Responses to Personal Passion vs Fundamentals
August 11, 2021 | Issue #35
Big Deal Small Business: Responses to Personal Passion vs Fundamentals
August 11, 2021 | Issue #35
If this was forwarded to you, check out the archive or subscribe below.
I got a ton of great feedback from readers on my last post about balancing Personal Passion with Fundamentals. Link here if you missed it.
Today I thought I’d paraphrase some of the responses I heard to share back into this wider group. I didn’t attribute to specific people as I wasn’t sure if people wanted their comments held anonymously or not, so I defaulted to paraphrasing & combining sentiments. But thank you for sending me your thoughts!
By the way, I just crossed 700 subscribers! Pretty cool that so many people are interested in the space and are following along as I progress my own search. If you’re new, my last search update is here.
Yale Case Study
Before getting into reader thoughts, Tim Ludwig (Twitter) shared a great case study from Yale titled “On the Nature of Passion in an Entrepreneurial Journey”.
That probably could have just replaced the post I wrote, it’s a great read with lots of case studies. But the core framework I liked was the “3 Ps” (a classic business school name for a framework).
The framework asks “Where do your passion lie in the entrepreneurial journey?” along the following vectors, quoted directly from the text:
Product: An entrepreneur is output-driven and is passionate about the specific product or service the company produces or delivers.
Purpose: An entrepreneur is mission-driven, and their passion is focused on a cause or big issue that the company is addressing and solving.
Process: An entrepreneur is agnostic about what the business does, but is passionate about learning, being an entrepreneur, and building an excellent business.
End quote.
Product & Purposes are pretty clear. They are also generally NOT where I see most searchers getting excited. At most, searchers build a thesis in a specific sector / product and get excited about it, but I haven’t met many searchers that had a very specific Product or Purpose-driven bent to their search.
Process
Process is the sentiment I heard from many readers. If there is some alignment between Process and the other two Ps, even better — for example, if you have a background in digital marketing, a local services business model might leverage your passion via great PPC & SEO execution.
Several readers pointed out that many businesses look very similar at the end of the day — it’s a lot of problem solving, teambuilding, sales, going to meetings, writing emails, running payroll, etc.
As one operator put it, “Most businesses taste like chicken,” akin to Vista Private Equity’s views that “Software companies taste like chicken.”
My reflection is that a passion for Process is the key link in how someone drives through the final 100-hour weeks.
If you LOVE landscaping (aka Product), that love probably doesn’t push you through hours 80-100. Those hours aren’t spent out in the field with your team — they are spent on scheduling, running payroll, and chasing A/R.
It’s a love of Process that probably gets you over that finish line.
A real-world industry example:
I’ve looked at several tour operators at this point — it’s a very low barrier to entry industry that is perfect for high Passion for Product people. As a result, I see a LOT of $200-$300K SDE businesses that can’t grow further. To be clear, really fun, dynamic lives for the founders, but not getting past that threshold.
At that stage, the growth constraint is more around the founder not wanting to build Process — they got into the business because they love travel and giving people amazing vacations.
The couple tour operators I have seen that are >$500K SDE featured founders that geeked out with me about how they optimize their tour van schedule, how they retain great tour guides, how they squeeze out 5% discounts by paying net 10 to suppliers, when they hire part-time help for sales, etc.
Don’t get me wrong, they love the Product too, but my sense is that eventually they have to love Process to take the business into the $3M+ revenue / $500K+ SDE range.
People
If I could be so bold as to add another P to the framework above, I heard a common sentiment around multiple readers around People.
They phrased it a few different ways:
I love leading good people or forming great leadership teams
Given most businesses taste like chicken, it’s really about the people surrounding me that define my happiness more than it is about the widget I’m making
Who are the types of customers I want to sell to, the types of employees I want to work with, the types of suppliers I want to associate with, etc. Not in a business school way, but in a more visceral “who is the person on the other end of the phone call” kind of way
This can probably be a sub-category under Purpose or Process, but I think it’s worth highlighting as a common refrain I heard.
Conclusion
The last post struck a nerve with a lot of folks that are wrestling with the same issue of balancing Passion with Fundamentals.
I heard some folks talking about how they might underwrite a shorter-term hold for High Fundamentals / Low Passion deals and longer-term hold for High Fundamentals / High Passion deals, but it’s hard to compromise on Fundamentals.
In any case, a lot to chew on as we all progress our own searches. Appreciate folks sharing their thoughts with me and hope this is a helpful continuation of last week’s discussion!
As always, I’m all ears to your thoughts and always happy to connect with folks to talk through live. Hit reply to this email or find me on Twitter.
Thanks,
Guesswork Investing
P.S. I’d always appreciate introductions to potential acquisition targets or brokers (primarily targeting $750K-$1.5M+ of SDE or EBITDA, ideally located in the Northeast, West Coast, or Colorado).