I learned it pretty painfully and I’ll tell you about it later in this article.
But first, let me share a quote from Warren Buffett that says,
A good management record is far more a function of what business boat you get into than it is how effectively you row. There’s no extra credit for the degree of difficulty, lower your degree of difficulty.
Warren Buffet is pretty darn famous for being a simple guy. There’s a tremendous amount of wisdom in that he’s known as the Oracle of Omaha. He has actually able to boil things down to a very simple way that is very understandable.
One of the powers that he has in making good investments is that he invests in things that he can really understand and he can grasp what’s going to happen to those businesses or what’s most likely going to happen to those businesses in the future.
Coca Cola is one of the biggest holdings he’s had. We all pretty much understand what has to happen for Coca Cola’s continuous win.
What entrepreneurship is all about
Again, Warren Buffet says that it’s more of a function of what business boat you get into than it is how effectively you row.
As entrepreneurs in this generation, there’s this kind of lore around this idea of the hustle. The idea that you have to be out there working 24/7, and that’s what entrepreneurship is all about.
And certainly, entrepreneurship is about working hard.
There’s no question about that and anybody who thinks otherwise is being foolish.
But the reality is that some businesses are simply harder than others. Some business models are simply better than others in terms of what they are likely to produce for the amount of money and effort that goes into building them.
This is why entrepreneurs complain about some venture capitalists. Venture capital firms are greedy and they won’t invest in just any business.
Venture capital firms are smart. They know that certain businesses have a potential for a really, really big reward. They know that if they put their money into those businesses it will have a much higher likelihood of a big payout than in other types of businesses and other types of models.
We can’t blame them. We should all be the exact same way.
All of us should be looking for business models and ideas that if we put in the same amount of effort that we’re going to put into any business that we’re trying to build, that we actually have a much better chance of getting the financial rewards that we’re all dreaming about.
Unless you’re running a business purely for the passion then it doesn’t really matter how much money you make.
But if you’re trying to build a business for the reasons like, you want more freedom, more money, and be able to do the things that right now you can’t do because you don’t have access to them then you better choose a better business model.
Business models affect your business boat
Certain businesses and models have a better chance of providing that for you than others do.
We should be very selective in what we’re investing our time and energy into. What I see and what I learned from my career is that most of us, because we’re just hustling so bad, just want to get something started.
We want to be entrepreneurs and just get going so bad that unfortunately, we take what we perceive to be the easy route in terms of generating cash right away. Which is, oftentimes, doing some sort of service or consulting or something like that.
That’s not necessarily the best model in terms of leverage, and in giving us a bigger potential upside. We’re trading time for money, agency businesses, and professional services businesses.
There’s a reason why those don’t grow to be very big and don’t generate a whole lot of asset value for the entrepreneur.
If we can be more selective, can take the time and the focus to find business models that have more leverage, it can pay off massively.
A lesson that I learned the hard way
And here’s my story that I wanted to tell you.
I spent about eight years building a service business, and by all measures in that industry, we did an outstanding job.
We had a great team and millions of dollars in recurring revenue. Our company had offices and clients across the country. We had incredibly high customer satisfaction scores.
It is a knockout. Because of that, we were able to get acquired. There is this company that had raised a bunch of money and a venture capital firm that were trying to acquire various businesses in the industry.
They did a huge search, landed on us and came to us then said, “We want to buy you. You guys are doing an outstanding job.”
And in that industry, we’ve got a great multiple on our revenue. I stress by those industry standards because it was a service industry.
We had done everything that we could to make it as smart of a model as we possibly could. But it was still a service industry where we’re trading time for money.
Now, I have a friend who during that same time period was building a software business and his software business never got to be as big as my service business. He never had as much revenue, never had as many employees,
But it was a software business. A software business with the right resources can scale like crazy.
And a venture capital firm came to him and said, “We recognize what you’ve got here. We’ve got the resources to take it and scale it to another level. We’re willing to pay much more than what our acquirer would pay for our business.”
It’s just a reality that a software business, they will get a much higher multiple than a services business.
Choose a better business boat
What I mean by that is, that the person or business acquiring that software company will pay many times its revenue to get their hands on that business because they know that the upside of that business is potentially so high that it’s worth it.
Whereas with the service business it is hard to run. You’ve got to get the right employees, you’ve got to train them and people screw up. There’s not as much margin to it and it just doesn’t scale.
My good friend who built a smaller business but using a better model is now very wealthy. Retired, was a professional race car driver for a period of time, travels the world doing whatever he wants, and lives in massive homes.
Whereas I’m still working. I did pretty well with the exit of my business, but I’m still working.
The hard-earned lesson
That’s an incredibly valuable lesson that we should all take into account. Which is, if we’re going to spend that time, money and energy, we better make sure that we’re applying it to a model that has leverage.
A model that when you put in that effort, energy, and money to build that business, you should get many multiples and rewards for the effort that you’re putting into it.
As what Warren Buffet said, “A good management record is far more a function of what business boat you get into than it is how effectively you row.”
Choose your models wisely.