Lessons Learned from Investing in 22 Companies (Pt.1) Ep 608

Summary Notes


Alex Hormozi, the host of a business-focused podcast, shares insights from his experience in investing and growing 22 companies with over a million dollars in annual profit. He emphasizes the importance of entrepreneurship, the blend of old investment strategies with new social media techniques, and the significance of generating high-quality deal flow. Alex discusses his active investment approach, focusing on quality over quantity, and the necessity for businesses to have transferable value and growth potential. He also delves into the 'what, who, how' framework for business expansion, the significance of leadership, and the six key areas where his company, Holdco, invests resources. Alex's investment philosophy includes focusing on cash-rich businesses, growth without large capital expenses, and the value of focused founders. He also shares lessons on the importance of product-market fit and the willingness to make strategic changes for long-term success.

Summary Notes

General Entrepreneurship and the Jack of All Trades Concept

  • Entrepreneurship often requires a broad skill set rather than deep specialization.
  • Entrepreneurs must understand constraints at a macro level and how to address them.
  • This approach is necessary to navigate the complexities of starting and growing a business.

"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."

This quote emphasizes the importance of having a wide range of knowledge in entrepreneurship to identify and overcome the main constraints that can hinder business growth.

Alex's Journey with Acquisition.com

  • Alex is documenting his entrepreneurial journey, similar to how he wished Bezos, Musk, and Buffett had.
  • He aims to build a billion-dollar enterprise and share the process for educational purposes.
  • His experience includes investing in 22 companies, all profitable, and he shares lessons and mistakes.

"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."

Alex is creating a documented path of his entrepreneurial journey to build a significant business, offering insights that other renowned entrepreneurs did not provide during their rise to success.

Investment Strategy and Portfolio Building

  • Alex's investment strategy involves a combination of old (investing) and new (social media) methods.
  • The goal is to create proprietary deal flow through social media and work with a small fraction of a large audience.
  • This strategy allows for brand building based on goodwill and economic sense.

"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."

Alex's investment strategy combines traditional investing with the modern reach of social media, aiming to create a unique and effective approach to generating business opportunities.

Deal Flow and Qualification Criteria

  • Acquisition.com receives around 2000 company applications per month.
  • Qualification criteria include geographic location (US and Canada) and a minimum of $1 million in profit.
  • Alex provides context on the size and range of companies within his portfolio.

"So basically, right off the bat, half of the people don't qualify because as of current, we only work with us and Canada."

This quote explains one of the initial filters in Alex's investment process, which narrows down the pool of potential companies to those based in the US and Canada or willing to operate under a US corporation.

Investment Philosophy and Approach

  • Investing is about quality over quantity, with a focus on fewer, high-quality companies.
  • Alex differentiates between active and passive investments, focusing on active involvement.
  • The investment approach is hands-on, with a team at Holdco guiding strategy and implementation.

"Now the thing about investing in general is that it's not a game of quantity."

Alex highlights that successful investing, especially in his approach, prioritizes the quality of investments over the sheer number of companies in the portfolio.

Deal Structures and Economic Sense

  • Deals depend on the founder and the economic viability of the investment.
  • Alex categorizes investments into active and passive, with active being the core of Acquisition.com.
  • The investment continuum ranges from pure betters to active turnaround specialists.

"For us, at a baseline economics level, it has to make economic sense."

This quote underscores the fundamental requirement for any investment to be economically sound, ensuring that the deal is profitable and viable for both Alex and the founder.

Growth and Value Creation in Investments

  • Alex aims for each deal to be the best the founder has ever done.
  • The focus is on companies with the potential to grow significantly in enterprise value.
  • By growing the pie, all parties benefit, and the remaining share of the company increases in value.

"My goal with every company, because my reputation matters to me... is that every deal that someone does with me is the best deal they've ever done in their life."

This quote reflects Alex's commitment to creating value for all stakeholders in a deal, emphasizing the importance of reputation and mutually beneficial outcomes in business investments.

