The Game with Alex Hormozi - Lessons Learned from Investing in 22 Companies (Pt.1) | Ep 589

Episode Date: September 19, 2023

“We take something old and something new and there's a lot of magic between the two of those things." Today, Alex (@AlexHormozi) discusses his experience investing in 22 companies over the past three years, sharing lessons learned and mistakes made. He provides insights on his investment criteria, deal structures, and the process of providing value to portfolio companies.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(2:37) - Our criteria for investing(10:36) - What we look for in companies(15:21) - Process of providing value (who-what-how framework)(28:33) - The role of leadership when investing(32:26) - Cash flow is king and helps reinvest in growth(39:32) - Focused founders are the key(44:58) - Two steps back to take ten steps forwardFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

I think that's why in a lot of ways, general entrepreneurship is about being a jack of all trades, master of none, 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 decontrain it. Welcome to the game where we talk about how to sell more stuff to more people in more ways and build businesses worth owning. I'm trying to build a billion dollar thing with Acquisition.com. I always wish Bezos, Musk, and Buffett had documented their journey.

So I'm doing it for the rest of us. Please share and enjoy. Over the last three years, I've invested in 22 companies, either as a majority owner where I took over control of the business or a minority owner where I just assisted in the growth of the business. And each of these businesses are doing over a million dollars a year in profit. So not top line, but bottom line. 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. 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. So you have the highest likelihood of actually making that happen. And at the very least, you'll probably learn a lot from the checklist itself that you can apply to your own business even if you weren't interested in that. And so either way, wait to the end and I'll walk you through it. 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. And so for us, something old is investing in something new is social media. 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. And so, you know, a lot of people have built businesses around, you know, building an audience, and then they sell stuff to that audience. 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. And the benefit of that is it would allow me to build a

brand based on a lot more goodwill than anyone else could because I would be giving to 99.999% but but still able to make it make economic sense. And so one of the big misnomer's 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. 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 2,000 companies per month that inbound. apply to work with us. 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. So basically, you know,

right off the bat, half of the people don't qualify because as of current, we only work with US and Canada. We also work with international companies who are willing to convert to the U.S. So if you're willing to have a U.S. Corp kind of be the hold co for your foreign corp, that works too. But half the businesses are not in that in that bucket. The next disqualifier is just size. A lot of the companies that apply are, you know, zero, two million dollars a year in top line. And that's, it doesn't really work for us. And so our minimum, minimum is one million. 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. It's a million dollars in profit. But right now I can probably look, but the median profit's probably about four-ish of the companies in our portfolio. just to give you a little bit of reference to size.

The largest company is about $20 million in profit, and the smallest one is probably like one and a half. And so that just gives you a range of the size companies. And the biggest companies that we have in the portfolio didn't start that way. And so that's why we're okay taking on a company that's doing $3 million, $5 million, $8 million, because we feel confident

that we can help them get to a lot bigger than that. Now, the thing about investing in general is that it's not a game of quantity. And so that might seem counter to like my advertising strategy of making content, because we get so much inbound deal flow. But if you think about it, like if you invest in one Facebook, you only need one Facebook. 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 definitely a quality or quantity game. And so you might hear 22 companies over three years and be like, oh, that's a lot. 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. 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. And so our rate of deal doing has gone down. Our quality of business has gone up. And it's not that the businesses earlier weren't as good.

It's more that the ones we do now are better fits. And so we've just learned more about how to identify those, which is the point of this. Now, how Acquisition.com deals work is that it really depends on the founder. And so for us, at a baseline economics level, like it has to make economic sense. Like we have to buy into a business for a certain established price that we feel is reasonable and we see that there's significant amount of upside for us and the founder, and the founder feels like that we can add significantly more value than they could accomplish another out. Like, that's the basics, right?

In terms of deal structures, for us, I have kind of two buckets. I've got active and I've got passive investments. I don't consider anything that's passive in the acquisition.com portfolio. And so, like, there's a variety of, like, tech companies and kind of like angel checks, which is very small checks you do for lots of companies that I have invested in, but I don't consider those part of my main game. Those are just some like businesses that I thought were really interesting and I was willing to take a small bet on them. But my bread and butter where I make the vast majority of my wealth is in me writing checks that I actively work in.

