What I Learned Investing in 24 Companies in 24 Months | Ep 784

We don't need more people. We need better people. We don't need more cooks in the kitchen. We don't need more hands in the operating room. We need better surgeons. This has just been this big recurring theme for me. Like the first question I'm trying to— I'm asking now is so different than what it was before. Call it 5 or 10 years ago. Over 24 months, we invested in 24 portfolio companies and then we took 18 months off and ended up doing 2 deals in that period of time. I want to talk to you about what I learned in those 24 months and subsequently why we slowed down deal activity and basically just the lessons that we learned from that. Big picture, the strategy of Acquisition.com, like any business, has slowly morphed over time, uh, from my initial thesis to kind of what my thesis is today. And so the initial thesis was, if I combine old and new old being, you know, private equity investing, and new being social media, I would be able to create proprietary deal flow for us. And then I wouldn't have to be the best at picking. I would just basically be able to attract the best quality deals, best quality founders who are amenable to working with us. So, you know, reasonable deal terms rather than what I would consider competitive or auction-like deal terms that happen in a, you know, when you've got 10 different companies bidding for, for one, etc. And so, uh, that was kind of the original thesis. It came true, but in a different way than I originally imagined. And so that's kind of what I want to share with you. We did 24 deals, like I said, over 24 months. A big part of that was figuring out the deal structure that made the most sense for what we did. Now, when we started, we started— we started with this like little hook, which I haven't said in a very long time, mostly because of me finding out that it was wrong. Which was majority work for minority stakes. After doing majority work for minority stakes, I realized that there's a reason that people don't do majority work for minority stakes, because it's just not worth it. But what was interesting though, and maybe there's a, there's a silver lining lesson I'll be able to take from this, but of the 24 companies that we originally invested in, we basically divested from the vast majority of them. Of those 24, I want to say 6 we are still invested in and/or doubled down into those businesses. So yet again, we're not really immune to power law of 80/20, right? But the thing is, is that most investors will write a check and then kind of just like hope for the best. The way that Acquisition.com did it historically is that we would write a check and do a lot of work too. And that was because I wanted to, you know, like I don't have a billion-dollar fund or something like that that I'm working with, and so it's like, I try to use the resources I have, which is like, we're good at growing things organically. And so for us, organic growth is what we're best at. That's how we grow the companies that we have. Of the companies in the portfolio today, the average founder has 13x'd the value of their equity. 13. Not including like, the value of the company, just their share. That's 13x from the deals they did with us. I feel pretty, you know, I feel really good about that. On the flip side though, we also kind of like let go of the companies that we didn't see as much potential in, we didn't see, you know, as much aggressive growth in those businesses. A discerning person would be like, okay, well, are you picking or is it you? And the answer I think is probably a combination of both, right? I think on one hand, you know, the ones that we did pick that have done exceptionally well, there's an element of picking there. But also, we tend to, I would say we are good at this part, which is starve the losers, feed the winners. And so we did this time study, I wanna say about 12 or 18 months in, I can't remember, of having done a lot of deal activity, the work on my portfolio team started expanding, and I could see that they were spread really thin. And so then I was basically faced with this idea of like, do I need to further expand the portfolio team, which I could have done, I was like, or should I just take the team that I have and allocate them where we get the best returns? That's what I ended up moving towards. But what we did was I did a time study for the whole team to see where they were allocating their effort. And you can probably already guess this if you're a business owner who's listening to this. A lot of the time was going towards the companies that were floundering, the ones that were struggling the most, the squeaky wheels, right? Which in a services business would function Anybody who has a services business, B2B or B2C, it's like this is what you don't want to have happen. And so I think that what happened next is the thing that you do want to have happen, but is also very scary to do. And so maybe this story will inspire some of you to do that. Basically, in seeing that, I was like, this is all wrong. We have these companies that are doing really well, and we're spending less time on them. And then we have companies that are stagnant or not really growing that aggressively, whatever, always seem to have problems. And I'm thinking to myself, Yeah, let's put all of our attention there. No, that