Category: Entrepreneurship

The Secret Sauce of Valuable Service Businesses

Robert Smith of Vista Equity Partners famously said, “Software companies taste like chicken. They’re selling different products, but 80% of what they do is pretty much the same.”

Service businesses are no different. 

You buy someone’s labor, mark it up, resell it, and spend opex to operate the business. You also spend money on capex to improve the “infrastructure” of the business, and what’s left over is your profit.

Markup – Opex – Capex = Profit

The challenge is that in the long term, the free market is annoyed with your business model.

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Entrepreneurial Motivations: Light and Shadow Forces

The best reason to start a company is to solve a problem that you genuinely, to your core, care about, and you can’t see another way to do it. People who find this are truly blessed.

And then there are the rest of us, and we are complicated. Here is my take.

The motivations for starting a company are complex – there are “light” and “shadow” forces. 

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Build Your Company to Exit

If your long-term goal is to move from labor to capital, then you need to build your business into an asset that you can personally “exit”, not a high paying job.

Assets can be sold or held once you have exited, but they do not require your day-to-day participation. Assets give you free time and capital to invest.

The “gravitational pull” of a service business is to stay small, never let the owner leave operations, and never be acquirable for more than 2-3X EBITDA (if at all).

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You, Inc – Getting Into Business

Wake up every day, consumed by “You, Inc”.

If your goal is to make the leap from labor to capital, from selling time to making money with your assets, then get into business for yourself as soon as you can. 

Don’t get into the perfect business, don’t get into your life’s work, just get into business.

Wake up every day, consumed by “You, Inc”. Have every thought process working towards your north star, building your little empire.

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Two Major Ways We Can Help Small Businesses Grow

I thought long and hard about what would most help a Bootstrapped Service Business (“BSB”) like ours grow faster and create more jobs, and it all comes down to improving access to meaningful investment capital – not small changes to tax rates, increasing deductions, payroll tax holidays, or tweaking regulations

‘Tis the season for tax reform, and in tax reform season, politicians talk about how changing the tax code will help small businesses grow and create more jobs.

I thought long and hard about what would most help a Bootstrapped Service Business (“BSB”) like ours grow faster and create more jobs, and it all comes down to improving access to meaningful investment capital – not small changes to tax rates, increasing deductions, payroll tax holidays, or tweaking regulations (which doesn’t even help if you happen to be a vassal with a feudal lord like the state of CA or NY…side gripe for another time).

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Liquid Net Worth may be a Better Basis than Income for Income Tax Rates

America does not have an income inequality problem so much as it has a wealth inequality problem. The top 1% make about the same total income as the bottom 40% combined, which is significant, but it is nothing compared to the wealth gap.

The top 1% have 139x as much wealth as the bottom 40%.

So, why are income and capital gains tax rates based on income, not wealth? This is an outdated and oversimplistic way to ballpark wealth, and modern technology makes it much easier for track wealth now than in the past. 

If we want to devise a more sensible tax system, we should strongly consider basing income and capital tax rates on a metric I will call Liquid Net Worth, instead of the traditional “taxable income”. This ensures that tax rates are assessed on a more full picture of someone’s financial situation, not just their year-to-year income.

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Government to Business – “Robots, Not Humans, are the Workers You Want”

 

Ever since sharing economy companies burst on to the scene, there have been disputes between governments, like the State of California, and companies, like Uber, about the employee/contractor classification of its workers.

Some companies surrendered (Instacart), a few are still fighting (Uber), and some had to shut their doors because of the changes (Homejoy).

None of these policies are good for the long-term of labor in America. They massively discourage entrepreneurs from building business that revolve around human workers, and they accelerate the transition to a job-lite world that is built on robot, not human, labor.

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Does “Cleverness” Lead to Superior Cash Returns? Venture Capital Cash Returns v Stocks and Bonds

Analysis of actual cash distributed to limited partners versus stock and bond performance from 1981-2006

There are a few people in the world who are lucky enough to be clever for their job – a job that pairs an excellent salary with extremely high upside.

Well-funded entrepreneurs, venture capitalists, private equity investors, and hedge fund managers are all put to work in the hopes that their cleverness will deliver outsized returns for limited partners (or investors in the case of entrepreneurs).

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Confession: I Don’t Think Uber is Actually a Great Business (Yet)

Additional Background If You Stumbled on this Post Randomly

Uber is everywhere – especially in the startup/technology world that I follow closely, mostly through podcasts. It is the source of deliciously spirited debate because it is a wonderful blend of ubiquitous consumer product and highly publicized startup juggernaut. And whenever I get in too many debates with people about one topic and get stuck on a plane with no wi-fi, I write out my arguments, which I occasionally publish and commit to the public record. 

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