Lessons Learned from Investing in 22 Companies (Pt.2) Ep 609

Summary Notes


In this episode of "The Game" podcast, the host and founder of Acquisition.com, Alex Hormozi, shares his insights on business growth, investment strategies, and the importance of having hard conversations to unlock potential. Hormozi emphasizes the value of being founder-friendly and creating partnerships that allow founders to retain a significant stake in their company, thereby benefiting from the growth that comes with additional resources and expertise. He critiques traditional private equity for its lengthy, litigious processes and preference for financial arbitrage over organic business growth, advocating instead for a model that is more collaborative and founder-centric. Hormozi also discusses the importance of aligning with founders who can manage change and growth, highlighting his belief in "jockey over horse"—valuing the founder's capabilities over the business itself. He introduces the theory of constraint as a guiding principle, focusing on the most significant growth limitations within a business to achieve rapid scale. Hormozi concludes by outlining the criteria for businesses to become part of the Acquisition.com portfolio, which includes knowing one's numbers, having a significant vision, decision-making speed, focus, and having a team with "gray hair" experience.

Summary Notes

Founders and Conversations in Business Growth

  • Founders who engage in difficult conversations can unlock significant business growth.
  • Growth is often behind a few challenging discussions.
  • Willingness to have these conversations correlates with success.

"The founders who are willing to have hard conversations are the ones that unlock the hard to get to growth. Because most of the growth in every business sits on the other side of two or three hard conversations."

This quote emphasizes the importance of facing challenging discussions to achieve business growth. It suggests that avoiding difficult conversations can hinder progress.

Business as a Game and Wealth Perspective

  • Wealthy individuals often view business as a strategic game.
  • The speaker aims to share lessons learned in business to help others grow.

"The wealthiest people in the world see business as a game."

The speaker indicates that successful businesspeople treat business as a strategic challenge, similar to a game, which involves careful planning and execution.

Core Pillars of Investment Decisions

  • Being founder-friendly is a key investment principle.
  • Acquisition.com was created to offer a better experience for founders during transactions.
  • The goal is to increase the value of the founder's share, even if their percentage of ownership decreases.

"So number one is being founder friendly."

This quote introduces the first core principle of the speaker's investment strategy, which prioritizes the interests and well-being of founders in business transactions.

The Shape of the Pie Analogy

  • Ownership percentage is less important than the overall value of the company.
  • A smaller percentage of a larger, more valuable company can be more beneficial.
  • Founders need to understand that bringing more people on board can increase the overall value.

"You can have a round shape of pie, but the round shape of pie can be like this, or you can have a triangle shape of a pie that looks like this."

The speaker uses the pie analogy to explain that the shape and size of a founder's ownership can change, but what matters is the value of their share, not just the percentage.

Traditional Private Equity Criticism

  • Traditional private equity (PE) processes are lengthy, painful, and litigious.
  • PE often focuses on financial arbitrage rather than organic business growth.
  • The due diligence process is compared to a root canal, with excessive attention to minor details.

"Here's a quick laundry list of reasons that I think traditional PE sucks."

This quote introduces a critique of traditional private equity practices, highlighting a range of issues from the cumbersome process to the focus on financial engineering over genuine business growth.

Founder-Friendly Approach in Transactions

  • Acquisition.com aims to simplify legal processes and keep founders involved post-transaction.
  • The company prefers plain English contracts and direct negotiations to avoid prolonged legal disputes.
  • They aim for a swift transaction process, which is more favorable to the seller.

"We wanted to create something different. And so for us, we went from a terribly litigious process to having plain English contracts."

The speaker describes their approach to transactions, which contrasts with traditional private equity by being more straightforward and founder-centric.

Jockey Over Horse Belief

  • The speaker values the founder (jockey) over the business (horse).
  • Unlike PE firms that often replace founders, Acquisition.com maintains founding teams in leadership roles.
  • The focus is on founders who can manage change, growth, and their egos effectively.

"This segues perfectly into the second belief that I have doubled down on. This might even be the biggest one, which is jockey over horse."

The quote introduces the second core belief of the speaker's investment philosophy, which prioritizes the capabilities and potential of founders over the existing business structure.