sounds like a terrible idea. Again, I think this kind of, the thinking process could be applied across customers. It works the same way. After the time study, I said, okay, here's the deal. We're going to reallocate everyone's time in order of company effectiveness. Basically, where do we get the best returns, right? And so we restacked the team and said, this is what it is. And then we removed people from projects, we removed people from communication cadences, with particular businesses. What we did was we got rid of all of the squeaky wheels that weren't, that weren't, that weren't growing and taking a lot of time. We also got rid of medium businesses too. And I know that sounds like crazy, but I've just been all in on this concept of focus, right? And you've heard this is this repeated theme over and over again in my podcast. It's because it's, it's still top of mind for me. What remained after I basically trimmed the portfolio Adam Hernandez, uh, was two buckets: companies that had good returns for almost no effort and companies that had exceptional returns for high effort. And so that's pretty much what we have in the portfolio today— companies that there's a lot of work that we do but we get a lot for it, and companies that we do a little bit of work that we get kind of medium returns on. But the relative or proportional returns are probably about as good. And so think about it like this, is like if there is a company that we think we're going to get, call it, you know, 30 or 40% annualized returns on, now that's sound— is great in the investing world, but, uh, for me as an entrepreneur, I'm like, I want way more than that, uh, because we're working too. This is the piece I think people like don't take into consideration. The vast majority of investment funds, uh, family offices, they write checks and like barely provide kind of like strategic guidance. We tend to do a lot more than that. Because of that, we just have additional costs, both hard costs like labor costs, right? Like I pay teams of people to do things, but just attention. There's a reason that most private equity funds are, you know, in the 8-10 companies is what they select, because that's usually what that size team can manage. And most fund managers quickly realize that you make more money just chasing bigger deals, uh, than you do off of doing more deals. Now there are some businesses like Constellation out of Canada, which is a conglomerate, and they have purposely focused on going horizontal rather than going upmarket. So they— their average company, I think, does like $3 million in revenue, and they acquire like 200 of them a year, something— some absurd number. And that was something that I looked at originally as like, maybe this is a model because it would make sense with media. There's— we have a lot— we have tons of deal flow in the $3, $5, $10 million range. But I would say that we We reinvented the wheel. And what we did was we, we looked at the companies that did the best and we put more of our, more of our attention there. And the thing that was the hard part to cut, I'll be honest with you, is those ones that are doing okay, right? Like we get distributions, they're doing okay. But the thing is, I know that the majority of my returns are going to come from the beasts, right? The ones that we're putting a ton of effort in that are just crushing it. And so basically we made the hard call. And parted ways as amicably as we could with those founders. Overall, the portfolio continues to grow at a faster rate, more profitably, and the team has more bandwidth to reinvest in the stuff that matters most. Some of the things that I learned, if I had to put bullets on this. So number 1 is I would say that I would bet on the jockey, not the horse. This is— and you know what's tough about this is that some of the things I'm going to say are going to be things that you're like, yeah, I've heard that before. And I wish I could translate it into like, there's like head nodding and then there's like deeply understanding it. I think there's the difference is called between declarative knowledge and procedural knowledge, knowing about something versus knowing how to. I can say these words and you're like, oh, I've heard about that kind of selection criteria versus understanding what it looks like to live with that selection criteria. So I just say that as a general disclaimer, like I said, first off, bet on the jockey, not the horse. It's so much. It's all people. It's all about people. People build businesses. And if you have dumb people, you build dumb businesses. And if you have smart people, you build smart businesses. And if you have good people, you build good businesses. If you have bad people, you build bad businesses. Smart, bad people, very bad. Not a good combo, right? I think Warren Buffett talks about it. He's like, you want somebody who's smart, hardworking, and ethical, more or less, integrous. He said, 'Cause if you have somebody who's smart and integrous, but they're not hardworking, you're not gonna get a lot done, right? If you have somebody who's dumb and integrous, well, the stuff that they're gonna do, and hardworking, they're not gonna do good stuff. But the worst case scenario is that you have a partner who's intelligent, hardworking, and evil. And then you have somebody who's working 24/7 against you, which