“How can a technology company,” our founder asked, “be worth more than real estate that will be around in 100-200 years?”

The answer is a 3-part explanation.

From window washing to apparel manufacturing to enterprise SaaS, all companies are all valued on the same things. Their ability to:

1. Generate cashflows
2. Consistently
3. Into the future

As we’ll cover in future posts, how and when companies (choose to) generate profits can be a complex topic. But the concept is simple: individuals and institutions (let’s generically call them “investors”) want to put money into companies who have a high likelihood of returning (multiples of their) money in the future.

The ability to sustain a surplus is what enables companies produce profits year after year. A lack of strategy or too little investment in building defensible moats means short-term cashflows may not be replicable in the future.

And investors don’t want to put $100 dollars into a company this year and only get a $110 back for one year. They want to see returns for many years to come.

The Shape of Your S-Curve and Intrinsic Values

In my opinion, the ability of every business to generate long-term, durable cash flows is in direct proportion to its moat. The harder it is to replicate success, the longer a company can enjoy pricing power, profitability, or both.

But the trajectory, slope, and length of the growth cycle of every company is also unique.

Investors are essentially placing a bet on the shape of a company’s S-curve. The height determines how large it can grow while the slope dictates its growth rate. The X-axis determines a company’s longevity. How long will they be around and how long can they maintain their peek?

Despite their ability to scale quickly and produce large profits, technology companies’ longevity have also been known to fluctuate widely. Why? By nature, they operate in disruptive markets. Consumer trends and new competitors can quickly shift the future outlook, especially if moats are not strong.

Said more simply, technology companies have characteristics that help them grow quickly. But if not properly constructed, those same companies could  “mature” and eventually decline shortly thereafter.

Real estate, on the other hand, typically doesn’t grow as quickly because those assets reside in more mature markets. But slower growth and lower peeks aren’t necessarily a bad thing. Better understood assets are generally viewed as “more stable” and protect against downside risks. Businesses with physical assets (buildings, trucks, tools, furniture, fixtures, equipment, etc.) have a lower downside because those assets have an intrinsic value

As entrepreneur and author Peter Thiel puts it, “Companies come and go, but cities rarely die.” Why? The tangible assets of residential multifamily real estate mean their intrinsic value will endure for a long time. People need places to live, after all. So long as humans need shelter, the likelihood of real estate going to zero is low.

What makes technology companies so valuable?

Generally speaking, technology companies are valued at a premium to offline or traditional companies due to a number of factors.

The first is high margins. Because digital solutions require bits and not atoms to produce, the materials – or cost of goods sold (COGS) – required is minimal. In fact, this number is so small – usually between 7 and 15% of sales – that many software companies give their product away for free initially in an effort to get customers using the product. Since the incremental cost to get one more person using a digital product is so low, they don’t have to worry about eroding margins.

Conversely, even a physical product as small as a t-shirt can’t be given away for free because the materials needed to make the shirt costs represents a large portion of the potential profit. There is fabric, boxes, zippers, and ink to pay for before a customer can ever get something in her hands.

The second factor is ease of distribution. The online world we rely on means large addressable markets exist far beyond our local geographic areas. Technology companies can sell their products far and wide to customers all over the world who have a problem that can be solved with software. When distribution of a product is frictionless and instantaneous, the slope of an S-curve for a technology company may be very steep.

The third reason is scalability. Growing a technology company’s infrastructure to support new demand isn’t easy, but it can happen quickly. Structures for rental housing, self-storage, and even mobile home can take years to develop. Technology companies don’t need to wait for another building to be constructed to increase capacity. Expand the number of servers you’re operating on the backend, and technology can scale 10-100x as quickly as needed.

How are technology companies valued?

There is a difference between value and price. Value is what an asset is worth while price is the amount someone is willing to pay for it.

In theory, the two amounts should be (nearly) identical. How can something be worth $10 if no one is willing to pay $10?

But during certain periods, those two numbers can be quite different. Consider public companies. Their value is based on the number of shares x the amount the market is willing to pay per share. When the markets are “up” and investors are feeling bullish on the future, that may be $100 per share. But if investors get nervous, the same stock may only trade for $73.

That means a company’s value may fall 27% – or more – without any substantial changes to sales, margins, or profits. Crazy, right?

Thanks in large part to runaway successes like Apple, Facebook, Google, and others, the belief that all “technology” companies have the ability to spit off cash for many years is assumed.

Of course, no two companies are the same – even within the same industry. The delta in scale between the “winners” and “losers” within a sector can vary widely.

This is a short way of saying that not all companies should be valued equally.

Really, it comes down to unit economics. Take Uber, for example, who started as a frictionless alternative to the taxi. By tackling transportation for everyone, they addressed a massive market with a high probability of repeat customers. However, because there is no true way to create customer lock-in (checking Lyft’s prices is just a click away), there is always an alternative available which prevents pricing power. (Taxis also still exist.)

So even though their revenue has scaled significantly as more and more people have used their service, they still haven’t found a way to turn a profit – 13 years later. How much money are you willing to invest in a company that is done growing and doesn’t have a clear path to paying you back?

Meanwhile, Amazon Web Service (AWS), is generating around $13.5 billion in operating profit.

Why are technology companies so desirable as investments?

People invest money into opportunities that have the ability to grow and generate outsized returns in the form of cashflows over time.

While digital companies can be highly profitable, the effort required to reach escape velocity (i.e. pull away from competition and/or reach a critical scale) and the strategy needed to maintain a competitive moat or become a monopoly is significant.

But once that velocity and scale kicks in, it is hard to debate whether technology companies make good investments or not.

In 2021, Salesforce generated over $19 billion in gross profits and $1.4 billion of net income.