Founder Vetting and Compliance Against Growth

  • A significant part of the investment decision is vetting founders.
  • Founders who comply with advice and guidance tend to grow their businesses faster.
  • The Solomon paradox suggests that external advisors can make better decisions due to less emotional involvement.

"80% of what we look for is the founder."

This quote emphasizes the importance placed on the founder's qualities when making investment decisions, suggesting that the right founder is crucial for success.

Following Advice Fully for Success

  • Partially following advice is ineffective and can be likened to a flawed diet plan.
  • A specific example is given where a founder's reluctance to replace an ineffective operator hindered business growth.

"You can't half follow advice. You have to wholly follow advice."

The speaker highlights the necessity of fully embracing and implementing advice for it to be effective in achieving business growth. Partial implementation can lead to suboptimal results.

Confusion and Chaos in Leadership

  • Having two leaders with the same title and responsibilities leads to confusion and chaos.
  • This results in finger-pointing, blaming, and an overall negative environment.

"And so what do you think happened? Who's in charge of what? And then you have two bosses giving two sets of directions, absolute, complete confusion and chaos, finger pointing, blaming, and ultimately a very terrible situation."

This quote illustrates the dysfunction that arises when clear leadership roles are not established, leading to a breakdown in organizational structure and morale.

Importance of Listening to Advice

  • Founders need to fully listen and act on advice, not just half-heartedly acknowledge it.
  • Growth often requires difficult conversations that founders may avoid due to personal or emotional reasons.

"And so the big lesson, and again, we learn these things like we've learned this, is that you can't half listen to advice."

The quote emphasizes the lesson that advice needs to be fully embraced and implemented, not just acknowledged, to be effective in business growth.

Hard Conversations Unlock Growth

  • Growth is often on the other side of difficult, avoided conversations.
  • Having an outsider point out issues can help address problems that are otherwise ignored due to personal connections.

"Because most of the growth in every business sits on the other side of two or three hard conversations you know you should have but haven't had yet."

This quote highlights that many businesses have untapped potential that can be accessed by having the courage to address tough issues head-on.

Culture as a Strategy

  • Culture is increasingly recognized as a critical component of business strategy.
  • A superior culture can outperform a superior strategy.

"And then now I just feel like culture is strategy. And so a company that has superior culture will beat the one that has superior strategy every day of the week."

This quote conveys the shift in perspective from valuing hard metrics to recognizing the overarching importance of company culture in achieving success.

Founder Execution and Enthusiasm

  • Founder enthusiasm and execution are key to a company's success.
  • Being willing to follow a proven playbook is a sign of humility and can lead to significant growth.

"And so the lesson that we've all taken from that is that we now put founders above everything, because if they execute what we already know works, then we've already derisked the implementation, or rather, we've already derisked the strategy."

This quote underscores the importance of founder execution and the willingness to follow established strategies to ensure business success.

Always a Bigger Fish

  • No matter how successful one feels, there is always someone more successful.
  • It's beneficial to listen and learn from those who are more experienced or successful.

"And so just a piece of advice there is that you stand a lot more to gain from listening than talking."

The quote serves as a reminder that humility and the willingness to learn from others are valuable traits that contribute to personal and professional growth.

Theory of Constraints

  • Every system has a single point of constraint that, when relieved, allows for growth until the next constraint is reached.
  • Focusing on the most pressing constraint can lead to rapid and significant growth.

"And so if you properly identify the constraint and then relieve the constraint, the business will grow until its next constraint."

This quote explains the core principle of the Theory of Constraints, which is identifying and addressing the bottleneck to facilitate growth.

Strategy as Prioritization

  • Strategy involves choosing how to allocate limited resources among unlimited options.
  • Effective strategy requires identifying the few critical actions that will have the most impact.

"So to give you a tactical realization of this, we used to have a six week diagnostic process where we'd do a huge deep dive into every single department of the company, and then we'd have 100 plus different things that we thought were wrong with the business."

The quote describes a shift from an exhaustive diagnostic approach to a more focused strategy that prioritizes the most impactful actions.

Leveraging the Theory of Constraints

  • By focusing on the primary constraint, businesses can achieve growth more efficiently.
  • Simplifying the approach to addressing constraints can reduce founder stress and increase growth rates.

"So if you think about strategy, it's just a fancy word for priorities, right? And so strategy is how you choose to allocate limited resources against unlimited options."