And that is what Acquisition.com is about. So this is an active portfolio. And so there's really kind of two types of investors. Again, this is a continuum. It's not binary. But on one extreme, you've got pure betters, which is you could have one guy looking at a zillion screens making bets. right? And you can make bets on the micro, which is like the whole day trading thing, which I think is more of a job than actually investing, but we won't get into that today.

Or on the other, you've got, you've got Warren Buffett who is just making one or two concerted bets over a year. And that's his bet, betting that this value is underpriced and it will go up over the long haul. On the other extreme, you've got like turnaround specialists. So people who buy like distressed assets or people who do roll-ups, that's a private equity play. We're familiar with that, which is like, I go buy 20 different dental offices that. that are all doing a million dollars in profit. I roll them together under one flag and I sell a $20 million EBITA,

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? And so that's like super, super active. And so we are, if we're looking at this continuum, way more on this side. We are active investors.

We have a huge team at Holdco. We have more people at Holdcoe than we have actual companies in the portfolio for context. And so we are very much directly guiding the strategy, and the implementation and even recruiting for key roles to grow the companies. And this is more or less why I think our rate of investing has gotten to a nice, steady cadence. Because obviously in the beginning, you have more people than you have companies,

so then your rate goes up. But then as we feel like we get into a nice rhythm of how we can onboard a company over, you know, a half a year to a year and get key players in place, identify the constraints, figure out the plans that we're going to do, implement those people, et cetera, et cetera. Now we've got kind of like a nice rhythm. And so for us, the deals obviously depend on how much we're investing in the business. So I currently don't do any deals for less than a third of a company that we're actively invested in. And so the majority of them are greater than that.

So I'd say of the last four deals we did, three of them were 49 percent, one was 40. And so that's just give you a little bit of context on how we structure the deals. We actually, I don't sure one of them was 51. And so just to give you a range, now we obviously have more investments to that, but we're very actively involved in them. 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. So let's say, for example, that I invest a million dollars a year in basically payroll of work, of consultants and, you know, recruiting and things like that that will install into a business,

you know, like doing a full CRM implementation, et cetera. Over the next five years, it's $5 million I'm going to invest into a business. if I'm, 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. And that's not really the target of what we have. 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. Now, the good news is, though, that I think every company we have is over what I would consider the free line. 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. 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? 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, 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. And so part of that is leaving some meat on the bone, if you will. I mean, if you think about the amount, you know, if I were to, like, sell something to my audience, like, there's a lot of meat on the bone there, but I'd always rather be, you know, 49 on the table and give 75 so that everyone wins. And that's, that's just kind of like

more of a life motto. And I'm going to walk you through a bunch of the lessons I have from the 22 companies that we've invested in and bought. 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. 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. 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.

And so companies that are going through, going from 500-ish, a million a month-ish to multiple millions a month, they all encounter the same problems. And so that's where our playbooks are really effective to just quickly deb bottleneck them. And, you know, transparently, this is why I do this. And by percentage, the greatest amount of enterprise value is unlocked in that jump. 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, as much as headlines will tell you that company sell for 20 times earnings, that's publicly traded companies. And there's a number of things that those companies have that companies below $5 million don't have. Because if you look at biz buy sell, they publish their stats publicly,

which the actual median transaction for small businesses is 2.28 to 2.53 times. And with 80 to 90% of those having seller finance notes. So how is that, how do you have 2ish X and 20ish X on polar extremes? And it's like, well, that's where the enterprise value gets built up. 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 uninvestable, like it's not really sellable in a clean transaction, to a $50-80 million exit. And so that little step up is where we focus all of our attention because that's where by percentage the greatest amount of enterprise value is created.

