Episode 499: Making Money 6 Months After Start Up with Chris Volk

Welcome to this edition of the Million Dollar Mastermind podcast. This is where we pick the brains of high achievers from all walks of life and get their hard earned real world insights on winning. I'm your host, Larry Wydell.

I'm talking with Chris Volk. And it's taken us a while to get together, Chris, and it's very worth it. Thanks so much. And your book just came out when?

The book just came out on May 10th. It's been out for about 10 days, May 10th.

And I think we started trying to get together a month or so ago and it's available now, folks. And so it's called the value equation. And talk about, elaborate on the fact what you said earlier was the companies that you've started, you've got this information, you've had it percolate in your head and then you had it in writing the book. The applications really came clear to you. And now you've had experience starting companies with this knowledge almost makes you dangerous, Chris. In a world where most companies fail, you've got yours throwing off excess cash in six months. Give us an example of that and how you set it up and how you set it up where the odds were stacked. You know, it's kind of like this. It's a phrase I use all the time. Success is never guaranteed, but you can sure stack the odds of success in your favor and you can continue to improve it to continue to increase those odds to where it eventually becomes almost inevitable. You know, things can always go wrong at the finish line, but there's a lot you can do to set yourself up for success. And that's what I'm liking, what I'm hearing about the value equation formula and book. So how did you use that information and set these companies up? Can you give us some examples?

Well, sure. The business that I've been in for the last 30 plus years has been doing either mortgages or more particularly sale leasebacks on real estate. So we would go off and buy a piece of real estate and we would rent it to the restaurant chain that was using it or to the veterinary clinic that was using it. So, and we in our last company focused on solely on profit center real estate, that this is store capital that we started. And, and you know, this, and this gets into the issue of what's a product and a solution. If you're, if an investor looks at the balance sheet of store capital and they look at the left side of the sheet where everybody likes to look, they're going to see a truckload of real estate, they'll see $10 billion plus worth of real estate, and they'll think, well, this company's in the real estate business. You know, I mean, but that's not it at all. You know that the reason Store has all that real estate is because its tenants have a choice where they own the real estate and finance it conventionally or they rent it. And so I spent the better part of my career convincing people they were better off not owning the real estate, but renting it. And because it added more value to their business, it would make them richer. And then I had to convince them that we were the best guys to rent it from. So there are other landlords. So it's a double sale. And then when you own the real estate, of course now you can attract investors because you now have this stream of cash flow and dividends coming in. And your investors like the cash flow and they like the dividends and they like the rent growth. And so we were able to do that. And so given that that was the business, the then we could model it out and get pretty close to exactly what was going to happen. When I would do my investor day presentations at Store Capital, I would whittle the model down to 14 variables. And by that time, it was a company that had over $9 billion worth of assets, about 100 employees, and north of half of $600 million plus worth of revenues. And you can whittle it down to 14 variables. So the idea is to try to take stuff and make it as simple as you possibly can for people and for us to do the same thing. And then we were able to, with that knowledge, do several things. One was to make our investments generating returns that were higher than what equity investors would expect. And so if you want to create wealth from thin air, if you want a company to be worth more than it costs, the prerequisite for that is to generate a return that's higher than your cost of equity. And so investors might want a 10% return, but you're able to generate a 40% return or something like that, which is oftentimes what happens with high tech businesses, where they come in and they can make just outlandish rates of return. I would say that the returns for Google and Facebook much, much higher than that. The appreciation in these businesses isn't because the assets are worth more. It's not because the real estate's worth more than we did. It's because the returns and the business model are good enough to be able to generate returns that are higher than what investors want. So when we had our first round of investors at store and they put up the money in 2011, we. When they got out in 2016, they made a 26% rate of return pretty, pretty solid for a real estate investment. That's just. I mean, they didn't have to develop anything, we didn't have to get entitlement. We didn't have to do anything. Right. I mean, we were a handful of people putting together a real estate company, a finance company, but it was all based upon understanding the returns that we could generate and generating returns that were attractive enough so that when they sold out, they sold out to people wanting a lesser rate of return. And so in the words of business, you're basically buying wholesale and you're selling retail. And that's what we did.