This quote ties the concept of strategy back to the Theory of Constraints, emphasizing the importance of prioritization in business growth.

Acquisition.com's Logo and Philosophy

  • The acquisition.com logo represents three ideas: the three-term contingency, leverage, and supply and demand.
  • These concepts reflect the company's focus on high-leverage activities and efficient resource allocation.

"The acquisition.com logo is comprised of three separate ideas that have been combined together, which is why I like the logo so much."

The quote explains the symbolism behind the company's logo, which encapsulates its core business philosophy.

More Better Approach

  • The "more better" approach focuses on doing more of what the business is already doing well.
  • This approach often aligns with the primary constraint and can be less glamorous but more effective than pursuing new ventures.

"And a big picture here is that we prefer, across everything, to find businesses where it's about more better."

The quote highlights the company's preference for businesses that can scale by improving and expanding on their current operations, rather than always looking for new opportunities.

Identification of Business Constraints

  • Identifying constraints is crucial for business growth.
  • A fixed amount of improvement in different areas can lead to varying increases in throughput.
  • The area with the largest increase in throughput from the same increment of improvement is the constraint of the business.
  • Focusing on the constraint and making improvements there can significantly multiply business output.
  • Ruthless discipline in focusing on the constraint can lead to less work and more growth compared to brute force methods.

"And so the area where you get the largest increase in throughput from the same fixed increment of improvement is what the constraint of the business is."

This quote emphasizes the importance of identifying and improving the constraint to maximize business growth. The constraint is the area where the same effort yields the highest throughput increase.

Disruptability by AI

  • AI's rapid development has changed the landscape for many industries.
  • Assessing the likelihood of AI disruption is now a critical factor in evaluating businesses.
  • Companies in certain industries, like graphic design, may be more susceptible to AI disruption than others, such as mechanic shops.
  • The risk of AI disruption can affect a company's enterprise value and may require starting over to reestablish product-market fit.
  • It's essential to consider the potential impact of AI when investing in businesses.

"So now one of our big criteria is how likely do we think that AI will have a huge disruption on this industry."

The quote highlights the importance of considering AI's potential to disrupt industries when making investment decisions, as it could significantly impact the future viability and success of a business.

Investment Strategy: Bigger Chunks of Bigger Companies

  • Initially invested in smaller chunks due to being new to investing.
  • Over time, the focus has shifted to investing in bigger chunks of larger companies.
  • Larger investments require more discipline and a clearer understanding of value addition.
  • Successful investors like Warren Buffett concentrate their portfolios on a few high-value investments.
  • The strategy is to invest in companies that can provide significant returns and have the potential for huge value unlocks.

"Buying bigger chunks of bigger companies forces us to be even more disciplined in which opportunities we really want to pursue."

This quote explains the strategic shift towards larger investments in bigger companies, necessitating a more disciplined approach to selecting opportunities that can drive substantial value.

Founder Influence and Aspirations

  • The wealth and experience of a founder can influence the financial aspirations and time horizons of other founders.
  • Hanging around wealthier individuals can lead to adopting longer time horizons and larger financial goals.
  • The goal is to help founders achieve a single, significant exit that creates generational wealth.
  • Acquisition.com aims to provide founders with the experience of working with more affluent individuals to recalibrate their financial expectations and goals.

"If you hang around with a lot of poor people, you'll adopt a poor ruler stick."

This quote reflects on how the financial mindset and goals of individuals can be influenced by the company they keep, emphasizing the importance of surrounding oneself with people who have achieved higher levels of success.

Acceptance of Imperfect Businesses

  • Early in the investment journey, there was a search for "perfect" businesses, which are rare.
  • Realizing that all businesses have imperfections and issues is part of the investment process.
  • The focus is on the potential for improvement and growth, not the current state of perfection.
  • Even businesses with significant issues, like high churn rates, can be worthy investments if their potential is recognized.

"Every business has skeletons. Every business has bodies buried everywhere."

This quote acknowledges that no business is without its flaws and challenges, and that recognizing and addressing these issues is part of successful investing.

Compounding Vehicles Within Businesses

  • Initially, businesses without an internal compounding vehicle were not considered for investment.
  • Now, the absence of a compounding vehicle is seen as an opportunity to add value.
  • Compounding vehicles can be content creation, word-of-mouth strategies, or financial reinvestment strategies.
  • The goal is to identify or create a compounding mechanism that can facilitate uncapped growth.

