracting people of influencing people to do things on your behalf once you have that skill. 274 00:30:01.680 --> 00:30:15.680 You can get everyone to do everything else for you without even needing to know anything besides that which is why sometimes you see some these really old guys running really cutting edge technology companies even though they have no idea how the technology works but they know how people work. 275 00:30:15.680 --> 00:30:44.680 And if we're thinking about value it is one of the most valuable skills because and they found this there is a big McKinsey study that looked at this but the contribution to growth for coaches on teams is the same as the contribution of CEOs to businesses which to me it just means that people work the same way right and that was the median was 30% which means that if you're in the top 10% of leaders that's how you come in and 10x a hundred x a company because of the contribution of the company. 276 00:30:44.680 --> 00:30:55.680 Because of the culture the norms and new rules of behavior that you install within a business that then unlocks discretionary effort from the entire employee base. 277 00:30:55.680 --> 00:31:07.680 So if you could imagine what the difference is between everyone in a company working at just the level to not get fired versus everybody working at the level of trying to impact and accomplish a mission together in alignment. 278 00:31:07.680 --> 00:31:25.680 I mean the difference is in double the difference is 10x and that skill is the meta skill that unlocks the most enterprise value and that's the one that Layla and I probably work the most with on the individual founders and sometimes real talk some founders recognize intelligently that they're like I feel like I'm too far off from this. 279 00:31:25.680 --> 00:31:35.680 And so I recognize my own deficiencies I actually like product better or I just really love being CMO or CRO meaning chief revenue officer or chief marketing officer. 280 00:31:35.680 --> 00:31:39.680 Or I just want to be just in charge of the sales team or I just want to be charge of success. 281 00:31:39.680 --> 00:31:45.680 And we have founders that have earned each of those positions because over time they get the increase their own self knowledge and they don't see it as a deficiency. 282 00:31:45.680 --> 00:31:49.680 They see it as a plus that they're more self aware. 283 00:31:49.680 --> 00:31:57.680 And in so doing same thing as Larry Page and Sir J. Brin they brought in Eric Schmidt because he was going to be the leader that was going to help grow Google. 284 00:31:57.680 --> 00:32:04.680 Now they were amazing product people incredibly good technologists but he knew how to build the actual build and operate the actual company. 285 00:32:04.680 --> 00:32:09.680 And so was it a bad move for them to do that? Absolutely not it was obviously worked out for them. 286 00:32:09.680 --> 00:32:22.680 And so having that level of self awareness and humility to be able to quote hand over the reins to an operator can sometimes be the most valuable thing that you do the business especially from an enterprise value perspective if you want to own something that can ultimately work with value of the future. 287 00:32:22.680 --> 00:32:31.680 So there's six key areas that hold co will basically dump value into or invest resources into growing where we feel like the highest leverage points are. 288 00:32:31.680 --> 00:32:36.680 So you've got marketing on the front to generate the man you've got sales in order to convert the man. 289 00:32:36.680 --> 00:32:46.680 You've got customer success to deliver on the promises that sales and marketing made you've got IT and technology that allows all of those things to work together and have data to collect off that platform. 290 00:32:46.680 --> 00:32:56.680 You have operations which underneath of that I'll put legal finance and HR together in terms of actually getting people to do the things not going to jail paying your taxes and all that stuff. 291 00:32:56.680 --> 00:33:06.680 And then on top of that's like five plus one is just leadership overall so that you can unlock the most discretionary effort across the entire team so that the organization grows together in alignment. 292 00:33:06.680 --> 00:33:16.680 So now that you have a little bit of an idea of kind of the context on how we work with businesses, how we provide value, how the deals usually work, what we target in terms of the companies their growth rates and the quantitative data. 293 00:33:16.680 --> 00:33:26.680 Now I want to shift to some of the stories and lessons that I've learned in investing in 22 companies and some of the failures that I've been fortunate enough to learn my experiences from. 294 00:33:26.680 --> 00:33:32.680 And so I want to break this into kind of three sections. So one is beliefs that I've helped from the beginning that remained unchanged. 