And I'm not going to publicly tell you the names of the companies. and the reason for that is actually to protect the businesses. And let me explain. So if I pump a company, right, what would happen is that, well, some of the companies literally couldn't handle all of y'all, and I appreciate you. But if I were to pump the company, what happened is that I now become tied to that company's success. And so a future require, or somebody wants to buy that company, would then mean that

Uncle Alex has to go with the deal. And that's not why I invest is to get myself another job. That's not the point. And so the idea is that I need to grow them independent of my influence. that they can, on their own, grow their own enterprise value, which is ultimately the goal of most entrepreneurs, not to be relying on me. And see here a couple quick hitting facts. Number one is, on average, we increase top line by 80% within the first 12 months. We increased profit by 3.01x within the first 12 months. We increased top line revenue by 1.8x within the first 24 months.

And then within the same first 24 months, we increase profit by on average 4.7x. So we're pretty good at this. somebody help you identify the types of businesses I look for so that you can look for those types of businesses too. All right. So number one is I look for, at least for me, a minimum of a million dollars in EBTA if the company has what we call transferable value. Meaning if you own, let's say, you know, five candy stores and all five candy stores do $200,000 a year in profit, then that would be something that I might be interested in as long as it's not your face. That's the reason that they're doing, which most local businesses is not the case, right? Or if you own an accounting firm, that was doing a million dollars a year in profit, and it's not based, again, on your face,

then it would be something that I would be okay with. If it is a personality brand or based on a creator or around a creator, which I get probably disproportionate amount of because I am this way, then the minimum line is $2 million a year in profit. And again, the reason there is that there is actually less transferable value in that business, and there's actually more work that has to get done to remove the face of the founder so that there is enterprise value. So, like, for example, with Jim Walsh, I know this story because I lived that story. So I built gym launch around my face. And then it took me 24 months to transition from Alex's gym licensing business to gym launch a suite of consultants who understand how to implement a very specific set of playbooks

into this type of gym, which is micro gym, and get this very reliable outcome. Right. 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, almost uninvestable or valueless, despite the fact that it made a lot of money into something that had transferable value that someone could compensate me for, which is ultimately where we're able to sell it for just under $50 million. And so that's the quantitative side of it. The qualitative side of it is two pieces. 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. Right. The reason I publish my first book, $100 million offers is because I want to make sure people knew what to sell, right? And make really good

offers. Because once you get that right, then you can usually quickly skyrocket above one, two, three million dollars in profit per year. And then it's much more interesting for us. 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. It's just not worth the time. I'd rather work with companies that already have that and then scale it. 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, like 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. One of the, ironically, the biggest company we have

actually had cut, it was like down 70% when we started working with them. And then it doubled from their all-time top, which is a massive jump, which is awesome, right? But that was a herculean amount of effort over 12 months to really reverse the nosedive into something awesome. The next one is just return on capital or cash flow. What that means is like there are some companies that don't have a lot of capital expenses. Right. So like if you're an accounting firm and you generate profits, there's not a lot, you don't have to buy heavy equipment to increase your capacity, right? 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. Like there's

capital expense that has to go out. Not to say that's bad. We have two very, very large brick and mortar chains that are awesome. 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. And then there are some companies that we actively bring the money back into Holdco so we can redeploy it into another asset that's going to increase in value. So I just went over some of the specific criteria we look at to pick companies. And now I want to talk about specific process that we go about picking them in general. Okay.

So we just talked about the criteria that we look for in order to provide value. And now let's talk about the actual process of providing value. 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? Is it, do we need to 5x the sales team? Is it we need to do 5x the ad spend? Do we need to make five times the content? Is that we need to cut churn by 5x?

Or do we need to completely reconfigure the pricing mix or the product suite? 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. Once we have identified that what, then comes down to the who, right? Which is who is actually new this implementation. One of the biggest things, especially at companies of this size, is that you typically have a founder who sometimes has one or two helping hands, but they don't actually have a full leadership team or full leadership suite. And so this is usually a very painful time for most businesses

when they're at $300, $500 million a month because they are still, they're in this in-between place of like they're still having to do some of the things they're good at. 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. And they can never really feel like they're getting their head above water because right as they fix one thing, something else breaks. And it's kind of this continuous cycle. And that is the symptom, the core issue is personnel, is that they don't have enough talent.