"You pretty much have to have a compounding vehicle to unlock crazy levels of growth and enterprise value."

The quote stresses the importance of having a mechanism within a business that can drive exponential growth independently of scale, which is vital for achieving high enterprise value.

Importance of Experience on the Team

  • A significant portion of the team should have experience relevant to the company's growth objectives.
  • For first-time founders, having team members who have already achieved the goals they are striving for is crucial.
  • This experience helps to avoid the limitations of a single founder's knowledge and accelerates business growth.
  • The principle is that you only need to get rich once, and having experienced team members can help ensure that.

"20% of your team should have already been to where you're trying to go."

This quote illustrates the value of having experienced members on a team who can guide the company towards its growth targets, leveraging their past successes and knowledge.

Importance of Experienced Leadership in Growth

  • Recognizing the need for experienced leaders to guide growth and provide stability.
  • Hiring seasoned professionals, like a CFO, can position a company for significant growth and prepare it for an exit.
  • Experienced leaders act as mentors and lend credibility, attracting other talented individuals.

"And so we want at least 20% of the team, which sometimes we have to right size and say, hey, we need two big leaders, or experienced leaders who have been there, done that in these functions to get us where we want to go."

This quote emphasizes the strategy of incorporating experienced leaders into the team to facilitate growth and guide less experienced members.

Founder Adaptability and Team Dynamics

  • The significance of founders moving into roles that suit their skills and allowing experts to take over other functions.
  • The value of having "gray hair" on the team for mentorship and emotional stability.
  • Personal anecdote of hiring a highly experienced CFO to provide expertise and confidence in the company's financial future.

"Well, sometimes it's good to bring in an outside person who's scaled multiple companies from five to 50 and have that person come in that role, move the founder over so they're operating or doing something else that they actually do have more experience or expertise in."

This quote discusses the benefits of bringing in external expertise to optimize team roles and enhance growth, particularly in areas where founders may lack experience.

Learning from New Hires

  • The importance of learning from candidates during the hiring process.
  • Using interviews as a litmus test for the candidate's potential to contribute knowledge and drive the company's growth.
  • The educational value founders gain from talented individuals joining the company.

"In the interview process, if you don't feel like you're learning something from the person you're interviewing, it's not the right person."

This quote underlines the idea that hiring should be an opportunity for founders to gain knowledge, especially in areas outside their expertise.

Competitive Advantage of Attracting Talent

  • Acquisition.com's strong brand allows it to attract high-level talent that smaller companies may not.
  • The presence of a reputable investor adds legitimacy, further attracting talent.
  • High talent density within a company leads to significant growth.

"Is that we have a big brand, and so we are able to attract really high level talent that a smaller company might not otherwise be able to attract."

This quote illustrates how a strong brand reputation can be a competitive advantage in attracting top talent, which is key to a company's growth.

Criteria for Partnering with Portfolio Companies

  • Emphasizes transparency and the commitment to provide value, even if a partnership is not formed.
  • The importance of knowing and being honest about your company's numbers.
  • The significance of having a big vision and being decisive and focused.
  • The value of having multiple founders or key partners with vested interests to accelerate growth.
  • The "beer at the airport" test as a measure of personal rapport and the potential for a successful partnership.

"And just as a quick side note, if you go through the process, my promise to you is that as long as you're meeting the basic level of quantitative qualification patients, if we decide not to do a deal with you, we will still give you what our recommendations are that you can benefit from for your company."

This quote captures the commitment to provide actionable feedback to companies that engage with the firm, ensuring they leave with value even if a deal isn't made.

Final Advice and Invitation to Potential Partners

  • Encourages companies with substantial profit to reach out to acquisition.com.
  • Offers the potential for a partnership that can lead to exponential growth.
  • Assures companies that they will receive a beneficial strategy plan regardless of whether a partnership is formed.

"And the worst case scenario is you get a full plan of what we would do on your behalf if we were to work with you. And the best case scenario is that we partner with you and we take this thing to the moon."

This quote presents a no-lose proposition for companies considering engagement with acquisition.com, promising strategic value or a potential partnership.

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