is what you don't want, right? That's probably number one is, It's all about, it's all about the people, man. It's all about the people. Number 2, this is more of a business thing, but I say now we look for revenue retention or the, or the path to revenue retention. Meaning fundamentally you want to have some compounding vehicle within the business. And this is something that it took me way too long to learn, but it's like, you need to have something that I get credit for the work I did this year, next year. If you don't have a way of getting credit for work you did 2 years ago, it means the only way to scale a business is simply acquiring more customers. And that is a very hard way to grow because there are so many things that can disrupt acquisition. You know, like if you're, if you're making content, you can get deplatformed for stuff for whatever reason. If you have a big, call it like door-knocking team, it's like a key leader can walk with half your sales force. If you're in paid ads, you can get deplatformed. Same thing, right? And so if you're very reliant on traditional advertising, which to be fair, I make so much content about this stuff. And so I say I understand this firsthand. Is that if you are so reliant on that, the company is significantly less stable and enduring than one that even if we lost all of our marketing tomorrow, we still have all the customers we acquired over the last 5 years, and then we would have some time to figure out what the next thing we're gonna do is to get customers or find where the attention is. I'll paint you two pictures really quickly. So let's say you've got Company A that does, sells 100 customers this year. I'll say quote loses 100, so those people don't buy again. Now you might be like, oh, they're a bad company. Well, there's, there's some businesses that lend themselves more to recurring revenue and repurchases than others, but let's just say they don't sell those people anything else a year later. So the next year they sell 200 customers. So the company doubles. Okay. Hooray. Year 3, the company sells 3 times as many customers. So they sell 300 customers this year. Okay. But they don't have any from year 1 or year 2. All right. So that's Company A. Now Company B sells 100 this year. And then keeps all of them. And then next year they keep acquisition the same and sell 100, but they still have the 100 from the first year. Now they have 200. And then year 3, they still don't grow acquisition. They sell another 100 and they have the 100 from the year before and the 100 from the year before that. And so they have 300. Now when you look at both these businesses from the onset, you see 2 300, you know, 300 customer businesses. But which business would you rather own? Obviously you'd rather have Company B Because it's significantly more stable. Typically, if you had a business that was structured that way, it's very likely that it'd be more profitable because you don't have to keep paying, like if you think about, so Company A had to pay the cost of acquiring 600 customers, and Company B only had to pay the cost of acquiring 300 customers. So all of that added cost drops straight to the bottom line. Pretty neat, right? And typically, not always, but typically customers become, more efficient over time, meaning like they require less to maintain them over the long haul. So actually margins can expand. Like it's the most expensive thing to do in the business is acquire a customer and then onboard and activate them. Once you have an onboarded and activated customer and they keep buying stuff from you, you're just making money. That is probably like the second big thing that we look for, which is like, do we already have some demonstration of, of revenue retention? Is there a subset of customers that have good retention, others don't? That would be a great silver lining for us 'cause we'd probably double down on that. Or is there like a path that we already know they're not doing that we know we could implement that would get revenue retention to kick in, right? And so there's kind of like the second big thing. It's like, okay, so we got the jockey and this is, you know, revenue retention should be more of the horse, okay? The next thing, I prefer businesses that I understand well. And so we tend to focus on service businesses and software businesses. And so we don't talk about this as much, but like right now, 40% of the portfolio is software. And it's because they get— it's a higher return on effort, right? Like if I add $10 million in profit to a B2B SaaS company, I might have added $50 million enterprise value or $100 million enterprise value. Whereas if I add $10 million to a service business, uh, it might get a multiple on trailing EBITDA. So maybe they run 30% margins. And so we'll call that $3 million in EBITDA. Let's say they trade at 8. Uh, and so they would get $24 million for that. So I can get $50 to $100 million for the same effort as I can somewhere else where I get $24. So it's just, even though the actual work is more or less the same, and that's what's crazy. This is something that I've only realized later. It's just like I could do the same work in a, in a company that just gets more for what we put in. Now, you can make the opposite argument that it might be more competitive, it's harder to build good software, et cetera. So of course there's