The Buy Box What We Look for in Companies to Invest In Ep 547



In this episode, the host shares insights on scaling businesses through, a portfolio company with a yearly revenue of over $200 million, aiming to increase net worth from $100 million to a billion. The host emphasizes the importance of investing in cash flow positive, profitable, and founder-led companies, with a preference for simple, AI-resistant businesses like Enchanted Fairies. He advocates for private investment opportunities for the general public and underscores the significance of having a compounding vehicle within a business for sustainable growth. The host also highlights the need for a solid product or marketing strategy, the value of customer and employee feedback, and the critical role of founder fit and leadership teams in business success. He concludes by stressing the power of word-of-mouth referrals for profitability and the strategic advantage of recurring or reoccurring business models.

Summary Notes

Compounding Vehicle in Business

  • Speaker A discusses the importance of having a compounding vehicle for scaling a business.
  • They argue that scaling by force is difficult, especially when aiming for large revenue numbers like $10 million a month.
  • The speaker is focused on building a billion-dollar enterprise through

"I like to find ways that I can put some sort of compounding vehicle in the business because otherwise the only way that you scale is by force."

The quote emphasizes the speaker's strategy for business growth, which relies on creating systems that allow for compounding growth rather than relying solely on effort, which is harder to sustain at higher scales.

Building Businesses Worth Owning

  • Speaker A aspires to document their journey towards building a billion-dollar net worth, similar to how they wish Bezos, Musk, and Buffett would have.
  • They share their progress and strategies to attract more companies to invest in through
  • The speaker and their wife have publicly shared their goal to grow from $100 million to $1 billion in net worth.

"I always wished Bezos, Musk and Buffett had documented their journey. So I'm doing it for the rest of us."

This quote reflects the speaker's desire to provide a documented path for others to follow, drawing inspiration from successful entrepreneurs who did not document their own journeys.

Investment and Business Frameworks

  • Speaker A outlines the importance of having a clear strategy and framework for investing in businesses.
  • They discuss how these frameworks can be valuable for both business owners looking to increase their company's value and investors seeking to make informed decisions.
  • The frameworks are also presented as a guide for starting a business correctly from the outset.

"And so these are the actual frameworks that we use to make the decisions about who's in and who's out."

The quote explains that the speaker uses specific frameworks to evaluate potential investments and decide which companies to include in their portfolio.

Hard and Soft Elements of Business

  • Speaker A distinguishes between 'hard stuff' (business metrics) and 'soft stuff' (team and people) in their investment approach.
  • They emphasize the importance of both quantitative and qualitative aspects in evaluating companies.
  • The speaker suggests that the soft elements, while more nuanced, might be even more crucial in the decision-making process.

"So we break this into the hard stuff and the soft stuff. And so the hard stuff is all the business metrics... And then the soft stuff is more about the team, more about the people, the more nuanced and subjective component."

This quote delineates the two categories of factors that the speaker considers when assessing businesses: measurable metrics and the human elements that drive a company's success.

The Changing Landscape of Public vs. Private Investments

  • Speaker A comments on the increasing difficulty of becoming a public company due to stringent reporting requirements.
  • They advocate for reduced reporting expectations to allow more companies to go public, enabling broader public investment opportunities.
  • The speaker's firm focuses exclusively on private investments, which are currently more accessible to wealthy, accredited investors.

"But we do only private investments, and so we look for cash flow positive companies, meaning every month they spit off more cash than they take to grow."

The quote outlines the speaker's investment focus on private companies that are cash flow positive, indicating a preference for businesses that generate more cash than they consume in their growth efforts.

Cash Flow Positive and Profitability

  • Speaker A explains the difference between being cash flow positive and being profitable, highlighting the importance of understanding accounting rules.
  • They describe cash-based accounting versus accrual accounting and the implications for how a business's financial health is perceived.
  • The speaker's preference is for companies that are both cash flow positive and profitable according to cash-based accounting.

"Now, there's a difference between being cash flow positive and being profitable."

This quote clarifies the distinction between two financial states of a company, emphasizing that a business can have positive cash flow without necessarily showing profitability on paper, and vice versa.

Criteria for Investment

  • Speaker A details the specific criteria they look for in companies to invest in, including growth, founder leadership, and profitability.
  • They mention a shift in their requirements, moving from a focus on top-line revenue to a minimum profit threshold.
  • The speaker emphasizes the importance of real, tangible profits over mere paper profits.

"From a size perspective, we have tweaked our requirements, so originally they're doing over $3 million in top line. We have since tweaked that to at least a million dollars in profit."

The quote indicates a strategic adjustment in the speaker's investment criteria, shifting from revenue to actual profit as a measure of a company's attractiveness for investment.

Cash Flow Investment Strategy

  • Investing in assets that generate more money over time than their purchase cost.
  • Portfolio includes companies with profits ranging from $1 million to $20 million.
  • Median profit among companies is approximately $5 million.
  • Acknowledges the commonality of having a few companies that carry the portfolio, referencing Pareto's principle.

