Importance of being founder-friendly in investments. Prioritizing qualities of the founder over the business. The need for hard conversations in unlocking business growth. Theory of constraints in investment decisions. Disruptability by AI and bigger companies. Checklist for selection as a portfolio company. Benefits of a shorter deal when selling a company. Importance of non-compete clauses and face-to-face conversations in investments. Valuing founders along with the business. Identifying opportunities in imperfect businesses. Calculating hypothetical maximum growth. Leveraging front-end efforts. Importance of hiring experienced leaders.
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Quick takeaways
Investors should prioritize the qualities of the founder over the business during the deal process to predict future behavior.
Founders play a crucial role in long-term success by navigating hard conversations and unlocking hard-to-reach growth.
Identifying and relieving constraints within a business, and focusing on the right areas, can lead to exponential growth.
Deep dives
Founder-friendly Approach: Empowering Founders in the Investment Process
The podcast episode emphasizes the importance of being founder-friendly in investment decisions. The speaker shares their experiences with institutional buyers and highlights the need for a different approach. Rather than removing founders entirely, the speaker advocates for a model that allows founders to retain a significant stake in the business while still benefiting from the resources and expertise provided by investors. This founder-friendly approach aims to create a win-win situation, where the founder's slice of the pie may be smaller, but the overall value of the business could be much greater.
Jockey Over Horse: Valuing Founders in the Investment World
The episode discusses the belief in prioritizing the founder over the business itself. While the private equity world values the business more, and the VC world focuses on the founders, the speaker argues for a balance between the two. By looking for founders who have been through similar journeys and have shown dedication and strong beliefs, the speaker believes that founders are key to long-term success. This belief is based on the idea that the growth and future of a business heavily rely on the founder's ability to navigate hard conversations and unlock hard-to-reach growth.
Theory of Constraint: Identifying and Relieving Constraints for Business Growth
The podcast explores the theory of constraint, stating that every system has a single point of constraint. By identifying and relieving these constraints, a business can continue to grow until it encounters its next limiting factor. The speaker emphasizes the importance of focusing on the right areas and prioritizing limited resources to achieve the highest return on investment. They also discuss the concept of having a compounding vehicle within the business, such as a content strategy or capital reinvestment, to unlock exponential growth. The belief is that even imperfect businesses can thrive if the right constraints are addressed.
Laser Focusing on Constraints for Higher Growth Rates
The speaker emphasizes the importance of identifying the constraints that limit a business's growth. By quarterly assessing the one thing that is limiting growth and laser focusing on it, businesses can achieve higher growth rates and reduce stress for founders. This approach involves prioritizing efficiency and resource allocation by identifying and deconstraining the biggest bottleneck. By doing so, businesses can experience significant growth until they encounter the next constraint.
Bigger Chunks of Bigger Companies and Litmus Tests for Portfolio Selection
The speaker discusses the preference for making bigger bets on bigger companies, rather than smaller ones, as it requires tighter and more efficient resource allocation. Investing in larger opportunities that have the potential for $50 million+ or ideally $100 million+ exits allows for greater leverage and value creation. The speaker also outlines several criteria for selecting portfolio companies, including knowing the numbers, avoiding number inflation, having a big vision or goal, displaying speed and decision-making skills, maintaining focus, building a strong team, and ensuring a good personal connection with the founders.
“The way you act during the deal process is a great predictor for us or a great measuring stick for us to see how you're gonna act afterwards.” Today, Alex (@AlexHormozi) discusses the importance of being founder-friendly in investment decisions and prioritizing the qualities of the founder over the business. He also shares his views on private equity models and the need for hard conversations in unlocking business growth.
Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.
Timestamps:
(0:40) Founder-friendly approach during deal process.
(10:02) Prioritize founder over the business.
(18:53) Theory of constraints in investment decisions.
(29:13) Disruptability by AI and bigger companies.
(34:36) Business doesn't require perfection or compounding vehicle.
(40:22) A "gray hair" on the team is needed.
(44:43) Checklist for selection as a portfolio company.