trade-offs, and there's a reason that the market prices it at that, at that is because there's just not as many of them. 3 is that it's within our sphere of competence. And so those are kind of, and for me, like, I love B2B. I think we're, I just looked at our stats, I think we're like 30, I think we're 30% direct-to-consumer, 70% B2B. Across the board, it might be 60/40. I'd have to, I'd have to think it out, but somewhere in that neighborhood. So we're a little more B2B than we are B2C, but we still have a significant, you know, B2C presence. I'll say the next thing that I really focused on is not going after great ideas. All right, so hear me out on this. I'm an entrepreneur and I am an optimist, eternal optimist. I get excited about the potential. That's what, I mean, that's what allows me to start businesses. Like, I'm willing to take on risk. But that has been a double-edged sword for me because I will believe in something more than the founder will sometimes. Basically, I've gone for a little bit more, a little bit more tested, a little bit more tried. Like, I want to see it, not believe it could happen. And so I think that's something that a lot of, you know, investors go into. And to be fair, it's kind of the same thing with business, right? Like, if you have an acquisition channel or a product line that you're thinking about starting, it's like, it's nice to know that there's already demand for something, Having some sort of, some sort of pretest before making a big bet. And I think I made, I made a lot of bets on things that I was like, I was really excited about the idea and the execution was, was lagging behind. And it was far— it's, it's far more likely to get something that actually works that already is working well. Like I said, like some of these, these lessons that I've learned have been— I actually do them now rather than kind of nodding my head. I know what it's like to turn something down just because it's a great idea and it's exciting, even though they don't have the track record that I think is, is supported. And so that kind of translates into fewer, better, bigger deals. Now, I could make the equal opposite argument of, well, you had to go through those to know these lessons. Now, yes, no, I don't know, but I know that I have those lessons now. And so basically we're, we're doing fewer fewer bigger checks to fewer better companies that are typically bigger than we were 3, 4 years ago. And a big part of that is also that the biggest companies in the portfolio, they're big. They're not small. I make content that's like, how to get your first 5 customers and things like that, because I like to encourage newer entrepreneurs. And my long game is that many of those entrepreneurs who do make it, they will hit me up when they're at $30 million or $50 million or whatever it is, so we can go from there. And so that's kind of my long game with this, just FYI. The businesses that we have are fairly big. I think we have— I could look at it, but I think we have 4 companies that are doing over $30 million a year. One's over $100 million. So like, in our average positions, just about 40%, right? And I don't use anyone else's money. And so this is all our funds. Those have probably been the biggest lessons. It's the jockey, number one. Then what's the one metric that I look at from an investing perspective, which is going to be revenue retention? I mean, I'll obsess about that. And I'll double-click into that real quick. The reason that I like that one so much is also that I can typically reduce CAC dramatically in a business. So that's like my sphere of competence. I know how we can get more customers, and I know how we can get them cheaper, make it better. Have a better offer, etc. If I know somebody's got a product that's sticky, that people want, people like, then I can figure out a way to sell it. That's, that's why I like those types of businesses, because again, it's uniquely suited to my competence, which is number 3. And then going after fewer, bigger— basically going after whales, not minnows, or hoping minnows turn into whales. Now, if I were to play devil's advocate with myself, which you can probably tell from the nature of this podcast, I do a lot. We did 24 deals and we have basically like, I'll call it 3 stallions in the portfolio that are really monster businesses. All 3 have billion-dollar potential, are already past billion-dollar potential in that they've received investorship in excess of that valuation. I would say, "Okay, well, 3 out of 24." It's like, "Okay, this is power law." You should have had somewhere in the neighborhood of 4-ish, maybe 5, companies that did, you know, exceptionally well, and we do. And the, the three monsters are obviously way outsized of just doing well. They're monsters. It's like, maybe I should just repeat that process again. And so I think, I think a lot about this stuff because this is, I mean, this is fundamentally what my job is, is where do we allocate our resources, where do we get the highest returns on what we put in. And so I will, I will, I will leave you with this, which is like, I think in the next few years some of these podcasts will probably get a disproportionate amount of views because we will have the third-party verification that the numbers we said are the numbers that we do. Maybe I'll just say this as a reminder for