295 00:33:32.680 --> 00:33:38.680 The second bucket is beliefs that I believed in the beginning but now I believe through and through and have doubled down on. 296 00:33:38.680 --> 00:33:46.680 And the third bucket is believes that I once thought were true and have been completely disproven and have completely new beliefs around the same subjects. 297 00:33:46.680 --> 00:33:56.680 So within the belief bucket of things that I thought coming into this investing world and things that I continue to believe I have three beliefs. 298 00:33:56.680 --> 00:34:10.680 So belief number one is that cash is still king, meaning companies that have low capex as in capital expenses and spit off lots of cash flow are in general healthy businesses that we like to invest in. 299 00:34:10.680 --> 00:34:19.680 And the reason for that is that one it's you can weather storms when you have cash flow cash flow is like oxygen to the business. 300 00:34:19.680 --> 00:34:26.680 If as long as you've got it, you can still pretty much spend your way out of problems, sell your way out of problems over and over again. 301 00:34:26.680 --> 00:34:33.680 If you don't have cash flow, you're taking time up until something happens and the unfortunate part about businesses that something always happens. 302 00:34:33.680 --> 00:34:39.680 And so I see cash flow in some ways as insurance on whatever purchase or investment I'm making. 303 00:34:39.680 --> 00:34:46.680 And it also opens up the bucket for belief number two, which is that I have cash flow to reinvest in growth. 304 00:34:46.680 --> 00:34:55.680 And so the growth can happen organically, meaning if I have an accounting firm that I'm looking at, they can continue to grow without actually having to redeploy capital. 305 00:34:55.680 --> 00:34:59.680 But if they do have capital, then there are other things that we could potentially acquire. 306 00:34:59.680 --> 00:35:08.680 We might acquire a bookkeeping business or we could acquire a piece of software that works out well or we could acquire a media property that would feed deals into that company. 307 00:35:08.680 --> 00:35:16.680 Or we could invest in writing a book that would then position the firm as thought leaders to then get more business, et cetera. 308 00:35:16.680 --> 00:35:20.680 And so the idea is that one, I want to have lots of cash flow from the business. 309 00:35:20.680 --> 00:35:27.680 Two, I want to have clear ways that I feel that we can grow the business that don't take huge leaps of faith. 310 00:35:27.680 --> 00:35:31.680 And so for us, we have to see what we call two triples. 311 00:35:31.680 --> 00:35:35.680 Now, a different way of saying that would be to see a 10X. 312 00:35:35.680 --> 00:35:40.680 But in my experience, I can see triples a lot easier. 313 00:35:40.680 --> 00:35:43.680 And if you see two triples, you get your 9X 10X. 314 00:35:43.680 --> 00:35:48.680 And that's not to say that thinking in order of magnitude is not a good idea. I absolutely think it is. 315 00:35:48.680 --> 00:35:54.680 But when I make bets, I like to choose really high probability bets that I think I can 10X. 316 00:35:54.680 --> 00:35:58.680 And that is, again, my investment style. 317 00:35:58.680 --> 00:36:04.680 Venture capital, for example, will take 50 bets that are very small, hoping for 100X. 318 00:36:04.680 --> 00:36:07.680 That pace for the whole portfolio where everyone else pretty much loses money. 319 00:36:07.680 --> 00:36:11.680 And so I have a different style. Our style is we want to win on everyone. 320 00:36:11.680 --> 00:36:17.680 And I'm okay just hitting 10Xs across the board and having, and ideally not having any 0Xs, 321 00:36:17.680 --> 00:36:20.680 whereas venture, and it's just a different investment thesis. 322 00:36:20.680 --> 00:36:24.680 But again, our risk is our time invested in the capital we put in. 323 00:36:24.680 --> 00:36:27.680 And so I don't like taking losses. 324 00:36:27.680 --> 00:36:30.680 And so that is why we're really selective about companies. 325 00:36:30.680 --> 00:36:35.680 Because if we do move forward with it, then you can be pretty sure that we feel confident that we already see the 10. 326 00:36:35.680 --> 00:36:38.680 And so growth is a big amorphous topic. 327 00:36:38.680 --> 00:36:43.680 But let's just break it into the three buckets that growth happens from an enterprise value perspective. 328 00:36:43.680 --> 00:36:46.680 So number one is you can get more customers. 329 00:36:46.680 --> 00:36:49.680 If everything else stays the same and you double the customers, you double the business. 330 00:36:49.680 --> 00:36:52.680 The second bucket is making customers worth more. 331 00:36:52.680 --> 00:36:55.680 And there's eight ways you can do that, but I'm not going to get into that. 332 00:36:55.680 --> 00:36:58.680 But you increase the lifetime growth profit of the customer. 