And so we invest in assets that hopefully make us more money over the long time than it costs us to buy them.

This quote emphasizes the speaker's focus on cash flow investing, where the goal is to acquire assets that will produce a return greater than their initial cost over time.

And that's just because 80 20, Pareto's principle, and I won't even get into that, but it's common.

The speaker references Pareto's principle, which suggests that a small number of investments will typically generate the majority of returns, a common occurrence in investment portfolios.

Criteria for Attractive Companies

  • Preference for companies that are "boring and simple" with fewer moving parts.
  • Looks for companies unlikely to be disrupted by AI in the near future.
  • Examples include a photography chain and a lawn care business.
  • Evaluates the potential longevity before a company faces significant disruption.

I look at companies that I think are boring and simple in terms of they don't have a lot of moving parts, I don't think they're going to be disrupted by AI or they have a lower likelihood of being disrupted by AI.

The speaker prefers investing in simple, stable companies with a low risk of being disrupted by technological advancements like AI.

So it's not will it get disrupted or not, it's how long away is that disruption and how profound will the disruption be?

This quote highlights the speaker's concern with not just the possibility of disruption but also the timeline and impact of such disruption on the company's operations and profitability.

Importance of Product and Marketing

  • A company must excel in either marketing or product quality.
  • Past mistakes involved investing in companies mediocre in both areas.
  • The growth strategy involves identifying companies with strong products that can be scaled using proven systems.
  • The company's product value and unique offerings are critically assessed.

The company either has to have an advantage on their exceptional at marketing or they have to have an exceptional product. They have to have one of those two things.

The speaker stresses the importance of a company having a competitive edge in either marketing prowess or product quality to succeed and grow.

Fundamentally, all of the money that you're going to make is going to be based on an extrapolation of the core unit of value you can provide to the end user.

This quote underscores the principle that a company's profitability is directly tied to the value it provides to its customers, and this value proposition is key to the company's expansion and market dominance.

Evaluating Company Performance

  • Online reviews are used as a metric to gauge product quality and customer satisfaction.
  • Reviews from various sources, including Glassdoor and the Better Business Bureau, are considered.
  • Acknowledges that some negative reviews are normal but looks for overall positive customer experiences.
  • The fundamental value provided to the customer is the basis for potential profit and market expansion.

We actually just look at reviews online. So just like a customer might look at reviews, we look at reviews, we look at Glassdoor that from an employee's perspective, we look at the triple b to see if they have some massive issue that's going on.

This quote explains the speaker's method of using online reviews as a tool to assess the performance and reputation of a company from both customer and employee perspectives.

The more valuable that outcome is, the more profit you can ultimately generate from the business as you expand and take over the market that it exists in.

The speaker highlights the direct correlation between the value a company provides to its customers and its ability to generate profit and capture market share.

Business Strategy and Compounding Growth

  • Identifies the importance of having an element of compounding within the business strategy.
  • Two main compounding vehicles are customer retention with increased spending and a self-propelling selling machine, often fueled by word of mouth.

I like to figure out a way to have one element of compounding within the business itself.

The speaker values incorporating a compounding element into the business strategy, which allows for growth and value to build upon itself over time.

Ideally that means that twelve months from now, all the customers you have now are still buying and ideally buying more.

This quote describes the goal of customer retention and increased spending as a means of creating a valuable, compounding company.

Engagement and Networking

  • The speaker invites listeners to connect on LinkedIn and engage with their posts.
  • Encourages tagging relevant connections in posts to foster a professional network.

Hey, mozanation, quick break, just to let you know that we've been starting to post on LinkedIn and want to connect with you.

The speaker is reaching out to the audience, promoting engagement and networking through LinkedIn, indicating a desire to connect with listeners and expand their professional community.

Compounding Growth in Business

  • Compounding growth is essential for scaling a business sustainably.
  • Employee compounding is exemplified by salespeople recruiting additional sales staff.
  • A business that grows its sales staff by 10% monthly will experience rapid growth.
  • Compounding allows for scaling without relying solely on forced growth methods.
  • Forced growth is easier at lower revenue levels but unsustainable for reaching higher targets.

if you could get each of these salesmen to recruit other salespeople to continue to sell for you, then every year, let's say you grow by 10% in your sales staff, or let's say every month you grow by 10% in your sales staff, then you're going to grow really, really quickly and that thing will continue to compound unto itself.

This quote stresses the importance of creating a self-sustaining growth model where employees help in the recruitment process, leading to exponential growth over time.

Niche Selection for Business

  • Selecting a niche with less competition can be advantageous.
  • Competing in highly capitalized and intelligent markets, such as AI, can be challenging.
  • A less competitive niche, like lawn care, may offer easier wins.
  • The strategy involves finding markets with abundant opportunities and fewer skilled competitors.

You just have fewer incredibly smart, incredibly capitalized people competing against you.

This quote highlights the strategic advantage of operating in a niche with fewer competitors who have significant capital and intelligence resources.