Alex's Investment Focus and Outcomes

  • The investment focus is on companies at a certain size encountering similar growth challenges.
  • The most value is unlocked when scaling a company from moderate to high profits.
  • Alex does not publicly disclose company names to protect their business operations and independence.

"By percentage, the greatest amount of enterprise value is unlocked in that jump."

Alex explains that the most significant returns on investment are achieved when a company scales from a moderate level of profit to a much higher one, which is where his investment strategy is focused.

Growth and Independence of Businesses

  • Alex emphasizes the importance of businesses growing independently of his influence.
  • The goal is to increase the enterprise value of businesses so they are not reliant on him.
  • Quick facts demonstrate the success rate of businesses Alex works with in terms of revenue and profit growth.

"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, which is ultimately the goal of most entrepreneurs, not to be reliant on me."

The quote highlights the objective of nurturing businesses to operate and grow independently, increasing their intrinsic value without Alex's direct involvement.

Investment Criteria

  • Alex looks for businesses with a minimum of $1 million in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
  • Transferable value is key; businesses should not be overly reliant on the personality of the owner.
  • For personality-driven businesses, the profit threshold is higher at $2 million due to the extra effort required to detach the business from the founder's personal brand.

"If the company has what we call transferable value, meaning if you own, let's say, five candy stores, and all five, many stores do $200,000 a year in profit, then that would be something that I might be interested in."

This quote explains the concept of transferable value, which is a crucial factor in Alex's investment decisions. It implies that the business's profitability should not be tied to the owner's personal brand for it to be an attractive investment.

The Journey of Gym Launch

  • Alex shares his experience with Gym Launch, transitioning it from a personality brand to a business with transferable value.
  • It took 24 months to shift the business model from being reliant on Alex to a team of consultants.
  • The company's valuation increased significantly once it had transferable value.

"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."

The quote describes the transformation of Gym Launch from being centered around Alex's personal brand to a scalable model that relies on a team of experts, demonstrating the importance of transferable value in a business.

Qualitative Investment Considerations

  • Product-market fit is essential; businesses should have a clear understanding of what they are selling.
  • Alex's book "100 Million Dollar Offers" was published to help businesses create compelling offers.
  • Growth in cash flow is critical; businesses should not be in decline unless under specific circumstances.
  • Return on capital or cash flow is considered, with a preference for businesses that do not require heavy capital expenditures to grow.

"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."

This quote stresses the importance of having a product or service that meets market demand, which is a fundamental criterion for Alex when considering an investment.

The Investment Process

  • Alex uses a "what, who, how" framework to assess and grow businesses.
  • Identifying the biggest growth lever for a business is the first step (the "what").
  • Determining who will implement the necessary changes is the next step (the "who").
  • Finally, the "how" involves the actual execution of strategies using proven playbooks.

"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."

The quote introduces the process Alex follows to enhance the value of a business, which is a systematic approach involving identifying the main growth lever, the team responsible for implementation, and the execution method.

Importance of Personnel and Knowledge Dissemination

  • Talent and personnel are crucial for a business's growth, particularly at certain revenue milestones.
  • Alex argues for the importance of having multiple knowledgeable individuals at the top of a company's hierarchy.
  • The growth potential of a company is limited if the knowledge is concentrated in a single founder.

"One of the big beliefs that I've learned is that the peak of the company is based on how many brains there are at the top that know different knowledge."

This quote emphasizes the need for diverse expertise within the leadership of a company to facilitate growth and avoid bottlenecks caused by a single person's limited knowledge.

Balancing Business Strengths

  • While individuals should focus on their strengths, businesses require balance across all functions to grow.
  • Alex advocates for a well-rounded approach to business development, ensuring all critical areas are adequately managed.
  • The "what, who, how" framework is applied to address the specific needs of each business function.

"The business needs to be balanced. And so that's the push and pull 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."