333 00:36:58.680 --> 00:37:01.680 If you sold the same amount of units, but you doubled the lifetime growth profit of the customer, 334 00:37:01.680 --> 00:37:03.680 then you would double the business yet again. 335 00:37:03.680 --> 00:37:08.680 Now the third bucket is one that I've learned over time, which is de-risking. 336 00:37:08.680 --> 00:37:14.680 Now, for example, if you had a company, like let me show you two examples of two companies. 337 00:37:14.680 --> 00:37:21.680 One company is super volatile, and it has big ears and low ears and high ears and big ears and low ears, whatever. 338 00:37:21.680 --> 00:37:26.680 And profit swings a lot and it's only been around for two years or three years, whatever. 339 00:37:26.680 --> 00:37:32.680 And on the other hand, you've got a company that's been around for 10 years and has grown at 10% a year. 340 00:37:32.680 --> 00:37:37.680 And they both in this year are the exact same size, which company is more valuable. 341 00:37:37.680 --> 00:37:39.680 This one, the second one. 342 00:37:39.680 --> 00:37:48.680 And the reason is because you have a high degree of confidence that it will continue to generate profits into the future and ideally grow in those profits. 343 00:37:48.680 --> 00:37:55.680 And so we think about all the different ways that are business good or zero and think how can we prevent all of those from happening. 344 00:37:55.680 --> 00:37:59.680 And so on the extreme, you have a business that's absolutely guaranteed to make money. 345 00:37:59.680 --> 00:38:08.680 So like if you had a 20 year contract with the government to maintain its lawns and you had a lawn care service, that would be an incredibly valuable business. 346 00:38:08.680 --> 00:38:14.680 It's almost a bond at that point because the government's not going to default and the contract's 20 years, they're probably not going to change the contract either. 347 00:38:14.680 --> 00:38:17.680 So like you're set pretty much. 348 00:38:17.680 --> 00:38:23.680 And I say this because a buddy of mine had an app that he contracted with only public municipalities. 349 00:38:23.680 --> 00:38:27.680 It was like an anti gun shooter safety app or whatever for prevention. 350 00:38:27.680 --> 00:38:34.680 He got 12 hundred municipalities on recurring annual revenue and he sold it for several hundred million dollars. 351 00:38:34.680 --> 00:38:37.680 And from a revenue perspective, it wasn't even close to that. 352 00:38:37.680 --> 00:38:47.680 But because the likelihood that that cash flow didn't continue on into the future was so minuscule that people were willing to pay huge amounts of money for it. 353 00:38:47.680 --> 00:38:58.680 And so the idea is even if we don't necessarily change the top line in bottom line of a business, but we can de-risk the founder, eliminate key man risk, add a couple acquisition channels, 354 00:38:58.680 --> 00:39:08.680 eliminate customer concentration meaning you have like one customer that's 80% of your business, eliminate financial risk meaning like you don't have audit ready financials, you're just like doing quick books and like doing crayon napkins, I'm just kidding. 355 00:39:08.680 --> 00:39:22.680 And even like key man risk from each of the roles. So like you have key man risk from if you have a public facing founder for example, or you have key man risk if like you have a genius coder founder who like if this guy wasn't here, the product would never continue to innovate the way it has. 356 00:39:23.680 --> 00:39:27.680 And so all of these are risks that in the future will continue to perform the way it does. 357 00:39:27.680 --> 00:39:38.680 And so when we think about a checklist of adding value to a company, we're increasing unit sales, we're increasing LTGP and we're increasing the likelihood that it will continue on into the future. 358 00:39:38.680 --> 00:39:48.680 And this is where actually the huge multiple occurs. And so if you think about units sold and lifetime risk profit, that's what the EBITDA or profit of the business is going to generate. 359 00:39:48.680 --> 00:40:03.680 Now the multiple on that profit is how likely it's going to continue. And so it's the interplay between these two things. So like if we can, for example, take a company that would be maybe valued at, you know, $5 million that's got $2 million in profits. 360 00:40:03.680 --> 00:40:17.680 So that would be taking that biz by cell stat to an X, right. And we take that company to let's say $5 million in profit. And then it gets an 8x multiple, then you have a $40 million business compared to a $5 million business. 361 00:40:17.680 --> 00:40:29.680 And so that's an 8x difference, even though all we did was we doubled the profit of the business, right. That's the key. So we went from $2 million in profit to $5 million. So there's a little bit more. 2.5x the profit of the business. 