The Shift from Business to Investing (on the Founder Podcast) Pt.2 July ‘23 Ep 607

In a conversation on "The Game" podcast, Alex Hormozi and the host discuss the intricacies of transitioning from business ownership to investing, emphasizing the importance of a founder's vision and coachability for successful investments. Hormozi highlights that ideal investments are companies with $2-10 million in EBITDA, led by founders who desire significant growth beyond financial comfort, and are open to guidance. He warns against entrepreneurs with limited aspirations or those who overvalue their companies based on effort rather than output. The dialogue also explores the pitfalls of shiny object syndrome and the necessity of long-term commitment to a singular focus for substantial success. Hormozi's strategy at acquisition.com involves creating value and establishing a selective deal process, ensuring alignment with founders who share expansive goals and are honest about their business challenges. The host and Hormozi agree on the principle of enduring short-term pain for long-term gain across all life aspects, including business ventures.

• Transitioning from business to investing requires a significant change in mindset.
• In business, the focus is on selling, while in investing, it's about understanding and getting to know the deal and the people involved.

"Switching from business to investing is a massive change in mindset, because when you're in business, you're used to selling all day, but when you're doing deals, it's actually about trying to get to know."

This quote emphasizes the fundamental difference in focus between being in business, which is sales-oriented, and engaging in investments, which requires a deeper understanding of the potential investment opportunities.

• Acquisition.com looks for companies with $2-10 million in EBITDA and a founder who is genuinely interested in scaling.
• It's important that the founder is not content with just tripling their income but has larger ambitions for growth.
• Coachability of the founder is crucial, as the skills needed to grow from $1 million a month to $10 million a month are vastly different.

"So an ideal company to invest in for us is going to be doing two to $10 million in EBITDA. They're going to have a founder that wants to scale."

This quote outlines the financial criteria and the founder's growth mindset that Acquisition.com seeks in a potential investment opportunity.

• Acquisition.com values the founder's ambition and dreams as much as the business itself, if not more.
• The founder needs to be coachable and willing to learn and adapt to scale their business significantly.
• The relationship with the founder is key; if the team doesn't look forward to interacting with the founder, it's considered a red flag.

"They have to be coachable. And that's a big one because, and this is actually probably one of the hardest ones to find, is that anyone who's achieved a certain level of success has some level of confidence that they're good."

This quote highlights the importance of a founder's willingness to be coached and the challenge in finding someone who is both successful and open to guidance.

• Founders driven by more than just financial success are identified through their language patterns.
• Ambitions such as wanting to create an excellent workplace, change an industry, impact a community, or simply test their limits are positive indicators.
• The desire to build a company of significant value, even after personal financial needs are met, is a sign of a motivated founder.

"So it's usually in the language patterns that they'll present with."

This quote points out that the way founders express their goals and vision can reveal their true motivations and whether they possess the drive to go beyond monetary success.

• Talking in small numbers or lacking a clear path for growth are red flags.
• A founder's inability to focus on one business or their tendency to exaggerate are also concerning signs.
• Honesty is critical, and any form of dishonesty or discrepancy in numbers is a deal-breaker.

"If we feel like they have a culture of fear within their organization, those are all signs for us that we're like, okay, this is probably not a good fit."

The quote conveys that cultural issues within a company, such as fear, can be indicative of deeper problems and are a significant red flag for Acquisition.com when considering an investment.

• Business owners must be willing to acknowledge weaknesses and areas in need of improvement.
• Self-deception is a major downfall for CEOs and can prevent necessary changes from being made.

"One of the most important things in order to enact change, in order to improve is actually being able to admit we're weak here. We suck at this, this, that, and the other. And getting real non self deceived."

This quote stresses the importance of business owners being transparent and honest with themselves about their company's shortcomings to drive improvement and growth.

• Effective management requires a balance between being too involved and too distant.
• Micromanaging can be as problematic as being too disconnected.
• Leaders need to set realistic value expectations and be open to owning a smaller portion of a larger, more successful business.

"If they're like microcontrollers, they want to micromanage everything."

This quote emphasizes the issue with leaders who are overly controlling and involved in every detail, which can hinder a team's autonomy and growth.

"They also have to have realistic expectations of value, and they have to be willing to have a smaller slice of a bigger pie."

Here, the discussion points to the importance of leaders understanding that owning a smaller percentage of a larger, thriving business can be more beneficial than owning a larger percentage of a smaller, less successful one.

• Many founders have inflated views of their company's worth based on effort rather than actual output.
• The median trading value for small businesses is often lower than expected, and deals frequently involve seller financing.
• Founders must recognize the importance of creating a business that can grow independently.

