What I look for to invest in companies [no bs]
Summary
Evaluate the number of potential units sold to understand how big the opportunity is and for how long it can be sustained. For a sustainable opportunity, consider industries where demand is consistent, such as weight loss, where people will continue seeking solutions and food continues to improve in taste, making it a long-term opportunity.
Assess the potential profit per unit by comparing the value provided against the cost of delivery. High-value, low-cost delivery opportunities are more appealing, while services with lower value but minimal cost may also present an enticing gross profit margin, especially if demand is high.
Analyze the competitive dynamics within the industry, examining supply and demand as well as the competitiveness of the landscape. Avoid industries where it's difficult to compete with established players, even if they check other boxes like potential profit and unit sales.
Consider industries with high gross margins, ideally 80% or higher. This allows for sufficient coverage of other business expenses while ensuring profitability. High margins are essential for scaling, which is why I favor information and education businesses, as they are akin to software in terms of margin but without development costs.
Reconfigure your business to increase its appeal to a broader audience or to enhance gross profit per unit sold. This may include improving the outcome provided or reducing fulfillment costs.
In service businesses, aim for high gross margins to ensure enough profit to cover additional expenses, such as marketing and administration. Remember that profitable businesses drive growth.
Information and education businesses are attractive due to their high margins and potential for building enterprise value. However, be mindful of churn rates, which can be higher due to the consumable nature of information. To address this, differentiate between one-time consumable aspects and ongoing consumables, like community and accountability, to increase customer lifetime value (LTV).
Don't rely solely on Total Addressable Market (TAM) as an indicator for the potential size of a company, since businesses can evolve and expand into new markets over time. A visionary founder will constantly seek new opportunities and markets, making TAM a less significant factor on a long-term horizon.
Finally, think creatively about how to address a unique space or redefine your current offering to stand out. This strategy can significantly increase the opportunity size and profitability of your business.
Video
How To Take Action
I would suggest starting by evaluating how many people could possibly want what you're selling. Is it a lot? Could it be even more? Think about stuff that always stays popular, like getting fit. People will keep needing that, right?
Next, look at how much money you could make on each sale. You want to give folks something awesome, but it shouldn't cost you too much to do it. When you've got a service that's terrific but not expensive for you to give, that's the sweet spot.
Also, peek at who you're up against in the market. If it's a really tough crowd with big names, it might be hard to play along. You want a space where you're not fighting giants.
Try to make super good money on each thing you sell. I mean, like, 80% of the money you get from a sale should stay with you after you've paid to make the sale happen. That way, you can grow big and help more people.
If you're sharing knowledge or teaching, it's even better. Those kinds of businesses have big margins without the heavy costs that other companies have. Just watch out for people leaving after they've learned what they need. To keep them around, make pieces of your business something they'll want to come back for, like being part of a community.
Your big plan should be about how many people you can help and how you can keep helping them more and more. Don't get stuck on the numbers today. Great ideas grow and find new folks to serve. So, think ahead! Ways to stand out might pop up where you least expect them, and those ideas can make your business cooler and richer.
And always remember, problems are kinda like blank checks. You get to decide if you want to cash them. Find the troubles you can solve and go for it. With each problem you fix, you might just be filling your wallet, too.
That's it, folks! Keep these tips in mind and go get 'em!
Quotes by Alex Hormozi
"Profit is what drives business"
– Alex Hormozi
"Thinking through these lenses to think about your own business"
– Alex Hormozi
"It costs one time to build it and then after that, the each incremental user is almost all profit"
– Alex Hormozi
"There's a lot of people want to buy this thing"
– Alex Hormozi
"All solutions create more problems"
– Alex Hormozi
Full Transcript
my wife and i laila talk to 10 to 20 service information e-learning coaching businesses per week that we're looking to invest in and that's you know after they've gone through uh you know several screening processes and what i wanted to talk about today is what are the ways that we think through in terms of the value of the business and not from a dollar's perspective but like what is the opportunity and i want to give you kind of the three-step checklist that i think through and how you can apply it to your own business and think like how can i take what i'm currently doing and make it more of an opportunity for me and if you don't know who i am my name's alex from rosie on acquisition.com it's a portfolio of businesses it does right now 110 million a year so um i make these videos just because i was once broke and i don't want you to be broke so that is why we do this anyways so let's rock and roll when you've heard people say opportunity or opportunity vehicle you need to get into a better monetization structure there's different ways of kind of saying the same thing which is like how much money can we possibly make that from this core thing and so when i'm thinking through this there are three pieces that i think through at the end of the video i'm gonna kind of walk through kind of the the downstream impacts of these things um and how you can apply them but this is the this is the big picture and you have to make these i i have to make lots of decisions really quickly so i have to use frameworks in order to make those decisions right and make snap judgments on like do i think this is interesting should we pursue this further or do should we just give some advice and you know wish them well and maybe see them in the future if they implement it right there's three things that i that i've kind of boiled down to an opportunity vehicle is this something is this something a business or opportunity that i want to pursue and so for a lot of you guys who are starting out this will be very valuable for you because hopefully you can just set this up right and if you're already in the process of building your business