362 00:40:29.680 --> 00:40:40.680 But we 8x the overall value. And that's the magic. So the third belief that I continue to believe is focused founders. And that kind of has two aspects of it. 363 00:40:40.680 --> 00:40:57.680 So focus in terms of the avatar that we're serving and the problem that we're solving, as well as just the ability to say no. And so Steve Jobs was quoted for saying that focus means being able to say no to truly phenomenal ideas. 364 00:40:57.680 --> 00:41:07.680 And he said you can count how focused you are by the number of truly phenomenal ideas to try to choose not to pursue. And the thing is that the bigger the company gets, the greater the opportunities become. 365 00:41:07.680 --> 00:41:15.680 Can you imagine the opposite? Like if Apple does anything, it's going to make a billion dollars. Like think about anything Apple does, it'll make a billion dollars or many billion dollars. 366 00:41:15.680 --> 00:41:29.680 And so it's not whether something makes money or not is, is it the best allocation of resources? And I actually see this problem all the time, especially with like creator based founders who have like big audiences is that they get what I consider false positives. 367 00:41:29.680 --> 00:41:50.680 And so it's like they create an umbrella business for their rain channel. And they're like, this is what I'm going to sell. But is making umbrellas the best opportunity? Will they make money? Sure. Right. They could probably sell sauce within audience that large. But it doesn't mean it's the best use of the resources to capture the highest percentage of the market at the highest LTVs. Right. 368 00:41:50.680 --> 00:42:02.680 And that's the idea. When I say LTV, I mean lifetime goes profit. So focused founder on what specific avatar I want to serve and what specific problem I'm solving for that avatar. And I'll give you a little story about this. 369 00:42:02.680 --> 00:42:16.680 One of our companies is a PR company, just pretty generic B2B public relations. And we specifically took this founder on because we just really like the founder. And that's something that I'll share later in terms of some of the lessons I have. But I really like the founder. 370 00:42:16.680 --> 00:42:31.680 And they were doing a lot of, you know, selling a lot of units. So they're selling 100 issue units a month of services. The problem was they had super high churn. And so I saw, okay, we have cleared a man. There's a lot of people want this stuff. And we're really bad at delivery. 371 00:42:31.680 --> 00:42:43.680 And so once we went through our diagnostic process, which is what we do at the very beginning when we take on a company after we invest is we say, okay, let's find out more. Right. Because the last thing you want to do is immediately jump in and then just change anything. Like that's not smart investing. 372 00:42:43.680 --> 00:43:01.680 So we go in and we look at the customer mix and we serve in the customer base. And we find out that 85% of the customers are one avatar and 15% of the customers are completely different avatar. And here is the funny part is that the 15% of customers were paying three times more than the 85% and they churned at one third the rate. 373 00:43:01.680 --> 00:43:21.680 And so you're like, wait a second, three times the price went through the churn. Yes, they were nine times more valuable. And so I had a conversation with the founder said, hey, look at this data. What do you think about this? And his initial reaction understandably so was, well, what am I going to do about it? And I said, well, what we're going to do is we're going to stop selling to 85% of your customers. 374 00:43:21.680 --> 00:43:35.680 And so you can hear the world's largest gulp. And I was like, yeah, so we're basically going to kill like most of your business. And mind you, this is after I like to get invested in this business. And this is the thing he having a lot of faith in us decided to take that jump. 375 00:43:35.680 --> 00:43:53.680 And over the next six months, we reconfigured all of the marketing messaging, all of the sales scripting, the offer, the price point, and you'll notice here, this is one where I don't like doing product market fit. This is me reimagining product market fit for a company. I don't do this because it takes a lot of time. 376 00:43:53.680 --> 00:44:08.680 And a lot of effort and a lot of trial and error. But that being said, we identified the avatar, we identified the offer, we identified everything. And here's the cool part. After we made the entire switch, the new customer lifetime value went from $6,000 to $75,000. 377 00:44:09.680 --> 00:44:21.680 And our response rates are advertising went up despite being more narrow. And so the idea was a lot of people think that you have to go general and there are times where going broader is the right decision. 