Yeah. And the center of this was the value equation of how you set that up.

The value equation was in the back of my mind, for sure. I mean, it was. Yeah. The answer is yes. And not only that, but. But because our companies over the years were going to middle market companies around the country to be our tenants. And so we were soliciting like you would a bank soliciting a customer. You know, we would use the value equation periodically to sort of understand how good our tenants. Businesses were. Cause you want to be able to. If you're lending money to people, it's sure nice to know that your tenants have a heck of a nice business model that can generate wealth for other people. So I find that the health of a business is oftentimes reflected in how strong their business model is, not just ours.

Yeah. And those 14 variables you would start off your presentation with, is that something that's covered in your book or is that.

The book actually just whittles down to six variables. So. So it gets even more basic, you know. Right. But the book will also guide you on how to make it more complicated. That's what you want to do. So, for example, the six variables are kind of an abstraction, you know, I mean, it's getting the business down to its fewest components. But behind each of the six variables are, you know, mathematical equations that you can create that would incorporate many more variables if you want to. It's up to the person running the business and what they want to do.

How did you refine your sales pitch to get people to decide it was better for them to rent than to own? How did you. And you had to get that, get them over that hurdle for them to want to be renting from you for.

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The first part was easy, which is that if they're going to own it, then they have to find decent financing to own it. And I think that given a choice, I would suggest that people own the real estate, don't rent it. But the problem is that the financing out there is so awful that it's hard for people to really choose that and think it's the best choice for them. And part of it's because when you go out and borrow money, lenders are asking people to tie up 30 to 40% of the value of the real estate in equity. Right. And if you do that, you're depriving yourself of the ability to put that 30 to 40% to work in the business that you have, you know, and, and the businesses generally produce returns that are far, far higher than the returns we ever got, you know, and, and so, you know, I'm. One of the things I was always grateful for was that we created a ton of mainairs and the companies that we were able to finance because they were able to use our capital instead of theirs. And, and then they were able to take their capital and whirl it back into their business, which generated higher rates of return and allowed them to become rich.

What do you think is the reason so many companies out there don't have a good model? They don't go to the trouble of putting together the right business model.

Is that.

Neglect? Is it some kind of flaw in education? I mean, is that even discussed in education? That much in these MBAs are. People get an idea, they start. Where do you see the breakdown on that?

Yeah, so I got an mba. I did it at night school at Georgia State when I was working at the bank and went through.

I'm a Georgia Tech guy myself.

Is that right?

Okay.

So I was, I was down the street, so. But I, you know, I went through four years of night school because they didn't have executive MBAs back then, so it was a full slog. And I got out of the four years of night school without really understanding why some businesses are worth more than others. You know, why do. I mean, when I was at the bank, I started figuring out, you know, some businesses are just flat better than others. I mean, they have better business models. And, and I got out of business school without really a good understanding of why some businesses create a lot of wealth and other businesses just don't, you know. And so over the years, it was kind of a passion of mine to try to figure out why that was, you know. And so the value equation is sort of the culmination of that. And you're right that business schools just don't teach it that way. I mean, so I would say what's in this book is going to be different from what people. If you've got an MBA and you've got the degree, what's in this book is something you haven't seen. It's different. If you don't have an MBA and you're reading this book, that's probably actually better because you hadn't had your mind cluttered with all the stuff that you learned while they were teaching the fda. And the thing is, it's not that difficult. As I was talking to you previously, it comes down to leaders controlling three efficiencies that they got at their fingertips, and one being their operating efficiency, the pricing and cost control side of the business. The other being controlling the business investment they got to make. And last one being trying to understand how to minimize the cost of money you got to use from other equity providers and lenders and lease providers. You know, how you minimize that cost as well, but also at the same time, make your business flexible enough to run because flexibility is key, you know, and you got to have always access to liquidity. I. You know, all the businesses out there in the world that failed didn't fail because they lost money, they failed because they ran out of cash. So you have to sort of make sure you have margins for error. In the book, there's a story about Damon John, who's a pretty famous guy and he's on Shark Tank. And Damon is an excellent public speaker and goes out and presents to businesses. And he presented to our conference that we put on. And one of the things that he talked about was that when he created his company, he didn't really understand what business investment was. I mean, he just didn't have a clue. I mean, so he had a certain Amount of money to start off with. And then what almost killed him was that he sold all his initial product out, but he had 60 day terms. So basically he swapped out his inventory for a 60 day loan. And he didn't have the money to lend somebody money for 60 days. He needed the money now. And so that loan, that account receivable, ended up being in this investment he had to make. And he didn't figure it out. You know, so. So as you're looking through the book, it sort of walks you through piece by piece, what the components are and how to create a business and understand it.