then maybe you can make alterations to the business and incorporate this so there's three things that i'm looking at in terms of like what i think makes something much more interesting number one is the number of potential units sold so a lot of times people talk about tam total adjustable market and i'll talk about why i think that that the longer i do this is somewhat of a misnomer um so i'll talk about that at the end but just how many people could potentially buy this thing right or buy this service or buy this you know whatever this thing is how many people do i think would be a fit um to be purchasers of the thing so that's number one and that's just gonna show me how big how long we can run this game is this indefinite is this like you know i mean like if you're selling weight loss like do i believe that people are going to continue is food going to keep tasting better and are people going to be able to change their genetics in terms of how they how they rely on it no i think those things are things that aren't going to change overall and so those are assumptions that i'm willing to base the fact that there's a lot of people want to buy this thing it's just a simple way of thinking through like what are the assumptions that would continue to make this trip so number one is how many people could potentially buy this service number two is gonna be what is the potential profit i can make from the service all right and that's a function of two things which is what is the value that people are are getting from this outcome and then how much does it cost us to deliver it and so those are two very important components because there's some some elements right that are extremely valuable but also very costly to deliver so that's something that i'd be less interested in it might be very valuable but like there's not a lot of opportunity for profit on the flip side sometimes it's a very very small amount of value but it costs nothing right and the thing is is there the gross profit is actually kind of enticing and depending on what that first one was which is how many people are wanting willing to buy this thing then it's like ah this becomes a little bit more interesting right and so the potential for profit and the gross margin of the of the unit of thing that we are selling becomes more interesting which is why layla and i in general like course e-learning you know guru coaching type businesses to work with because we can transition them from a not valuable model into a much more valuable enterprise model that has something that they could sell in the future if they wanted to the third piece is the competitive uh the supply demand or competitive dynamics of the landscape and so i'll give you a counter example and and a good example so if i wanted to get into wireless cell phones right like or cell phone service well lots of people need it okay that's good because how much does it cost me to add one more uh user to my phone phone network pennies right and what do i charge them hundreds of dollars a month but then the third one is competitive dynamics well i'd have to uh beat out verizon and any tnt and all the other big conglomerations of phone service that exist it'd be very difficult for me to break into that and so that's an example of it checks two of the three boxes but not the third one and so different example of that i'll tell you like a hypothetical crazy good example would be if someone had figured out a way to create hardware that does crypto mining right and let's say that that crypto mining you know could get could make people let's say 50 000 a year all right this is i'm using an extreme example to illustrate the point well if they had figured that out then one just about everybody wants you know passive or close to passive side income so total number of people that we can sell this to a lot amount of of value that someone's getting a lot 50 000 in this case it's actually quantifiable how much does it cost us in this instance we'd have to figure out what the cost of the rig would be but let's say it was you know small let's say it was 500 well then this business becomes incredibly interesting as an opportunity and then the fourth or sorry the third is what are the competitive dynamics well if there's no one else who can offer this then we're we're off to the races right but on top of that how new is the space are there a lot of new people coming into it are there established uh people who are killing it that would try and price us out et cetera and in this space for example everything's brand new and so the competitive dynamics are great and it's massive you know it's very quickly growing and will continue to grow probably for the first table so in this instance it'd be like wow this is a very interesting business that i would want to participate in or learn more about and so if you're thinking through these lenses and i'll talk about the tam thing in a second about why i don't think it's necessarily as good as people used to think in terms of assessing the value of the business i'll talk about that in a second but if you're using these three lenses to think about your own business you can ask yourself okay is there a way that i could make this you know applicable to potentially more people so that i could have a total higher number of units or bigger audience that i could sell to number one number two is is there a way that i can reconfigure this thing so it either makes the the customer a more valuable outcome and or it costs us less to fulfill that outcome right so we increase the gross profit per unit sold is there a way that i can reconfigure what i'm doing right and i'll give you a couple rules rules of thumb here that i like which is if i'm just doing any kind of service business i like to have 80 or higher gross margins all right so what that means is if i'm selling something for a thousand dollars a month it has to cost me less than 200 a month and for those of you who are new to making money people will get their panties in a wad about that but like profit is what drives business all right it's not that all of that gross profit that's before cost of doing business goes to the owner that's just everything that you have to chip down away from so you're starting at 80 and let's say you want to run a business that runs 50 margins well then that means you've got 30 percent there right in that thousand dollar a month example i got 300 bucks a month to cover everything else that i do in the business that covers that covers marketing that covers admin costs it covers payroll that covers that uh that covers you know hr finance all of these other fun legal whatever all the other functions of the business so the thing is 80 is minimum and the thing is especially smaller businesses think for some reason that that that's like charging more is bad right and you got to get out of that because if you want to help more people you need to have gross profit in order