And so the easiest way to envision this, if this is you or somebody you know, is think about your best employee. All right. Imagine if you had six of them. How much more money would you make? Probably a lot more money. Well, that's kind of the idea. So, for example, I was talking to a really cool, like tech-enabled service yesterday. that we're moving forward to invest in. 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. And as the company has grown, he's promoted people from within, which is not a bad ideology overall.

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, it means that the entirety of the knowledge and the entire company is from one person's brain. And so if you think about this, here, I'll give you my little triangle. 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 they're at the top that know different knowledge.

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's way, way, way bigger. And so it's almost like a Christmas tree of dissemination of knowledge at scale. And so like if you don't like, and this should make sense because if you want to get to $100 million 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. 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.

and you're not going to die and be reborn and learn how to market and sell, et cetera. 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. And so one of the big misnomer is about growing a business is that people say, double down into strengths, which is actually true for the individual. But the business needs to be balanced. And so that's the pushing pool that people miss in context, is that even though you may be really good at sales and marketing, 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, an HR function, an IT function so you can track data. 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. 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. 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? 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. And so to give you a little bit of context,

we at Holdco, for us, have what we call SMEs 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. 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? 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.

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. 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, 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. 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. 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. And so one of the interesting things is, I mean, I talk to all of our directors within Holdco, And it's cool that they have learned a really cool lesson I'm going to share with you, 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. A lot of people want to make things fancy. And I have this little saying, fancy fails, simple scales. 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. 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. Right?

Like, as long as you have those fundamentals in place, you're going to get 80% of the gains. 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 effects, more visuals, more graphs, you know, drawn out stuff. Sometimes it can help hit the brain centers in different ways. You can check on my YouTube channel. It's absolutely free. Go check that out if that's what you are into. And if not, keep enjoying the show.

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 responsible of the experts. And so that's why we have experts. We bring in the person who's going to be underneath of that CS person, for example, to cut churn, fixed 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. 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, 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. All of these are different selling mechanisms. And we have companies that literally do all of them. 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 customic success or product, right, which is somebody to make sure that all the eyes are being dotted, and the T's are being crossed, and that people have an exceptional experience and making sure that we maximize revenue in the back end.

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 are skyrocketing is because they are unlocking so much value for businesses if you know what you're doing. And so, for example, if you have a company or you have a product

that has $100 price point and it goes from 10% churn monthly to 3% churned 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. 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. On the flip side, if you have really amazing data, it's really easy to look smart because you just make common sense decisions

based on the data you're presented. 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 to having it all centralized

so that we can track everything in real time from click to close. Beyond that, you then 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, 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. So, like, a big part of the reason that small companies can't get big multiples is that they don't have clean financials, right? They're still doing cash accounting. They don't have their dot accounting based on accrual. And they don't have someone who can actually give them cash forecast. I'll give you an example of this. So one of our portfolio companies was growing like a rocket. And all of a sudden, they basically plateaued at around $2 million bucks a month for like six months. And the problem that the founder 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. And so he 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 that was the nature of the business had extended payment terms. And so I remember pulling him aside and saying, I want you to remember this feeling because the feeling that you have is that you don't have a finance function. And so he knew sales, he knew marketing, he knew customer success, but the feeling he had was a lack of data around money. And so he didn't know how to put his finger on it, but I have been there because I had a impromptu $9.2 million tax bill that came up one year. Why? Because I, and I'll tell you, like I lived these mistakes. I hired somebody frontline, promoted, promoted, until they were director of finance without ever having that experience.