myself at that point. Everyone just is— everyone's just figuring it out. There's so many things I don't know, and there's so many times where I just, I just make a, I make a guess, you know, I mean, I make a bet. I'm like, this feels like it makes a little bit more sense, you The big thing that I keep coming back to is just leverage. Where do we get the most returns for what we put in? And how can we speed that loop up as fast as possible? And so I just spend a lot of time doing that and a lot of time deleting. And that's from the top down. Deleting companies that just aren't a good return for us, deleting people that don't have good returns, deleting processes There are, in my opinion, only a handful of people that provide the outsized value within a company. A lot of the rest are not— they don't really move the needle that much. When you're thinking through making a company better, removing the dilution of value can sometimes be one of the most powerful things you do. Anyone who's worked with a team before— I don't know if you've ever worked with a team in high school where you had to do like— or college— you had to do like a project in a group or something. And you're like, guys, I'll just do the whole damn thing. Like, you guys can take off. I don't— like, it would be easier for us and we will all get better grades if I just do it than me try to fix all the terrible stuff that you're going to do and then be affected by it. And the thing is, is like, I think a lot of companies run that way, is that like people do group projects because there's a group, not because the output's better, right? If the output's better in theory, because we assume 10 hands with, you know, 5 brains is going to do better than, you know, 2 hands with 1 brain. But if 1 brain is way more experienced and has more knowledge around that specific thing, then that 1 brain and 2 hands is honestly handicapped by the other 8 hands that don't know what they're doing, literally just getting in the way. So I'll give you an analogy. So think about it like there's a surgeon, right? So world-renowned surgeon, and he's got to do a brain surgery. You say, okay, well, we're going to bring more people into the surgery room so that they can help him out because they've got brains and hands too. I'll bet you that surgeon would just be like, just get out of the way and let me do the surgery. And so sometimes we have this, and this is just something that's been a theme for me right now, just because it's probably top of mind with some of the portfolio companies. We don't need more people, we need better people. We don't need more cooks in the kitchen. We don't need more hands in the operating room. We need better surgeons. And so this has just been this big recurring theme for me that's been a big emphasis for how I'm building, really assembling companies more than building them. It's like, how do I get the absolute— like, the first question I'm asking now is so different than what it was before, call it 5 or 10 years ago. Like, the first question I ask is like, how do I get the absolute smartest people to want to work here? And then that question becomes almost central to the strategy, because if we have the absolute smartest people who are the hardest working and they're incentivized and they're aligned with the goal, I'll just— I'll walk out of the surgery room and let them do the surgery. And so that, that has, that has shifted dramatically from, you know, uh, how I thought about things before. And if you listen to some of the, the, the founders that I look up to a lot, a lot of the big publicly traded companies who, who who are still founder-led, this is this recurring theme that they talk about too. It's just all about the people, which is why I say, I know you'll nod your head, and I know you'll say, well, duh. It's hard to be able to recognize that level of talent and have a deliberate strategy for attracting true A-players. And the thing is, is that your idea of an A-player is not as good as what your idea of an A-player will be in 10 years. I promise you that. And so it's trying to like, it's trying to like play this game with myself where I think, okay, what will 10 years from now me think a player is? And how can I, how can I hold that standard in that bar today? Like, what do I have to do to trick myself? And how do I, how can I get into these networks where I can, I can leverage some of these, these better people in? Those are, those are some of the lessons that I've learned from the, uh, the 24 deals that we did, um, over 24 months. We shrunk it down to the deals that we got the highest return on. We shrunk, we deleted people, we deleted processes that were not value-additive. We focused on the jockey, not the horse. The horse itself, we looked at revenue retention. As long as we thought that we could add the acquisition part, that's where the third, third, third element of that is our core competence, which for us is business services and, uh, sorry, services and software. And going after fewer fewer, better, bigger deals. And so, yes, my friends, that is, that is the Top of Mind pod. I partially am making this so that I can document it for myself so that when we do hit our, our B or multiple Bs, I can not, not let it go to my head because I'm learning as I go, same as you. Anyways, have an amazing day. I'll catch you guys soon. Bye.