Alex points out that a business must have competencies across all essential functions, not just the areas where the founder excels, to ensure sustainable growth.

Execution and Expertise

  • Execution involves implementing specific strategies and playbooks across different business functions.
  • Alex has a team of subject matter experts (SMEs) in various domains to guide the implementation process.
  • The focus is on executing fundamentals well in each department rather than pursuing complex strategies.

"You would be amazed at how much growth can happen when all you do is the fundamentals in every single department."

This quote underscores the importance of mastering fundamental business practices across all departments to drive growth, rather than relying on overly complicated or niche strategies.

Final Remarks and Call to Action

  • Alex invites listeners to check out his YouTube channel for visual content that complements the podcast.
  • He emphasizes the value of engaging with different formats to enhance understanding and learning.

"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, drawn out stuff, sometimes it can help hit the brain centers in different ways."

The quote serves as a call to action for listeners to explore additional resources that may provide a more engaging and informative experience, highlighting Alex's commitment to delivering value in various formats.

Demand Generation

  • Discusses various strategies for generating customer demand, including cold calls, emails, content creation, ads, affiliate networks, referrals, partnerships, and scaling existing employee efforts.
  • The goal is to create a pipeline that feeds into the sales function.

"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?"

This quote emphasizes the beginning of the customer journey, focusing on the importance of demand generation as the first step in the process.

Sales Conversion

  • Conversion of demand into sales using different mechanisms like sales scripts, video sales letters, written sales letters, webinars, and live events.
  • Alex acknowledges not being a master but competent enough to recognize when sales strategies are effective and then move on.

"Once we have demand, it's about converting that demand."

This quote underlines the transition from generating demand to the critical phase of converting that interest into actual sales.

Customer Success and Product

  • Highlights the importance of customer success in ensuring a great experience and maximizing revenue.
  • Differentiates customer success from customer service, noting the industry's recent emergence and its impact on business value.
  • Reducing churn from 10% to 3% can triple the value of a customer.

"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 I's are being dotted and the t's are being crossed, and that people are having an exceptional experience and making sure that we maximize revenue in the back end."

This quote explains the shift in focus from sales to ensuring customer satisfaction and product quality, which are crucial for long-term revenue maximization.

Data Function

  • Stresses the importance of data for making smart business decisions.
  • Describes the evolution from using disparate tools to having centralized data systems for real-time tracking from click to close.

"And so getting that implementation in place is one of the key things that we help with."

This quote signifies the pivotal role of data implementation in enabling businesses to make informed decisions and track performance efficiently.

Legal, Finance, and HR Functions

  • Legal: Discusses the strategy of not having in-house legal but providing support to portfolio companies.
  • Finance: Emphasizes the need for clean financials, accrual accounting, and cash forecasts for transactions and growth.
  • Shares a personal anecdote about an unexpected tax bill due to a lack of proper finance function.
  • HR: Divides HR into benefits, payroll, compensation, and the more valuable recruiting and headhunting aspects, which build the people who build companies.

"And then finally, from the HR perspective, there's two kind of sides to HR, right? You've got, like, the benefits, payroll compensation, incentives ish side of HR. And then what I would consider the most value added."

This quote delineates the two facets of HR, highlighting the strategic importance of the recruitment side in building a successful company.

Leadership as a Meta Skill

  • Leadership is presented as the overarching skill that amplifies all other business functions.
  • Describes leadership's impact on company culture and employee effort.
  • Discusses the potential for founders to recognize their strengths and delegate leadership to others better suited for the role, using the example of Google's founders and Eric Schmidt.

"And the last discipline I'll consider, and this is probably the one where Layla and I contribute the most to, is, and I feel even weird throwing myself in this, it's probably more Layla is leadership, right?"

This quote introduces leadership as the ultimate skill that can unlock the full potential of a company by effectively managing and inspiring people.