We sent them to a conference that I paid for. And then at the conference, Friday afternoon, she emails Lela and I and says, by the way, I just learned that, after you're over a certain size, you can't pay your taxes at the end of the year. You need to pay them quarterly. And 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. And so, if you've heard me say that I had that $17 million by second year at gym launch with $17 million in profit, well, I had $9 million in taxes that was due at the end of Q1 of that next year. And so I actually had Q1 because I had to pay quarterly plus the four quarters before that, all due. 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, hey, I'm busy me at the conference. I was like, this is one where you can step out of the conference that I paid for. And so obviously stepped out. We talked about it. And I wrote a $9.2 million check that next Monday. And so again, I know what that failure feels like. 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. 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 headhunting side. Because what we have also learned in this process is that you don't actually grow companies. You build people who build companies. And that is a key piece that took me way too long to understand. Like the reason that Jim Launch became a very valuable thing was because I found valuable people to then run and grow the company on my behalf. And until you get to that point, you don't own enterprise. The enterprise owns you. 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, that grows tax-free. In the last discipline, I'll consider, and this is probably the one where Lail and I contribute the most to is, and I feel even weird throwing myself, and this is probably more Layla is leadership, right? Because if you think about this from a meta-scale perspective, 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 principle's thinking perspective, if anyone in the world would work for you, 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, 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 of 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. And if we're thinking about value, it is one of the most valuable skills. Because, and they found this, there was 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 in 10x, 100x a company 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. 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. I mean, the difference isn't 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. 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. Or I just want to be just in charge of the sales team. Or I just want to be in charge of success. And we have founders that are in each of those positions because over the time, they get, they increase their own self-knowledge. And they don't see it as a deficiency. They see it as a plus that they're more self-aware. And in so doing, same thing as Larry Page and Sergei Brin, they brought in Eric Schmidt because he was going to be the leader that was going to help grow Google. Now, they were amazing product people, incredibly good technologists, but he knew how to build the actual, build and operate the actual

company. And so was it a bad move for them to do that? Absolutely not. It was obviously worked out for them. 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. So there's six key areas that Holdco will basically dump value into or invest resources into growing

where we feel like the highest leverage points are. So you've got marketing on the front to generate demand. You've got sales in order to convert demand. 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. 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.

And then on top of that, so 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. 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, some of the quantitative data. 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. And so I want to break this into kind of three sections. So one is beliefs that I've held from the beginning that have remained unchanged. The second bucket is beliefs that I believed in the beginning, but now I believe through and through and have doubled down on.

And the third bucket is beliefs that I once thought were true and have been completely disproven and have completely new beliefs around the same. subjects. 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. 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. 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. 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. If you don't have cash flow, you're a ticking time bump until something happens. And the unfortunate part about business is that something always happens. And so I see cash flow in some ways as insurance on whatever purchase or investment I'm making. And it also opens up the bucket for belief number two, which is that I have cash flow to reinvest in growth. And so the growth can happen organically, meaning, you know, if I have an accounting firm that I'm looking at, they can continue to grow without actually having to redeploy capital. But if they do have capital, then there are other things that we could potentially acquire. We might acquire a bookkeeping business, or we could

acquire a piece of software that works out well, or we can acquire a media property that would feed deals into that company. Or we could invest in, you know, writing a book that would then position the firm as thought leaders to then get more business, et cetera. And so the idea is that, one, I want to have lots of cash from the business. Two, I want to have clear ways that I feel that we can grow the business that don't take huge leaps of faith. And so for us, we have to see what we call two triples. Now, a different way of saying that would be to see a 10x. But in my experience, I can see triples a lot easier. And if you see two triples, you get your. And you get 9x, 10x. And that's not to say that thinking in order of magnitude is not a good idea. I absolutely

think it is. But when I make bets, I like to choose really high probability bets that I think I can 10x. And that is, again, my investment style. Venture capital, for example, will take 50 bets that are very small, hoping for 100x, that pays for the whole portfolio where everyone else pretty much loses money. Right. And so I have a different style. Our style is we want to win on everyone. And I'm okay just hitting 10xs across the board and ideally not having any zero Xs. Whereas venture, and it's just a different investment thesis. But again, our risk is our time invested in the capital we put in. And so I don't like taking losses.

