(Partially Redacted) 2023 Annual Letter
April 27, 2024 | Issue #98
Big Deal Small Business: (Partially Redacted) 2023 Annual Letter
April 27, 2024 | Issue #98
Today I’m sharing the annual letter I sent my investors a couple months ago. I’ve redacted it to make less identifying and to remove confidential details, but the core message is there. This is a longer read, hence the weekend publication. Enjoy!
2023 Annual Letter
My first pass at this annual letter was much harsher than this final version. I felt hard-pressed to find positives about our 2023 performance. Running a small business with no manager layer and high leverage has been a grind. At the conclusion of most weeks, I struggle to find wins; the crises managed and losses suffered consistently loom larger.
I won’t bury the lede: the company’s financial performance was weaker than anticipated in 2023, which I will briefly summarize below. But upon further reflection, there is a deeper story of progress that I want to unpack for you.
[In the real investor version, I laid out financial information here.]
But let’s delve a layer deeper, behind the financials. 2023 was a year of laying foundation – both for the business, as well as for me personally as the operator. The challenge with laying foundation is that once you’re done, it still doesn’t look like much. It’s much easier to appreciate the work completed once the house is built.
That’s why further reflection is required – when I’m in the day-to-day of running the business, I don’t notice improvements or wins. But sustaining through the arduous process of building the house (or in this case, the business) requires remembering to pause and appreciate the foundation-laying process.
This annual letter is my attempt to do that.
Building the Business
In January 2023, very little of today’s team or infrastructure was in place. One of the former owners was still working full-time in the business as a service provider & salesperson, but he was retiring at the end of February.
We had yet to find our service team replacement for him, a crucial hire. Our new salesperson hire was less than two weeks on the job. We wanted to launch a new service vertical, and the newly hired leader of that division was one month into his role. It was early days, with the team very much in transition.
Today, we have a true leadership team, largely rowing in the same direction. We meet weekly and drive progress.
We launched that new division and won over 100 clients in 2023.
We methodically improved our processes all year. In January 2023, all sales proposals were handwritten by the salesperson, then typed up & emailed by the office team.
Today, each salesperson has an iPad, so they type up & email their own proposals, removing a crucial bottleneck step.
Every proposal now gets a follow-up text after 24 hours, a call after 48 hours, and an email after 72 hours. We still have a long way to go in optimizing our closing process, but last year we only had the automated email reminder.
Every completed job now gets a call 24 hours later, requesting feedback. Happy clients are asked to leave a review and are immediately texted a link to Google Reviews.
We absorbed the largest change to local city code in 15 years. The new code dramatically increased paperwork & permitting requirements for our trade. Rolling through the changes seamlessly took training & teamwork across the sales team, the office team, and the service team.
Looking back at my 2022 annual letter, I stated that “2023 will be a year of investment & laying foundation.” The sentiment was correct, but I did not appreciate just how difficult and slow going that process would be
Signs of Inflection
When I recognized the financial underperformance halfway through the year, I knew I had to tighten the ship. To that end, I set three measurable goals for the final 16 weeks of the year.
Average Weekly Sales Target for the rest of the year
Re-forecasted a new 2023 EBITDA Target
Re-forecasted a new End of Year Liquidity Target
We met 2 of 3 goals. We only missed our sales goal by 8%, which still represents 29% higher sales over the same period in 2022.
The recent sales activity shows that the business can support 30%+ higher revenue levels. If we can improve our closing rate with better closing processes, we’d be comfortably supporting 40%+ higher revenue levels without incremental overhead. Further, the slowing of EBITDA declines and improving predictability of cash flow both point to a stabilizing business, not one that needs to J-curve even harder in 2024.
To be clear, getting to this point took longer than expected, and it was more expensive than expected. Customers tightening wallets, rising rates, smaller project sizes & higher advertising costs contributed to a year that felt like death by a thousand papercuts.
But the last 16 weeks of the year show signs of an inflection point in the business.