Recurring vs. Reoccurring Revenue Models

  • Distinguishing between recurring and reoccurring revenue models is crucial.
  • Recurring models involve regular, predictable payments, like a Netflix subscription.
  • Reoccurring models depend on repeat business without fixed schedules, like Facebook ads.
  • Businesses aim to create value that ensures customer retention over time.

A recurring business is like you were on a monthly subscription for Netflix. They are a recurring business model. A reoccurring business would be something like Facebook ads.

This quote defines the difference between recurring and reoccurring revenue models, with examples to illustrate how each model functions.

Long-term Customer Value and Business Profitability

  • Ensuring that today's sales contribute to future earnings is key for long-term success.
  • Businesses should aim for customer retention and repeat business.
  • A business model that retains customers without scaling marketing costs is highly profitable.
  • A business's value is based on its future cash flow, making customer retention crucial.

If you don't get credit for the sales that you make today in two years, you're always starting at ground zero.

This quote emphasizes the importance of building a business where sales made today will continue to provide value in the future, preventing the need to constantly acquire new customers from scratch.'s Investment Criteria

  • looks for companies with $1 to $10 million in annual profit.
  • The sweet spot for their investments is within this profit range.
  • Companies outside this range are considered outliers and may not have started within the target profit range.

So like I said, one to $10 million in profit per year is kind of like, I would say the majority of the, well, one is the minimum, but one to ten is kind of like, I would say the sweet spot.

This quote outlines the profit range that targets when looking for companies to invest in, indicating their preferred investment criteria.

Investment Portfolio Criteria

  • Focus on both hard and soft elements in the investment portfolio.
  • Hard elements refer to quantifiable aspects like the "buy box."
  • Soft elements include founder fit and leadership team, which are weighed more heavily.

"Those are kind of the hard stuff, the hard sciences of the investment portfolio. Like the buy box is what they call in the investor world. It's like, what's your buy box? The other part is the soft stuff. And this may be not may, it is actually the thing that we wait more, which are two elements, founder fit and leadership team."

This quote explains that investment decisions are based on both quantifiable metrics (hard sciences) and qualitative assessments (soft stuff), with particular emphasis on the founder fit and leadership team.

Founder Fit

  • Founder fit is analogous to a marriage; investors seek founders they can work with long-term.
  • Founders should embody three core values: sincere candor, unimpeachable character, and competitive greatness.
  • Rigorous screening processes are in place to ensure alignment with these values.

"So when you get into a business partnership or you invest in someone's company, like, you're in, you're co owners, you're now locked in. It's like a marriage, right? And so you want people that you think you could be married to in five years, right?"

This quote compares the commitment of investing in a company to a marriage, emphasizing the need for a good fit with the founder for a successful long-term partnership.

Leadership Team Importance

  • The quality of the leadership team is crucial for attracting and maintaining exceptional talent.
  • An effective leadership team is necessary for scaling a business from $1 million to $10 million a month.
  • A desirable leadership team should include members with prior experience scaling similar businesses.

"The other piece is that if we want to grow these businesses, what do you think those founders need? They need an exceptional team. And exceptional teammates will not work for shitty leaders."

This quote highlights the necessity of having a strong leadership team to attract top talent and to facilitate business growth.

Scaling a Business

  • Founders often mistakenly believe they need to learn everything to scale from $1 million to $10 million.
  • It's more effective to become the type of leader who can attract skilled individuals who can contribute to growth.
  • Leadership teams should have a portion of members with extensive experience in scaling businesses.

"Because one of the big limiting beliefs that a lot of founders have is that they feel like they have to learn their way from 1 million to 10 million when it's much more about becoming the type of person who can attract the people who can help get you to 10 million a month and beyond."

This statement addresses the misconception among founders about scaling a business and emphasizes the importance of leadership qualities over purely knowledge-based growth strategies.

Evaluating Product Value

  • Product value is assessed through customer reviews and hard metrics.
  • Quantifying the value provided to customers and the degree to which it is monetized is critical.
  • A key indicator of product value is the percentage of customers coming from referrals.

"In terms of having an exceptional product, I measure the value of the product in a few ways. One is sure there's reviews. The second is more of the hard metrics, which is if we can quantify how much value the product or service provides, the average customer, which you can track how much of that is being captured and monetized."

This quote outlines the methods used to evaluate the value of a product, including customer reviews and quantifiable benefits to the customer.

Word of Mouth Impact

  • A significant percentage of customers coming from referrals indicates a strong business.
  • Word of mouth can effectively reduce customer acquisition costs and increase profitability.
  • Lack of word of mouth implies negative reputation, which can erode profits.

"The biggest metric is always going to be the percentage of customers that come from referrals. And so if a large percentage of the customers come from referrals, not necessarily all of them, but a significant percentage, which for me is like 25% to 30% of the business, comes from word of mouth, then I know that this is a solid business."

This quote emphasizes the importance of word of mouth as a metric for business strength and its positive impact on profitability.

What others are sharing

Go To Library

Want to Deciphr in private?
- It's completely free

Deciphr Now
Footer background
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon

© 2024 Deciphr

Terms and ConditionsPrivacy Policy