And so that is why we're really selective about companies because if we do move forward with it, then you can be pretty sure that we feel confident that we already see the 10. And so growth is a big amorphous topic. But let's just break it into the three buckets that growth happens from enterprise value perspective. All right? So number one is you can get more customers, right? If everything else stay the same and you double the customers, you double the business. The second bucket is making customers worth more. And there's eight ways you can do that, but I'm not going to get that. But like, you could, you increase the lifetime gross profit of the customer. Right. If you

sold the same amount of units, but you double the lifetime gross profit of the customer, then you would double the business yet again. Now, the third bucket is one that I've I've learned over time, which is de-risking. All right. Now, for example, if you had a company. Let me show you two examples of two companies. One company is super volatile, and it has big years and low years and high years and big years and layers, whatever, and profit swings a lot, and it's only been around for two years or three years, whatever. And on the other hand, you've got a company that's been around for 10 years and has grown at 10% a year. And they both in this year are the exact same size. Which company is more valuable? This one, the second one.

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. And so we think about all the different ways that a business go to zero and think how can we prevent all of those from happening. And so on the extreme, you have a business that's absolutely guaranteed to make money. 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. 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. So like, you're set pretty much. And I say this because a buddy of mine had an app that he contracted with only public municipalities. It was like an anti-gun shooter safety app or whatever for prevention. He got 1,200 municipalities on recurring annual revenue and he sold it for several hundred million dollars. And from a revenue perspective, it wasn't even close to that. but because the likelihood that that cash flow didn't continue on in the future was so minuscule that people were willing to pay huge amounts of money for it.

And so the idea is even if we don't necessarily change the top line and bottom line of a business, but we can de-risk the founder, eliminate keyman risk, add a couple acquisition channels, 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 QuickBooks and like doing crayon napkins. I'm just kidding. And even like key man risk from each of the role. 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. And so all of

these are risks that in the future it won't continue to perform the way it does. 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. And this is where actually the huge multiple occurs. And so if you think about units sold and lifetime gross profit, that's what the EBITA or profit of the business is going to generate. 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 profit. So that would be,

taking that biz buy-sell stat, two and a half 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. 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 it's a little bit more than $2.5x, the profit of the business. 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.

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. And he said you can count how focused you are by the number of truly phenomenal ideas. you choose not to pursue. And the thing is, is that the bigger the company gets, the greater the opportunities become. Can you imagine the opportunity? Like, if Apple does anything, it's going to make a billion dollars. Like, think about it. Like, anything Apple does, it'll make a billion dollars, or many billion dollars. 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. 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? Now, will they make money? Sure. Right?

They could probably sell sauce with an audience that large. But it doesn't mean that's the best use of the resources to capture the highest percentage of the market at the highest LTVs, right? And that's the idea. When I say LTV, I mean lifetime gross profit. So focused founder on what specific advertry I want to serve. and what specific problem I'm solving for that avatar. And I'll give you a little story about this. 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. And they were doing a lot of, you know, selling a lot of units. So they're selling 100-ish units a month of services. The problem was they had super high churn. And so I saw, okay, we have clear demand. There's a lot of people want this stuff and we're really bad at delivery. 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 everything. Like, that's not smart investing. So we go in and we look at

the customer mix and we survey 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 turned at one third the rate. And so you're like, wait a second, three times the price, one third of the churn. Yes, they were nine times more valuable. And so I had a conversation with the founder. I 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. 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. 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 and a lot of effort and a lot of trial and 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. And our response rates for 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. 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. 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. I want to zoom in on this because I think it's a really powerful lesson. Most entrepreneurs, I would see most entrepreneurs are not willing to do what this founder did, which is take two steps backwards so you could take 10 steps forward. 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. And I saw both of them and I hated one 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. 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. 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.

And so think about it, you're six months in, and you gave up two-thirds of your income, and you still don't know if this is working, right? 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. And so I think one of the big things a lot of entrepreneurs don't do is they don't play it out, right?

Is 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, it's nice to have an outside investor in because 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's a really well-studied phenomenon called the Solomon Paradox. And so the Solomon Paradox is simple,

is that people give better advice to other people than they follow on their own. 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. 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's person actually does. And so now you can hypothesize it's 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. 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. And so it allows you to have some outside perspective to be like, dude, it's cool. 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. And I'm pretty sure that you don't want that. 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. 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. You just need to expand the time horizon and see that you're on another path that's way more profitable.