Why do so many entrepreneurs build technology companies?

Tech has long attracted the brightest talented in the world, drawing bright minds from across the country to areas like Silicon Valley, New York, and Los Angeles. Today, hubs like Austin and Miami are attracting the next wave of digital, crypto, and Web3 entrepreneurs.

Since digital companies with large addressable markets have a much larger potential upside, the opportunity to create outsized returns – and, therefore, wealth – is significant.

To go back to the concept of the S-curve, technology entrepreneurs with the skills to grow a company to a high peek over a short period of time stand the chance of being rewarded handsomely for their efforts. The tech companies who “make it” are either acquired by private equity firms or larger technology companies. They may also go public.

In doing so, founders and employees with equity may cash out by pulling future profits and equity into the present. This allows companies who aren’t yet profitable to be rewarded financially when buyers are willing to bet they can return money in the future.

What are the risks of investing in technology companies?

On the surface, technology companies seem sexy: they have the ability to grow and scale quickly; they get a lot of news coverage; they attract smart, young employees who want to work on cutting-edge products.

But what most people fail to realize is that while technology companies can experience higher highs, they are also more susceptible to lower lows.

Their S-curves can rise quickly – but they can also come crashing down.

Competition

For all of the reasons listed above, the benefits of building a technology company are what attract a lot of smart investors and operators to the space. In less mature markets, it is not always the company that builds the best product that wins. Competitors will better distribution, pricing, or niche offerings may find fit and scale more quickly, making scaling a technology company difficult.

Low Switching Costs

Technology without a moat will almost always lose out to better or less expensive alternatives. Pricing models and implementation cycles play a large part in determining how long a customers stays with their technology provider or using a digital product.

Nascent Markets

Traditional small businesses may not win too many awards for innovation, but what they do have is product-market fit. As Brent Beshore puts it, “People have been dipping their bodies in water to cool themselves for thousands of years.” For this reason alone, Permanent Equity was comfortable buying a leading pool construction company in Phoenix.

An app that tracks your dog’s sleep cycles? That product may get broadly adopted – or it may not. The underdeveloped nature of a market introduces risk into the system which may inhibit your company’s ability to produce profits over time.

High Disruption

Technology, by definition, is highly disruptive. If you believe in the theory of incremental gains, the capabilities of technology will accelerate at an accelerating pace.

Said differently, things will get a lot better, faster. This means solutions that are being adopted today may be replaced in the near future with even better solutions.

Final Thoughts

Entrepreneurship comes in many  flavors.

Owning a stable, low-growth, profitable business may suit your lifestyle and aspirations well. Or maybe starting a new company in a bleeding-edge sector is what fires you up.

In either scenario, understanding the underlying basics of a business will serve you well.

1. Businesses are valued based on their ability to generate profits into the future.
2. How quickly a business grows and how long it can maintain a competitive moat determines future profitability.
3. Technology companies have characteristics that help generate enduring profits.
4. Those same benefits may also attract competition. Without a solid strategy, competition may erode your advantages over time.

Yet most employees don’t know what the term means let alone understand the role private equity plays in the market.

In this article, we’re going to break down the phrase and provide some examples to help you understand when and why private equity could be used – as an owner, operator, or investor.

What is equity?

Before we dive into “private” equity, we need to understand what equity is in the first place.

Equity is the difference between what something is worth and what is owed

For example, if the home you own is worth $400,000 but your mortgage balance is only $320,000, you have $80,000 worth of equity.

In personal finance, the sum of all your equity (your home, stocks, retirement accounts, etc. minus your mortgage, credit cards, student loans, etc.) is known as your Net Worth.

The same simple concept applies to businesses. The value, or equity, of a business is the difference between what is owned and what is owed.

The equity of a business is calculated on its Balance Sheet.

What is equity in a company?

In financial terms, equity refers to ownership of a company—the amount of stock that investors own and, therefore, share in its profits or losses.

Equity is the opposite of debt: while debt means “borrowing money” (paying back with interest), equity means “owning part of something.”

How is equity different than debt?

Debt financing is money lent from another person or institution to another with the requirement to pay back the loan at some point in time—usually over several years. The loan amount, monthly payment, schedule, interest rate and more can range widely based on what your company is borrowing against as collateral.

Debt can be good or bad, depending on how it’s used. For example, businesses can borrow against money that is owed to them in the future (known as Accounts Receivable financing) or purchase inventory ahead of time without giving up ownership in the company.

Equity, on the other hand, is a way to invest in a company. When you buy equity, you are buying ownership in that company by providing funds for the company to use as they wish. You’re not borrowing money, but making an investment into the company with your own funds that does not require repayment.

This means that if the business goes under or fails to meet its goals, business owners don’t have legal obligations to repay equity investors like they do with debt financing.

As private equity investors purchase stakes within companies for-profit enterprises are able to expand their operations without needing access to capital markets through issuing shares or increasing their levels of indebtedness; thus reducing their risk exposure by raising new funds outside traditional banking channels such as commercial banks who often require collateral deposits before issuing loans.”

1. Debt needs to be paid back at some pre-defined point in the future
2. Debt doesn’t “own” equity in the company

Debt gets paid out before equity

Because debt has preference (it gets paid out before equity), it doesn’t share in the potential upside of a company. Said differently

What is private equity?

So what makes private equity “private”?

Private equity – or, PE for short – is a form of investment where individuals, families, or firms purchase ownership (via stock or stock options) in privately-held businesses that aren’t yet publicly traded.

In order to be publicly traded, companies need to have their financials audited, certified, and approved by the Securities and Exchange Commission (SEC) before offering them up as a security to the general public. Public companies are listed on stock exchanges like the New York Stock Exchange, NASDAQ, and more. These stocks are also known as “public equities” because investors can buy the equity of a public company.