My Development as an Operator
I’m deeply aware (and appreciative) that when my investors chose to invest in this company, they were making a bet on me just as much as they were betting on the deal itself. This is despite me having zero experience as an operator – my investors were betting that I could step into the role & learn on the job.
The list of lessons learned in two years is a long one, but one lesson feels like a sea change from my former life to my current life. I’ve had to fundamentally reset my definition of progress & success.
It has been draining to feel like the business is not improving, primarily due to my focus on financials. I’ve been confused as I work fewer hours than I did in private equity, and yet I feel more tired and worn out each week. For much of 2023, I wondered if I’d lost that “extra gear” I utilized in PE to get a deal model done at 3am.
I’m starting to understand that operating a small business is a slow, methodical grind upwards; as one of my advisory board members Chase Murdock said to me, I’m now in the period of “miraculous compounding.” It’s a series of small initiatives that slowly stack on top of each other. Even if successful down the road, when I look back, it’ll be hard to point to any one silver bullet.
In PE, progress felt more linear – you sprinted for 80-100 hours/week for three weeks to get a deal done, and then the deal got done. That’s where my extra gear came from – I knew what the 3am work would accomplish, and so I did it. That cause & effect linearity doesn’t exist in small business. Self-motivating to show up every morning at 6:45am has been difficult when I can’t clearly connect the dots between effort and outcomes.
So, what’s the solution?
If financial & business success is going to take an indefinite number of small improvements over an indefinite period of time, the solution requires two elements:
I learn to enjoy the identifying, creating, and implementing small improvements – tritely, learn to love the process.
I build my life to be sustainable; this is Type 2 fun, and it could take a while.
To be clear, recognizing the required mindset shift versus actually executing it are two different things. That’s my personal work for 2024.
To effectuate that, I am making three adjustments for 2024:
While I will create a basic budget to have guardrails on the business, I will be less mentally & emotionally tied to the budget – I did not find it useful for decision-making purposes in 2023. It primarily served as a self-criticism tool.
I will be more intentional in how I allocate my time & energy. This includes creating time to work from home, where I have space to focus on the business. It also involves learning to delegate tasks more aggressively to our very capable team.
I will focus more effort on learning how to be a great small business leader – this includes reading books as well as spending time with more experienced operators. If you have recommendations or referrals on this front, I’m all ears.
The Year Ahead
We needed all of 2023 to invest & lay foundation – predicting growth in the back half of 2023 was overly ambitious. As a result, while I’m optimistic that 2024 is the year we move towards growth, I’m wary that 2024 may be yet another a year of stabilization.
Generating step-change growth requires taking swings, but we don’t currently have the cash flow to burn or excess cash to test out strong marketing pushes. Instead, growth will come from compounding progress across each member of our team.
As a result, the message I delivered to our leadership team is to drive personal & team excellence this year. Now that we have found our footing as 2023 comes to a close, our leaders can drive steady growth in the business in 2024 through incremental, focused progress.
Conclusion
While 2023 was a frustrating year from a financial standpoint, at least some of the disappointment was a function of my unrealistic expectations. But if I take a step back, we accomplished meaningful improvements in the business, both in terms of team development and my personal development as an operator.
2024 is a year to generate small, consistent wins. It’s a year to grind out process improvements. It’s a year to do the hard work of building a business. And, just as importantly, it’s a year for me to learn how to celebrate that process.
Thank you as always for your trust & support on this bizarre journey. Please reach out anytime if you’d like to catch up or if you have questions.
Conclusion (to this Substack post)
Hopefully you found it interesting to understand where my head & heart is with the business.
For other small business operators who read my newsletter, I hope it is validating to the extent you’ve felt similar feelings of frustration over the past couple years.
As always, if you’ve got thoughts or feedback just hit reply to this email or post/DM me on Twitter. My response times for search-related & newsletter-related emails is slower these days due to work priorities, but I will get back to you eventually.
Thanks,
Guesswork Investing