"The median trading value is two and a half x on profit."

This quote provides a statistical benchmark for small business valuations, highlighting that many founders' expectations may not align with market realities.

"You have to build an asset that can grow on its own, and that takes time."

The speaker is stressing the need for entrepreneurs to focus on building a sustainable business that doesn't rely solely on them, which is critical for a higher valuation.

• Entrepreneurs often overestimate the value of their businesses, especially when their personal brand is heavily tied to the business.
• The value of a business is not solely determined by its current profits but also by its potential for growth without the founder.

"In what world is this worth five to six multiples?"

Speaker B is challenging the unrealistic valuation expectations of a business owner whose company's value is tied to their personal social media presence.

• Successful entrepreneurs must learn to say no to distractions and focus on their core business.
• It's crucial to recognize when to pivot and when to double down on what's already working.
• Long-term vision and strategy are essential for substantial business growth.

"If there's a single trait of entrepreneurs that can make them successful, it is if they can master this."

Speaker A identifies the ability to stay focused and avoid distractions as a key trait for entrepreneurial success.

"No big things, love, that are built fast."

The speaker is underscoring the idea that significant achievements in business require time and sustained effort, reinforcing the value of patience and long-term commitment.

• Discusses the mindset change required when shifting from being a business owner to becoming an investor.
• Highlights the difference in focus from seeking immediate affirmations (yeses) in business to seeking valuable deals in investing.
• Emphasizes the importance of setting clear parameters for what constitutes a good deal.
• Notes the challenge of delayed gratification in investing compared to immediate results in business.
• Mentions the speaker's personal experience and difficulty in adjusting to the long feedback loops in investing.

"And so for us, we try to combine both those things to create an investment thesis. And the problem with you're in this season now, right, is that switching from business to investing is a massive change in mindset."

This quote explains the speaker's approach to developing an investment thesis and acknowledges the significant mindset shift required when moving from business operations to investment strategies.

"But when you're doing deals, it's actually about trying to get to know, which is so counter everything that you and I have had ingrained in our minds."

The quote emphasizes the contrast between the business mindset of always pushing for a 'yes' and the investment approach where sometimes a 'no' can be more beneficial, as it might prevent a bad deal.

"But an investment vehicle also doesn't give you the quick hits that business does."

This quote highlights the difference in feedback and reward timelines between running a business and investing, with investing often having a slower payoff.

• Discusses the principle of being "aggressively patient," which involves being proactive in the moment while remaining patient for outcomes.
• The principle is applicable to both business ownership and investing.
• Emphasizes the need to embrace monotonous work and not get distracted by fleeting opportunities.
• Discusses the compound effect in skill development and audience growth, leading to significant results over time.

"I love the phrase in regards to what you're talking about, aggressively patient, right? Like just being aggressive in the moment, but very patient on any results, any lag, anything that's going."

The quote introduces the concept of aggressive patience, which combines immediate action with a long-term perspective on results.

• Compares the growth trajectories of businesses and investments, noting the difficulty in comparing growth rates at different stages.
• Highlights the necessity of thinking in percentages rather than absolute amounts to avoid discouragement.
• Discusses the different types of business models and their associated challenges and rewards.
• Explains the concept of front-loading pain in certain business models for greater long-term gain.

"The amount of growth that your company had in the last year is probably more than it did in the first five years."

This quote illustrates the exponential nature of growth that can occur in a business, particularly after it has been established for several years.

"On one extreme, you got like info businesses, right? ... On the flip side, you start a software company, and if you do it the right way, you're probably not going to make any money at all for a long period of time."

The speaker contrasts different business models, highlighting how some may provide quick returns while others take longer but may yield greater profits once they reach a certain scale.

• Discusses the principle of choosing when to experience pain in business and life, with the understanding that early pain can lead to greater rewards.
• Applies this principle to various aspects of life, including fitness, relationships, and career.
• Suggests that enduring pain early on can lead to more substantial and lasting benefits.

"Your fitness, your relationships, everything is choosing pain now versus later, right? If I choose pain now, I experience real long lasting fruit later."

This quote encapsulates the principle of choosing to tackle challenges early for long-term gains, as opposed to seeking immediate comfort which may lead to longer-term difficulties.

• Discusses advice given by Grant Cardone to a young entrepreneur considering leaving corporate America to start a business.
• Cardone suggests partnering with an established business rather than starting from scratch to leverage existing momentum and experience growth more quickly.
• The speaker reflects on this advice and considers how it aligns with their own perspective on business and investing.

"Grant said don't go and launch a business. He said go and find somebody that has put in the years of essentially compounding and is pumping the brakes. Go and figure out how to partner up with them and leverage that compound that's already been created and participate in the upside."