Now, what would he. What was he bringing? You know, when Daymond Johns comes in to speak, what's he bringing to? Where were you? I mean, what was this thing? Was your company. Did you bring him in as a speaker? Did you go to a conference?

Yeah, we bought him as a speaker at a conference that we put on for our customers. So it was a educational conference designed to help our customers. And we would do this once a year to give them information that they could use to run their businesses better and also an ability to network with other people and other businesses that were similar, to be able to get ideas and share. Share stories and. And so Damon was a speaker at one of the events, and I thought it was really appropriate as he talked about how he almost went out of business as he's starting his company. And he was very honest and humble about it. And. And when I listened to him do that, I knew that I had a chapter in my book dedicated to that. So I did it. Yeah.

You know, the thing about it, people feel that successful people are just arrogant SOBs and this, that and the other. They don't understand. Successful people have gotten there after so many failures and run into so many brick walls that there's a human. You know, they really understand what it is to get beat down. You know, like Elon Musk says, all my heroes told me I was crazy. You know, all of my heroes told me I was wrong. You know, he said, I've had nothing but abuse and rejection my entire life. It's funny.

Yeah, well, I mean, you know, I basically started similar companies. I took one pump and started two similar companies sequentially and just got better at it, you know, I mean, so you. So by the time we were starting third one, I had a pretty good idea of what to do, and I'd been there and done it before. And so you're taking less risk and there's far less luck involved in it. I mean, most entrepreneurs Try as hard as they can to make their luck. I think that if someone becomes a billion dollars worth a billion dollars or somebody comes worth a lot of money, there's generally some luck in that because most of those people don't really understand at the time that they're starting their business how great those businesses are going to be. And they become that great sometimes for reasons owing to luck. But all those people would have been rich in any case. They may not have been billionaires, but they would have all been rich. And I think that there's kind of a brotherhood, sisterhood of entrepreneurs and, and anybody who's ever tried to start a business or work for businesses starting up understands what it takes and the differences. The things that separate us tend to be fairly small, but they're related to business models. How big the problems we're solving, how big the markets are that we address. Those things sort of separate the richest entrepreneurs from those that are less rich. But in either case, no matter whether you're at the top of the food chain or you're at the bottom of the food chain, you can make an awful lot of money starting business if you know how to do it.

Thanks, Chris. Really, really good stuff. Really fun talking about making, you know, what makes businesses work and what doesn't, you know, and so, you know, there's lessons we all have to learn and nobody knows them all, but you know, you, like you say, the more you get out involved in it, the experience you pick up, you can move more in setting things up for success and not have to depend on the luck so much. Running by the seat of your pants type thing, minimizing the element of risk, you can never take it all out because there's always some kind of surprise. I'm sure around the world where they've had volcanoes erupt and hurricanes come in and they've had two feet of rain come in out of the blue, you.

Know, and, you know, or pandemics. Right?

Yeah. Don't ever get so arrogant and say, we got this.

You know.

Yeah. You know, whenever someone said, we got this, watch out. So thanks so much.

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