to scale if you look at the biggest companies that exist out there they sell something that's very valuable that costs them almost nothing so think about google right they sell ad space it costs some moments nothing besides the actual like their incremental cost of running an ad is is virtually zero right and they charge a king's ransom for it right facebook same thing right they charge for eyeballs that cost that like they've one time cost of building then after that the incremental cost of of showing add some more eyeballs is almost nothing so it's all margin you look at the phone company that i was i was explaining earlier they have their one time cost of building the thing but then the at the additional cost of adding one more user is almost insignificant right but they can still charge a great amount of money for it this is the reason software is something that people find incredibly valuable it costs one time to build it and then after that the each incremental user is almost all profit now the only other type of business that's like this with a close to 100 gross margin is information and education businesses which is why layla and i like these types of businesses because they have they have the same margin as software businesses except you don't have the cost of development the downside is that those types of businesses tend to have higher churn because the increased value or the value declines over time when someone learns a skill from this type of business that being said there are ways of reconfiguring the business to increase the stick of the client with by pulling out the things that are consumable versus not for versus one times consumable um and i'm going into the weeds here but hopefully you'll enjoy it so something that's a one-time consumption would be something where i have now gotten the skill from the thing or i've learned the learn the process and this is especially true with learning or elearning type businesses if someone comes for a skill they learn the skill and then the value of training for the skill decreases because they already have it duh that makes sense but the thing is a lot of times when people are learning something there are other components that surround them that are consumable on an ongoing basis so the information is one time consumable as long as they learn the skill but then there become other things that are consistently consumable so community is consumable as in like i want access to it this month i want access to it next month accountability is consumable i consumed it this month to get to point b but now i want to consume it again to get to point c um an additional piece would be if the the type of skill that you're teaching someone creates new problems which most times if you're good at teaching something all problems create solutions or all solutions create more problems right and so when we solve the the old problems we get new ones and that's why we as business owners should always just see problems as blank checks for us to cash in at our own desire right there are problems everywhere and they just have a dollar amount attached to them and the question is do we want to go and cash that check in and solve that problem right like that's how you can you can perceive problems in the world in terms of opportunity for these types of business which is why we like them is that we can pull these pieces out and then create something that has really high margin and has high ltv and continues to build enterprise value over time by selecting and peeling these pieces apart and so finally i want to talk about why i think tam is not as good of a you know indicator for the potential size of a company well look at some of these original companies so look at facebook when they started out it was like supposed to just be a college you know network thing right it was supposed to be you know facebook i think is what the actual term was way back in the day uh for like a yearbook right and so that's literally what the name of the thing was right and so somebody might look at that initially obviously people could see where it could potentially go but they saw that be like well maybe the the tam the total just market is just college students the reason that i think it's interesting is that businesses and founders expand in vision over time and the the time when when a vision is a visionary or founder has run out of vision or run out of future is the moment that the business dies or they sell it because they just don't know what else to do to grow it right what happens a lot of times is that if we can if we can conti you know continue to increase and eat up the the total adjustable market that we have defined for ourselves and our business a lot of times adjacent you know or adjacent markets or silos all of a sudden become more and more attractive we find out that there's a lot of similarities or that we find out there's another need and then we can branch into yet another silo now if you're like i that's the exact decision i did and i went from a hundred thousand to two hundred thousand a year no that was dumb like that's not that's not the point of this like you could you could just scale one avatar to probably you know 100 million a year before doing that that's not the point the point is that you know on a long enough time horizon businesses also through mergers and acquisition things like that they can buy up other companies that are adjacent close to them et cetera and expand the total market they have which is why i don't necessarily think of it on a long term time horizon but i do think about it on a short-term time horizon so if i'm looking at like the next three to five years then i may be like okay we're not going to change avatars next three to five years but do i think that this thing over the next 20 years could eat up more and more of the pie by expanding who we're potentially serving if the answer is yes then the original tam or the current tam is not necessarily what the future tam is going to be and so that's why i don't see tam as as valuable as i think it it is purported to be if you're new to the channel welcome you hopefully can think through those three different opportunity kind of vehicle frames in terms of like how can i look at my tam in a way that potentially could sell more customers how can i increase the value versus the cost of what it is that i'm delivering and is there a way that i can enter a space that is more unique or newer which i can either do by going into the clearly new spaces or by trying to redefine what i'm doing in a new way right if we can do those things then we increase what i would consider the opportunity size of what we are pursuing and then ultimately make more money all right and so that's what i'm thinking about when i'm looking at these companies that we're you know potentially investing time and money into otherwise hope you have an amazing day and i'll see you guys next vid bye