Investment Beliefs and Lessons

  • Alex shares his experiences and insights from investing in 22 companies.
  • He plans to discuss unchanged beliefs, beliefs that have been reinforced, and beliefs that have been disproven and replaced with new understandings.

"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."

This quote transitions from discussing the operational aspects of business growth to reflecting on the beliefs and lessons learned from Alex's investment experiences.

Investment Strategies and Venture Capital

  • Alex discusses the difference between his investment style and that of venture capital firms.
  • He prefers high probability bets that can yield a tenfold return, as opposed to venture capital's approach of many small bets in hopes of a few large returns.
  • Alex emphasizes a desire to win on every investment and avoid losses, which leads to a selective approach to company investments.

"And if you see two triples, you get your nine x, ten X. 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 ten x."

The quote highlights Alex's preference for high-probability, high-return investments and his strategy of aiming for consistent tenfold returns rather than the more speculative approach of venture capital.

Growth Strategies in Business

  • Alex breaks down growth into three key areas: acquiring more customers, increasing customer value, and derisking the business.
  • Derisking involves making a business more stable and predictable, which in turn increases its value.
  • Alex uses examples to illustrate how a stable company with predictable growth is more valuable than a volatile one.

"Growth is a big amorphous topic. But let's just break it into the three buckets that growth happens from an enterprise value perspective."

This quote introduces the three areas of growth that Alex considers crucial for increasing a company's value: customer acquisition, customer value, and derisking.

The Value of Stability and Derisking

  • Stability is a significant factor in a company's valuation.
  • Alex explains that a company with a predictable revenue stream, like a long-term government contract, is highly valuable.
  • Derisking involves eliminating factors that could cause a business to fail in the future.

"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?"

The quote emphasizes the importance of identifying and mitigating risks to ensure the longevity and stability of a business, which can significantly increase its value.

The Impact of Focus in Entrepreneurship

  • Alex discusses the importance of focus for entrepreneurs, particularly the ability to say no to opportunities that are not the best use of resources.
  • He cites Steve Jobs on the essence of focus and the importance of prioritizing the best opportunities over merely profitable ones.

"Focus means being able to say no to truly phenomenal ideas."

This quote underscores the critical nature of focus in entrepreneurship, where the ability to decline potentially good ideas in favor of the best ones is a measure of success.

The Power of Targeted Customer Bases

  • Alex shares a story about a PR company that increased its customer lifetime value by focusing on a more profitable customer segment.
  • The company stopped selling to less profitable customers and reconfigured its marketing and sales strategies to better serve the more valuable segment.
  • The result was a significant increase in customer lifetime value and response rates to advertising.

"So focused founder on what specific avatar I want to serve, and what specific problem am I solving for that avatar?"

The quote highlights the importance of understanding the target customer and the specific problems the business is solving for them, which can lead to more successful and efficient marketing strategies.

The Challenge of Reimagining Product-Market Fit

  • Alex describes the difficulty and time investment required to reimagine product-market fit for an existing company.
  • He emphasizes that this process involves a thorough diagnostic approach and a willingness to make significant changes to the business model.
  • The story of the PR company is used to illustrate the impact of focusing on the right customer segment and the potential for increased profitability.

"I don't like doing product market fit. This is me reimagining product market fit for a company."

This quote explains Alex's reluctance to engage in redefining product-market fit due to the substantial effort and risk involved but also acknowledges the potential rewards when done correctly.

Long-Term Vision and the Solomon Paradox

  • Entrepreneurs often need to take a step back to achieve greater success in the future.
  • Alex talks about the Solomon paradox, where people give better advice to others than they follow themselves, highlighting the value of external perspectives in decision-making.
  • He stresses the importance of focusing on long-term goals rather than short-term financial gains.

"You just need to expand the time horizon and see that you're on another path that's way more profitable."

The quote encourages entrepreneurs to look beyond immediate cash flow and consider the broader, long-term trajectory of their business, which may require temporary sacrifices for greater future success.

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