Private equity investors chose to invest cash into private companies in exchange for a portion of the business because:

1. Private stock can sometimes be bought at a discounted price and sold later at a premium, allowing for significant returns on the initial investment.
2. Investors believe their investment will allow the company to grow in size and value, increasing the value of their equity over time.

How is equity used in a company?

Equity is the lifeblood of a company. It can be used to purchase a business, fund its operations, expand its footprint, acquire another company or project, and so on.

Equity is also one of the most valuable assets for investors because it represents ownership in a company.

In terms of private equity vs. public equity:

• Private equity funds are only available for accredited investors—people who meet certain financial criteria set by regulators such as having an income over $200,000 per year or have a personal net worth (assets minus liabilities) of $1,000,000 or more.
• The equity or stock of a public companies can be bought and sold by anyone with enough money to buy shares on a stock exchange.

What kinds of private equity are there?

When you hear that someone “works in private equity,” it usually means they hold a role at a company that specializes in investing in private companies. How, when, and where they invest depends on the specifics of that firm. There are many different types of private equity. All are similar in that they consist of purchasing securities of companies that have not been publicly traded or listed on an exchange yet.

What are the different kinds of private equity?

We’ll be producing a deep dive into the nuances of each private equity firm type in the future. For now, here’s a short list with a brief description of each type’s specialty:

1. Venture Capital or Venture Firms – Invest in early-stage companies to provide capital to new product ideas
2. Buyout Firms – Groups who raise funds from investors with plans of buying a controlling stake of a promising company. This allows them to make decisions to improve the company as they see fit.
3. Turnaround Firm – Groups of experienced operators who buy undervalued or struggling companies with the hopes of “turning them around,” thus increasing the business’s value – and their investment.
4. Search Firm – An individual or group of people who have raised money from outside investors in hopes of finding a company to acquire and run themselves.
5. Fundless Sponsor – Individual searchers who find capital on a deal-to-deal basis, rather than raising a fund first and then finding companies to buy or invest in.
6. Growth Firm – Growth firms seeks investments into solid companies that have found product-market fit and need capital to scale their growth in an effort to capture the market quickly.
7. Family Office – Groups that manage and invest their own money in private companies rather than letting financial planners place it passively for them. Family offices may want to manage the companies they invest in, or they may work to bring in managers or executives to run the day-to-day operations.

How are private equity and venture capital different?

Private equity (PE) and venture capital are very similar in that they consist of purchasing securities of private companies.

However, PE is a broader term that includes venture capital and encompasses many other types of investment styles (see above).

The main difference between the two is that private equity tends to focus on larger, more established companies that want to stay private for a while – or indefinitely.

It’s also worth noting that unlike venture capitalists, most PE firms don’t invest until an organization has already proven itself profitable and can sustain itself after an acquisition. Even then, most will only make smaller investments in comparison with later stage venture capitalists.

Venture capitalists – or VCs – on the other hand, put money into a company earlier in its lifecycle to provide funds to get the business off the ground. They are investing in ideas and future potential rather than focusing on current profitability or existing assets like PE funds do.

Later stage private equity usually invests in the growth of a company in exchange for a portion of ownership; it doesn’t involve as much risk as early stage investing does because investors know what they’re getting into beforehand.

Final thoughts

In its most basic form, private equity is simply investing money in exchange for ownership in private companies.

Don’t be intimidated when you hear phrases like “private equity,” PE, or many other jargony phrases. Many terms in the investing space may seem complex or intimidating, but breaking them down will help you understand and use them to advance your journey in the pursuit of a prosperous future.

The downside, experienced by a slew of recent startups, it raising money at sky-high valuations with a plan to “burn, baby, burn!” with hopes of EVENTUALLY finding product-market fit and generating revenue.

To make matters worse, entire sub-industries (like awards and press) support this approach – confusing the means for the ends by celebrating rocket ship growth or publishing articles about massive new funding rounds for startups.

This… is completely bass ackwards.

Even the largest companies in the world take the exact OPPOSITE approach at the beginning. Here’s why…

Amazon wasn’t built in a day

Amazon is a behemoth of a company. As of today, it is the 5th largest company in the world. AWS generated $62.2 billion alone in 2021 has some 15,000+ employees.

Yet, many of Amazon’s products and internal programs (like AWS, FBA, Marketplace, and others) that compound the company’s growth WEREN’T launched with the support of hundreds – or even dozens – of team members.

They started with small teams validating ideas and building simple solutions first.

Learn from Amazon: Follow the “Two Pizza” Rule to Start

Have an idea for a massive new product or company? Great!

The size of your initial team for any new initiative should not be larger than can be fed by two pizzas.

Small, nimble teams of 3-7 people should have the skills and autonomy to create and test hypothesis through interviews, mockups, prototypes, and user acquisition tests WITHOUT the need for massive outside investment… yet.

Rather than raise a few million dollars and hire like crazy, go talk to 100 people about your idea.

This includes prospects and long-standing customers, industry experts, total newbies and power users, ideal customers and dream VIPs. Until you can describe your customers’ problems better than they can, you don’t have any idea what to build.

Of course, talking to people and gathering insights doesn’t take a team of 20 engineers, three product managers, a CSM and a marketing lead.

As your understanding of the problem – and solution – become more clear, then work to build and scale your people and solution. A simple solution that solves the right problem is infinitely more valuable than an overbuilt solution that no one wants.

As John Gall, author of The Systems Bible puts it, “A complex system that works is invariably found to have evolved from a simple system that worked.”

Tips for Getting Started

Tip #1: Keep your team purposely small while talking to potential customers. What keeps them awake at night? Where is there too much friction in their day-to-day? Where are there gaps in the market (because of the prior two questions)?