378 00:44:21.680 --> 00:44:44.680 But oftentimes, especially if you're smaller or starting out, selling going general means that the vast majority of people don't resonate with your message. And so you have to make up for having huge amounts of volume, whereas we were now able to cold outreach to a significantly smaller audience and get three times the response rate and close rates at higher prices by making that switch. 379 00:44:45.680 --> 00:45:02.680 So I've only done this massive change twice. And I'm about to do a third, but that's at a very different stage in the business. But in terms of like making product market fit at a base level, I've only done twice outside of all the companies I founded on a zoom in on this because I think it's a really powerful lesson. 380 00:45:02.680 --> 00:45:11.680 Most entrepreneurs, I would say most entrepreneurs are not willing to do what this founder did, which is take two steps backward so you could take 10 steps forward. 381 00:45:11.680 --> 00:45:19.680 And ironically, our second largest company that we have had this exact same thing happen when they came to us, they had two aspects to their business model. 382 00:45:19.680 --> 00:45:27.680 And I saw both of them and I hated one of them and I love the other one, but the other one was way harder to do at scale. But it had the most enterprise value. 383 00:45:27.680 --> 00:45:40.680 This one was fast, easy money, but didn't scale the same way. And so I told him to cut his personal income by two thirds in order to double down on this and this took nine months to stand up. 384 00:45:40.680 --> 00:45:53.680 And it's easy for me to say nine months, but when that nine months is 280 days of feeling like shit every single day and second guessing because he doesn't know when he's going through it that it's going to work out. 385 00:45:53.680 --> 00:45:58.680 And so think about your six months in and you gave up two thirds your income and you still don't know if this is working. 386 00:45:58.680 --> 00:46:06.680 And so that's where having trust with partners and that's a lot of I'll get to some of the beliefs that we've learned later is so important. 387 00:46:06.680 --> 00:46:10.680 And so I think one of the big things a lot of entrepreneurs don't do is they don't play it out. 388 00:46:10.680 --> 00:46:20.680 It's that they judge their self worth by their monthly cash flow. And what that prevents you from doing is seeing the bigger picture, which is why to be fair. 389 00:46:20.680 --> 00:46:31.680 It's nice to have an outside investor in because I'm going to I'm going to I'm going to side quest here, but I think it'll be I think it'll be worth it is that there is a really well studied phenomenon called the Solomon paradox. 390 00:46:31.680 --> 00:46:38.680 And so the Solomon paradox is simple is that people give better advice to other people than they follow on their own. 391 00:46:38.680 --> 00:46:43.680 And they've actually studied this in a variety of settings, whether it's business, relationships, finance, people actually give better advice than they follow up. 392 00:46:43.680 --> 00:46:50.680 They even take people's actual situations, whitewash the name and then ask them what the person should do and it's different what the person actually does. 393 00:46:50.680 --> 00:47:02.680 And so now you can hypothesize this because they're emotionally detached and they can just be more logical about it, but at the end of the day, they see higher, higher correlations with better decision making when you are not emotionally invested. 394 00:47:02.680 --> 00:47:13.680 And so having somebody on the outside or really on the inside who doesn't have the same emotional buy-in can ultimately allow you to grow the business to a much larger degree because their identity isn't associated with it. 395 00:47:13.680 --> 00:47:17.680 And so it allows you to have some outside perspective to be like, dude, it's cool. 396 00:47:17.680 --> 00:47:23.680 Look at what five years looks like because if you keep doing the other game you're playing, you're just going to plateau at 10 million a year and you're going to stay there. 397 00:47:23.680 --> 00:47:26.680 And I'm pretty sure that you don't want that. 398 00:47:26.680 --> 00:47:36.680 And so as soon as you realize that you know you can make money and you decide that you want to build a bigger thing, then you are making progress by taking a step back. 399 00:47:36.680 --> 00:47:45.680 You just have to redefine what progress is. You're making progress toward a much bigger goal. You're not making progress on your monthly cash flow tomorrow. 400 00:47:45.680 --> 00:47:49.680 You just need to expand the time horizon and see that you're on another path that's way more profitable.