This quote relays Grant Cardone's advice, which advocates for the strategic move of partnering with an established business rather than starting anew, to capitalize on the groundwork already laid by others.

"I think that I will have a slightly different take than Grant, and it's not because I disagree with his advice, but because I think it depends on the context that it's given."

The speaker acknowledges the validity of Cardone's advice while also suggesting that the best course of action may vary depending on individual circumstances and context.

• Business experience is crucial for adding value to an acquired business.
• Without experience, it's challenging to convince a business owner that you can contribute significantly.
• Knowledge in analyzing business quality is lacking for those without a baseline of experience.
• Acquiring businesses without proper understanding can lead to poor investment decisions.

"It's just that if you have no business experience, one, it's tough to get that business owner to say, yeah, you're going to be a huge value add to my business."

The quote highlights the difficulty of convincing a business owner of one's value addition potential without prior business experience.

"You still don't know what you're doing and you don't know how to analyze what is a good business because you don't have a baseline."

This quote emphasizes the lack of analytical skills in evaluating businesses when one does not have foundational business experience.

• Private equity is a lucrative opportunity that involves raising funds, acquiring companies, and profiting from their growth.
• The process sounds simple but is complex and requires significant expertise.
• Grant, an experienced real estate investor, advises buying a massive building as a sound investment strategy.
• Dave Ramsey suggests evaluating one's experience as a pie chart to determine investment strategies.
• The speaker's experience is entirely in business, influencing his investment decisions.

"Private equity is literally based on this. Like, you get into private equity, you start a fund, and you can go make a billion dollars in five years."

This quote describes the potential of private equity as an investment vehicle but also implies the complexity behind it.

"Grant said, go buy the biggest building you can possibly buy. That's what we should do."

The quote reflects Grant's advice based on his extensive experience in real estate, suggesting large-scale investment in property.

"Dave said, if your experiences and your skills were a pie, right? So think about a pie 100%. He said, how would your experiences break down between investment assets?"

Dave Ramsey's advice, as recounted by the speaker, is to assess one's experience across different investment assets to guide decision-making.

• After selling a business, seeking advice from successful individuals can yield diverse perspectives.
• Each person tends to give advice based on their own experiences and successes.
• The speaker's strength lies in business, which guides his investment choices and risk assessment.
• He recognizes that businesses, on a long enough timeline, become investment firms allocating capital for higher returns.
• The speaker believes in learning the game of business and identifying arbitrage opportunities.

"I talked to every single guy I know who was worth over 100 million, every single guy I probably had. I don't know. I want to say minimum 40 conversations with guys who are worth 100 to multiple billions, right."

The speaker sought advice from numerous highly successful individuals to inform his post-transaction decisions.

"All businesses, once they are successful enough, become investment firms. They have to make decisions based on returns on capital."

This quote explains the speaker's understanding that successful businesses evolve to focus on strategic capital allocation and investments.

• There are two paths to gaining the experience necessary for leveraging a business: employment and entrepreneurship.
• Sales roles are particularly beneficial for learning about the product and market, aiming to eventually participate in scaling a business.
• Entrepreneurship involves learning through failure and experimentation.
• The speaker agrees with Grant's advice but emphasizes the need for positioning oneself with the right experience and skills first.

"So the interesting thing is exactly to your point, in order to get to a point where you can go and leverage a big business, you have to have the experience, you have to have the skill set."

The quote underscores the necessity of experience and skills to successfully leverage and grow a large business.

• The speaker, Alex Hormosi, has a podcast titled "The Game with Alex Hormosi."
• Alex is active on various social media platforms and runs a website aimed at helping businesses grow.
• The speaker provides his contact points for interested listeners to engage with his content and services.

"If you're a podcaster, I have a podcast called the game. So you can go Alex the game with Alex Hormosi, you can just look at it."

Alex Hormosi invites listeners to his podcast for those interested in his insights and advice.

"If you type in hormosi on any platform, which is Instagram, TikTok, YouTube, Twitter, LinkedIn, and if you're a business that is doing over a million dollars even, and you want to grow a lot more than that, then go to acquisition.com."

This quote provides information on how to find Alex Hormosi's content online and mentions his business services.

• The speaker offers motivational advice for those facing difficulties in business or personal life.
• He suggests that recognizing the common quitting point and pushing past it is key to success.

"Whenever I have the thoughts, like, why do I even bother? Why should I keep going? I just remind myself that this is the point where most people quit, and that's why they don't quit."

The quote provides encouragement to persevere through challenges, as this is often the point where others give up.