Tip #2: Create hypotheses and validate assumptions. What will be the hardest part about gaining traction with your idea? Where are the bottlenecks? What absolutely needs to work in order to get the idea off the ground? What can you build quickly to find out?

Tip #3: Get to 40%. Once you have customers using your product, ask them: “How disappointed would you be if this product no longer existed?” If fewer than 40% answer “Very disappointed,” you still have work to do. Continue iterating until you hit that benchmark, or kill the idea before you sink good money into a bad idea.

Tip #4: Accelerate growth. Once you find product-market fit (“you’ll know it when you see it”), then – and only then – should you pour gasoline on the fire. Once you’re sure the unit economics work, explore applying the right amount of funding to maximize growth while minimizing the downside.

Growing fast may seem like a dream, but it can be a death sentence for startups if not managed properly. Without the right balance of funding and product-market pull, the viability of your company may hang in the balance.

“Fail fast and fail forward,” they said.

After some trial and error, I ended up leading a company that has been quite successful to date. That is not to say it’s been easy, but it has worked out well – for myself, for investors, for employees, and customers.

Today, the choice seems much more difficult. Blogs and Twitter make nearly every business opportunity look enticing for its own reason. Everyone seems to have found their niche and have a clear perspective on how and why it will work.

Maybe it’s my age – or maybe I’m just being indecisive – but opportunity cost feels very real. “What if I choose the wrong thing to work on?” Time, of course, is the only thing we don’t get more of.

So I forced myself to think deeply about these feelings and come up with a framework on how I (and you) should be spending the time and money we have.

Rule 1: Invest in Yourself

Always bet on yourself.

Choosing to be responsible for your outcomes opens your mind and your possibilities.

The statement, “It’s not my fault, but it is my problem” will become your motto. You will learn to find solutions and take actions that lead to results.

From a financial standpoint, investing in yourself enables you to build businesses that generate future value in the form of equity. Ownership is one of the fastest ways to wealth. Returns made from investing in yourself will almost always be higher than investing passively in other businesses.

Rule 2: Cash is King

The only reason companies go out of business is because they run out of money. Conversely, “revenue solves everything.”

This is a shorthand way of saying that finding a quick and clear path to profits is a near sure way to get your company to the “next level” – whatever that level may be.

Without future cash flows, there is no opportunity to pay yourself or investors back on the investments you make. Without cash, you can’t expand your product offering or hire more people. Without cash, there is nothing to invest or buy other companies with. Without the prospect of cash in the future, there is no opportunity to raise money today.

That doesn’t mean a business has to be profitable from day one – especially if you are founding a brand new concept. But it does, in my opinion, mean applying an appropriate amount of capital to an idea based on its current stage. Not all companies should be bootstrapped, but responsible capital goes much farther than raising and spending a hundred million dollars on a hundred thousand of revenue.

This calculus changes a bit for growth companies who have the opportunity to expand their user base now and monetize later, like Instagram before the Facebook acquisition. But most companies aren’t the next explosive social network.

Always keep your breakeven point and payback periods in mind well before deciding to raise your next round.

Rule 3: Pick the Right Game

Resources and attention are finite. It is better to buy a so-so business in a growing industry or sector than be the best company in a dying industry.

Every business is hard, so don’t make things more difficult than they need to be. Work on the ones that have a chance for disproportionate upside.

I have felt the pain of trying to push a boulder up a mountain. I have seen team members bang their heads against the wall wondering why their efforts aren’t making an impact. I have made the mistake of trying to grow a product in a struggling category. Don’t fall into the trap of transforming your house into the nicest one in a terrible neighborhood.

Rule 4: Look for Upside

There are lots of companies for sale with untapped potential. Local small businesses that have yet to be “modernized” with cloud-based software are a good example.

Others may be under-monetized, have adjacent product opportunities, process deficiencies, or unexplored revenue potential. These improvements could generate additional future cash flows to return the original investment more quickly.

Of course, you will need to decide how confident you are in that upside before founding or purchasing a company. Should you bet the farm on growth and pay accordingly, or should you buy on a multiple of the trailing twelve months (TTM) profits?

In other words, protect the downside, maximize the upside. 

This is what Enduring Ventures did with their acquisition UpCounsel. They saw an asset with a loyal customer base, steady revenues, and a durable advantage (organic SEO) for acquiring high-intent customers. But they also knew there was meat on the bone and believed they could grow the business in the future with proper management.

Look at your opportunity, look into the future, and determine what customers will want more of in the future. Then go build toward that future state to maximize your upside.

Rule 5: Invest in Sustainable Growth Strategies

Don’t build your house on rented sand – unless you think you can quickly sell it for a premium.

I have seen many businesses get built on the backs of Google and Facebook advertising. I’ve watched massive ecommerce companies grow through Amazon’s marketplace. I have watched new restaurants and venues take off thanks to positive reviews on Yelp.

The ability to quickly launch a brand and acquire customers efficiently gives early marketers and operators a significant advantage over the competition.

But I have also seen fast-growing brands tumble as customer acquisition costs (CAC) soared, operating system (iOS, Android) changes impacted their app’s functionality, algorithms changed, and modifications to terms of service or commission rates destroyed business models.

More simply: avoid platform risk.

Instead, focus on activities that produce durable advantages over time. This means building things that compound, that support themselves, that are difficult to replicate and, therefore, create a competitive moat.

Classic examples of moats include:

1. High switching costs – Customer data should improve the user experience and make it tougher for people to leave
2. Cost advantages – Low-cost production means savings can be passed on to customers
3. Network effects – The more densely populated your customer base, the better their experience. This may be good for growing the number of users, but may not lead to an actual moat (think WhatsApp or Uber)
4. Intangible assets – Branding, good will, customer experience, and more form a positive emotion in the minds of prospects and customers
5. Other more web-based examples include content (library), community, addictiveness to the product

Do the Work

Do the hard work now, the work that no one else is willing to do.

Do the work that takes time now, the work that is difficult to replicate and emulate and that can’t be “turned on” overnight.

Do the work that only you can do, the work that highlights your personality, expertise, and reflects your company’s ethos.

Do the work that will last, the work that no platform or competitor or customer can take away from you. Build up your war chest of assets and goodwill so that your corporate fortress is strong and impenetrable.

This includes the products you use, the media you consume, the ads you are exposed to, the software that runs on your computer and phone, the infrastructure that powers our homes and offices, and the food you eat and drink each day.

Behind each of those items is a business – some successful, some not.

Some of those businesses have been around for a hundred years while others are just getting started.

For entrepreneurs, starting, buying, or running a successful business – one that generates profits – is the goal.

Ideally, businesses produce something that can be sold to many people over long periods of time. That durability enables consistent profits. Without durability, the laws of supply and demand come into effect as competitors sell similar products, taking market share or reducing prices.

With these basic concepts in mind, we pondered:

Can you build a perfect business?

In a way, this question is the premise for this entire site.

So today, we’ll jump into a variety of questions that will make it easier to identify the attributes of successful businesses, people like you could set out to build, buy, and operate multiple businesses as a way to increase your cash flow and build wealth over time:

What is a business for?

Businesses exist to provide value (often in the form of products or services) to customers in exchange for money.

When the money paid for those goods exceeds the amount of fixed and variable costs to produce the product, a surplus – or profit – is generated.

These profits can be used for a variety of activities including reinvestment (growing the capacity and capabilities of the business), product expansion, debt repayment, distributing profits to the owners, and more.

But as Naval Ravikant, founder of Epinions and AngelList, puts it:

You will get rich by giving society what it wants but does not yet know how to get. At scale.

Put more simply, a business rewards entrepreneurs for delivering value at scale.

What is a perfect business?

As we’ll explore, every business model is different.

But all successful businesses have similar characteristics:

1. High profit margins, thanks in part to
2. Limited competition, that allows for
3. Persistent returns into the future

This ability to generate returns in the future is the entire reason investors buy stocks (public equities) and invest in private companies. Investors expect to capture a portion of future profits or returns in exchange for capital today.

The more perfect a business, the more likely and faster it is to repay capital that was initially invested. Put a dollar in, get two – or two hundred – back.

In his book 7 Powers, Hamilton Helmers outlines seven strategic imperatives that enable businesses to thrive. As their power grows, they approach the truest definition of a “perfect business” because their ability to generate consistent returns (profits) grows.

But if power stalls or declines, changes in their market enable competitors to creep in, steal market share, and erode the ability to generate profits.

How do businesses generate profits?

In its most basic form, a single-product business is profitable when it sells its product for more than it costs to make. The more it sells, the more profit it makes.

This is because the unit economics – the ability to generate a profit on an individual sale level – are profitable. The amount of margin from selling the product exceeds the amount of money it takes to manufacture, distribute, and sell that same item.

What are enduring profits?

Today’s sales do not guarantee the sustainability of any company.

“The only thing constant is change.” We operate in a capitalist society and, as a result, there is a constant shift in market entrants – new businesses starting and closing down – as the wants and needs of consumers chance over time.

Changes that decrease customers’ ability or willingness to buy a product – like a competitor that comes along with a better or less expensive alternative – ultimately put pressure on existing businesses’ ability to generate high levels of profit.

An enduringly profitable business may have multiple sources of income and revenue so that even if one source dries up unexpectedly or permanently, there are others which can sustain the organization long into future years (perhaps indefinitely).

The best businesses have a moat or – better yet – many moats.

How can a company build a competitive moat?

A competitive moat is an advantage that helps protect a business from competition. Like a waterway surrounding a castle, the wider the moat, the harder it is for outsiders to reach and penetrate the business.

Moats can be created in a number of ways. A business that has low-cost advantages, such as economies of scale or access to inexpensive raw materials, will likely have a stronger moat than one that does not have these advantages.

The creation of proprietary technology or intellectual property (IP), though expensive, may also help create a competitive moat over the long term. This makes it difficult for competitors to copy your products or services, thus increasing the cost required by them to enter the market and compete.

Another way to build a competitive moat is by creating an inimitable brand image that makes consumers want what you’re selling before they even know what you’re selling—think Apple’s ability to create demand for new products from their base of devoted current customers.

Is there such thing as a perfect business?

This is the question that has fascinated me for years, and one that I’m determined to pursue for the rest of my professional career.

It is also the question I hope you keep in the front of your mind as you found, evaluate, and purchase companies in the future.

Many entrepreneurs get sucked into pursuing business opportunities as they present themselves without ever asking, “Is this is business worth pursuing? How close to being a perfect business is it/could it be?”

The basic framework I use to evaluate business models is:

1. High Utility – Is this product or service something that it’s customers consider a “must have”? If 40% or more of your customers would be very disappointed when asked the question, “How would you feel if you could no longer use the product?” – you’re onto something special.
2. High Repeatability – Recurring revenue is the holy grail, especially in software. But all businesses that have confidence in when and where future revenue will come from are at a significant advantage over those who have to wake up each day and hunt for new customers.
3. High Margins – The draw to many digital businesses is that their COGS is low because there is nothing physical to manufacture. As the saying goes, “It’s not about how much you sell, but how much you keep.” High gross and net margins are a key ingredient to a perfect business.
4. High Differentiation – The opposite of differentiation is commoditization. If customers can get the same product everywhere, there will always be a competitor willing to sell it for just a little less profit. And as marketer Seth Godin puts it, “The problem with the race to the bottom is that you might win.” On the other hand, selling something unique that can’t be found anywhere else allows you to sell at whatever price you see fit.
5. High Brand Affinity – If a product is something you buy, a brand is the way it makes you feel. Starbucks sells coffee, but their brand elicits an emotion from its customers and, as a result, allows them to capture more value than a generically-branded cup of joe down the street.

The best business is one that provides a sustainable competitive advantage—but it’s important to remember that these kinds of advantages don’t last forever.

However, keeping these elements in mind will help us all be better entrepreneurs. Business is inherently hard; let’s not make things more difficult than they need to be. If you’re in it for the long haul, apply these principles to your thinking and reap the rewards as your empire grows.

Here’s to more,
@PaperPursuits

As astrophysicist Neil deGrasse Tyson puts it:

“We presume that balance is a good thing. When something is out of balance, you can get quite innovative in your attempts to resolve that fact. You don’t go to the amusement park roller coaster and say ‘I want to be balanced.’ No, you want to be as unbalanced as possible, because that’s the thrill ride.”

Yet at a certain point, we seek balance.

We settle.

We settle with the job we hold, or the industry we work in, or the house we have, or the amount of money we earn each year. We settle with the quantity and quality of our relationships, the size or impact of our network, and the impact we have on our family, friends, and community.

We settle because it’s easier than leveling up. We settle because we view the world through a lens that has been crafted for “most people.” Because we fail to consider “unreasonable” paths since the people around us are incapable of thinking about, let alone constructing and managing, a life that offers more.

Consider Jack or Elon or Andrew or Brent or Codie or Neil or Xavier or Alex or Michael or John or Kelcey (and many others you’ve never heard of) who are building wealth and compounding their impact by acquiring and growing multiple companies.

This site is for those who demand more from life, for those who know that freedom comes from properly evaluating risk and taking responsibility for their actions.

It is for those who choose to put their livelihood in their own hands, to constantly learn, to deploy capital, to lead and manage teams, and to deliver products and services to their customers.

It is for the driven, the doers, the owners, the operators, the creators of value and opportunity.

It is for people who see the world not for what it is, but for what it could be and have the perseverance to bring their vision to life.

It is for those who carry the belief that they can leave the world better than they found it and be rewarded by delivering value.

Running a SoloHoldCo is for you – the “unreasonable” optimist – who understands (or is interested in learning about) capital, scale, leverage, business models, operations, recruiting, lead generation, sales, customer service, and the countless other facets of running a successful business.

Time Is All We Have

In my last role, I served as an executive at an advertising technology company. I worked mostly in the sales, marketing, and operations side of the house. Over an 8.5 year time period, I helped grow the business from around $5M in revenue to over nine figures. I was well-compensated and have a good amount of equity in the company through stock options that were granted to me along the way.

We hired well, operated in a fast-growing industry, and have a defensible moat. The company is at a scale and has a team that doesn’t require my day-to-day intervention.

As a result, a majority of my net worth is tied up in a highly-profitable, fast-growing company. This margin in my life gave me the opportunity to consider what I want next in life. Over the past month, I have been listening to podcasts, reading, learning, and meeting new people.

Through these conversations and my own experience, I have learned the following:

1. Wealth is not made by trading time for money. Even the highest-paid lawyers and doctors are capped in their earning potential.
2. Wealth is generated by creating value, owning assets, and compounding continuously over many years.

Accelerate Your Learning – and Your Life

This website – and eventually newsletter, podcast, courses, community, and more – will serve as the home for my learnings, ideas, analysis, and discoveries about profitable business opportunities.

This site is a hub for anyone who wants to own and run multiple successful businesses.

I don’t believe entrepreneurship is for a select few who attended top-tier universities. Press and social media publicize startups, funding rounds, newly-minted “unicorns,” and massive acquisitions that turn founders into multi-millionaires.

But don’t be fooled.

Most of the country’s businesses are started, run, bought, and sold in our backyards – literally.

They are the roofing, HVAC, and lawncare businesses. They are the corner convenience store, restaurant, and local retailer. They are the Shopify or Etsy shops that sell physical products. They are bootstrapped software companies serving niche business verticals. They are event organizers and small law firms and real estate agencies.

In fact, U.S.-based small businesses employ 47% of our population – not international technology companies or energy conglomerates. Over the next 10-15 years, a majority of these solid, cash flowing, Baby Boomer-owned businesses will be sold to the next wave of owners… or closed for good.

This is a long way of saying there are many paths to success in the game of entrepreneurship.

By understanding the principles of business, you increase the likelihood of building wealth, freedom, and purpose in your life.

In Pursuit of More

Maybe you are starting at the ground level. You’ve never dipped your toes into entrepreneurship. Perhaps you’ve worked a corporate job your whole life in a single function, but you’ve never considered owning a business yourself. Or maybe you already operate one business and want to learn how to grow your empire.

Regardless of where you’re starting from today, there is always more if you seek it out.

The older I get, the more it feels like I don’t know anything. This, of course, isn’t true. But I do believe there is always something new to explore. New techniques, new strategies, new business models, new ways to acquire customers, new ways to evaluate deals.

This is an infinite game, and today – no matter your starting point – is Day One.

I hope that in 10 years, you’ll look back on the beginning of this journey, like we will with this site, and be humbled by how far you’ve come – and realize how much better your life is because of the decision you made to start.

Let’s start this shit up.

Mine does, every so often.

Sometimes it comes from within:

“Pssst. This is interesting and important,” my mind says. “Go check it out.”

“But why? This doesn’t even have anything to do with what I’m working on,” I respond. “I don’t know anything about that topic/idea/industry.”

“Just check it out. Trust me.”

Other times, it comes from the outside world. Articles that I’m reading and podcasts I’m listening to and stories I’ve heard recently spontaneously present themselves and overlap with one another, sparking new ideas and taking on a life of their own.

The past few months has been one of those periods.

That little voice inside has been whispering, “You can do more. You can do better. Go find out how.”

And without actively looking, bits of inspiration and insight and partial solutions have presented themselves in the form of people, tools, and opportunities.

This time around, it has to do with the concepts of scale, leverage, and impact, and – more specifically – the idea that there is a formula for getting more done with less, for making more of an impact with fewer resources, and for delivering value to people and businesses in a way that scales without compromising your own life.

What I accomplished for my friend Lindsay this past October is precisely what I’m looking to dissect. Questions like:

• What are the systems that allowed me to raise almost $30,000 in three months as a side project?
• How can I do more projects like that on a more consistent basis?
• How can I show others what I accomplished and why it worked?

I don’t have the answers (yet), but that’s what I’m setting out to analyze.

Time to Think Bigger

Currently, I work in a space that changes every day. It is our job to keep tabs on all of the new services and features the Internet has to offer so that we can pass along best practices to our clients. The good news is that we’re really good at what we do.

But lately I have been sucked too far into the details. Is it really worth my time to find the absolute best Twitter app for iPhone? Do we really need to build a custom widget, or will something off the shelf for a fraction of the cost accomplish the same goal?

As to methods there may be a million and then some, but principles are few.

– Ralph Waldo Emerson

It’s time for me to dig into the principles. It’s time to uncover not only “what” works, but “why” it worked (and has worked for years). It’s time to take a broader view, a systematic approach to defining and analyzing the systems that make online and offline successes happen.

I don’t know where this journey will take me, nor do I know how deep the rabbit hole goes. But something tells me it’ll be a fun ride.

Join me?

[To see her full story, visit ForLindsay.com]

Running was never my thing growing up.  I played volleyball in high school, a sport comprised mostly of compact, precise, explosive movements with periods of rest in between.

Eventually running a marathon was an item on my long-term bucket list, but it always seemed fairly unattainable – not because it had never been attempted before, but because my idea of a “long run” was anything over two miles.

Put another way: the gap that stood between me and reaching a life goal was too large. I didn’t want to train. I just wanted to wake up one day, magically have the ability to run 26.2 continuous miles, and check “marathon” off my to-do list.

And that, of course, is the problem.

So many of us want to skip over the gaps in our lives – our careers, our financial situations, our relationships – that we aren’t willing to put in the work it takes to make that keystone event a success.

Small Successes Lead to Larger Opportunities

Back when I started training for the full marathon in May, my average distance was 3.1 miles and I was happy to break the 9:40/mile pace. This past Sunday, I ran my fastest 15k ever (7:52 per mile) and felt great. I even finished in the top 20% of all participants.

Why?

• Did I buy new shoes?
• Hydrate using a new supplement?
• Will it to come true?

Nope.

It was a byproduct of all the training I had done leading up to the race. I ran 3-4 times per week for the last four and a half months. I did sprints to increase my speed, long runs to increase my endurance, and cross-training to strengthen ancillary muscle groups. It was nothing more than little chunks of hard work repeated over time. But together, they produced a run I am very proud of.

Hard Work Is Necessary

Hard work increases our pain tolerance and shapes our character. Hard work proves that we are able to change, improve over time, and grow stronger with repetition. It shows us what we’re made of and what we’re capable of. Without hard work, our dreams and plans remain figments of our imagination. And the gap remains as wide as it started.

This graphic is my training log from the Nike Running app over the past nine months. It contains most of my runs during since the beginning of the year and is proof that “big” achievements become stepping stones to larger opportunities over time.

“If what you did yesterday seems big, you haven’t done anything today.” -Lou Holtz

“Long” runs (4.5 miles) become short runs, and short runs become warm ups. Who knows, one day 26.2 miles might seem like a short distance.

Nervous, The Opposite of Prepared

I have been following certain conversations on Twitter lately, looking mostly for training tips and race day preparation plans. I am feeling pretty good about my training up to this point, which is why I’m always surprised to come across people who are “nervous” about the race.

My question is: What is there to be nervous about?

Sure, factors out of our control like bad weather or a random cramp might impact finish times, but if you have put in the work leading up to your goal, there is nothing to be nervous about.

Unpreparedness is the only logical reason for fearing the outcome. What are you nervous about?

Hard Work Can Build a Bridge

Life isn’t about waiting for your chance to magically appear (it won’t). Life is about taking small, consistent steps toward a goal, learning from your experiences, and closing the gap little by little.

But the first step is to start.

Start small. Start with something you know you can accomplish. Start with something that comes easy to you. Just don’t say you “can’t” accomplish something before you’ve even tried. Start closing the gap today, no matter how insignificant it seems.

In the end, you’ll look back and think, “What was I so afraid of again?“

This is a stark contrast to where I was 13 months ago. When BULX (my previous employer) was sold to a company in New York, I had to scramble to find enough steady work to hold me over.

Today, I’m turning projects down.

When friends and acquaintances ask me how I’ve been lately, “Busy, but good,” has been my go-to response.

And while busy is better than slow (I am extremely grateful for the work I am doing), I cant help but wonder how much more effective I could be if weren’t completely maxed out.

Quality Over Quantity

I believe in the concept that quantity breeds quality. Do anything enough and you are bound to turn out a gem or two eventually.

But at what point does “doing things as fast as possible just to get them done” hurt the quality of each individual project or task?

Less Does Not Equal Lazy

The entrepreneurial mindset is that if you aren’t working 18 hours a day (which I’m close to at times), you aren’t working hard enough.

I call B.S.

I’m not saying I don’t believe in pushing yourself or working hard or putting in the hours it takes to be successful. Quite the contrary.

This is more about being as effective as possible, doing the most important work possible. It’s about purposely executing on a handful of initiatives that will have the biggest impact on your organization instead of running around like a chicken with its head cut off trying to do everything.

Tim Ferris, author of The Four Hour Work Week, described this as Work for Work’s Sake (W4W). He argues that the goal is not to fill every hour of every day with W4W. The goal is to do the best work you can in the least amount of time possible so that you have the opportunity to plan, review, and analyze your efforts and think about what actually makes sense to accomplish next instead of reacting to whatever lands on your plate on a given day.

Important > Urgent

Do you do things that are important or urgent?

As a business owner, it’s easy to focus on whatever lands in your lap on a given day. I can relate. I’m the first to open and delete/respond to every email that makes it to the top of my Inbox.

As tidy as this may seem, it’s an incredible waste of time. (Sadly, our work culture now demands this instant response – but that’s a different topic for a different post.)

Do you have a plan (maybe in your head, maybe written down somewhere) of where you want to take your career or business? How often do you execute on that plan? Every day? Or are you are forced to respond quickly to the emergencies that pop up throughout the day?

Are you strategic – or reactive? Are you insightful – or rushed? Are you making a dent in the universe, or just scratching the surface of what you’re capable of?

Remember, “we are what we do frequently.” (Aristotle) Becoming aware of our own habits is the first step in changing our behaviors for the better.

100% Capacity = Zero Room for Opportunity & Growth

The final – and perhaps most serious – issue with being “busy” (as a one-man shop) is that it leaves little opportunity to explore other options, take on new projects, or work on initiatives that are more interesting, pay better, or will make a larger impact.

I love working for myself because it allows me flexibility with my schedule, with my pay, and most importantly with the diversification of clients I work with. Like so many other entrepreneurs, a lack of drive is not something I need to worry about.

Yet this has always been my tragic flaw. I believe that I can single-handedly take on the world. And now that my plate is full, I’m forced to say “No,” in some cases to projects and teams that I would LOVE to work with.

It’s Not About Money, It’s About Impact

This is not a blog post about making as much money as possible.

It’s about scaling our time and resources. It’s about finding balance and exploring the entrepreneurship work-life balance. It’s about doing work we’re proud of, that we are happy with, that we love doing every single day.

When we are happy and excited about our work, the motivation to accomplish more comes naturally. Our bodies move and our brains function differently – for the better.

Conversely, when the opportunity to engage is replaced with a non-stop flow rush of work, burnout is imminent. When we perform the same mindless tasks repeatedly at a feverish pace, boredom AND burnout take place.

I’m not bored or burnt out (yet) – but I certainly don’t have the answers.

If you own your own company, how do you choose what to work on next – both internally and externally? And how are you achieving balance in your work life?

When I joined the BULX team in July 2010, I was completely new to the tech startup world. I had always considered myself an entrepreneur and had founded a handful of my own companies. But it wasn’t until my involvement with BULX, TechColumbus, and social media that I became conscious of the incredible network of people and programs available here in Central Ohio.

As we work to grow and evolve ChatterJet, the network of talent people and the number of resources we have at our disposal are astonishing.

Accelerators

• 1492 (http://onefourninetwo.com/) – A partnership between Columbus State Community College, CCAD, and TechColumbus, this Ohio Third Frontier-supported program provides early stage startups up to $20,000 in funding along with access to mentors, resources, and weekly business development sessions during an intensive 11-week program.
• 10x Program (http://10xelerator.com/) – A mentor-driven accelerator program headed by Ohio State University’s Fisher College of Business. This 12-week program often draws hundreds of entries from across the nation to attract and retain some of the best talent in the space.
• Founders Factory (http://foundersfactory.com/) – A blend between an accelerator and a typical startup fund, the team at Founders Factory place an emphasis on their mentors, agile pre-seed funding, and lean acceleration.

Events & Groups

• Wakeup Startup (http://wakeupstartup.com/) – Have a big idea but don’t know about next steps or who you should be talking to? Attend this monthly meetup to hear other pitches and meet the people involved a wide range of early stage concepts.
• Startup Weekend (http://columbus.startupweekend.org/) – Supported by the Kaufman Foundation and held multiple times throughout the year, Startup Weekend is a 54-hour sprint to build something (anything!) with other budding entrepreneurs. Another great way to meet talented people looking to build “the next big thing.”
• TechLife Ohio (http://www.techlifeohio.com/events) – A hub for all things technical, this group supports the startup ecosystem by connecting people with local events and meetups.

Other Resources & Funding

• TechColumbus (http://techcolumbus.org)
• Ohio Small Business Development Center (http://www.entrepreneurohio.org/)
• Ohio Growth Summit (http://ohiogrowthsummit.com/)
• Ohio Tech Angel Fund (http://www.ohiotechangels.com/)
• NCT Ventures (http://nctventures.com/)

People

The most important part of any community is the people. The startup movement is no different, and Columbus is not an exception.

While there are far too many talented, driven, and connected people to list here individually, locating and reaching out to those involved is easier than ever – especially with the use of platforms like Twitter. And unlike many of the traditional tech hubs (Silicon Valley, New York, etc.), those involved in Columbus are extremely approachable, active, and supportive.

Keep It Going…

This blog post is intended to serve as a starting point and an on-going, continually updated resource for past, current, and future entrepreneurs in the central Ohio area.

So please leave a comment below with other tips, programs, and people that should be added to this list.

It’s an exciting time. I can’t think of a better place to start something great than here in Columbus.