(Embargoed until 01 July 2020 00:00 UTC)
== Preface
As some of you know, earlier this year I resigned from full-time employment, at the stroke of 10 years, to start a music label with Karan. Originally planned for 2021, we decided the time was right and we’d experiment, learn, iterate and ease into business gradually. And so, we started BossHouse Records. We had #first100days, I knew enough about finance and Karan knows even more about music and art, what could possibly go wrong!
A lot as it turned out. Plan A of hosting gigs crashed as fast as it started, Plan B of signing musicians crashed even faster (with collateral damage!) and is now recovering, and Plan C of buying a business showed promise but low actionability due to the quarantine. It was back to the drawing board.
Karan has built his career building brands in the creative arts and enabling the artists behind them to grow freely. And so began BossHouse Academy, a resource helping people start and build careers in music.
That left me with finding a way to be useful. On the drawing board, the only rules were “no job for 12 months” and “start a business”.
It was time to apply what I had learned.
== Businesses and startups
The only real world skills I have learned are:
- how to understand how much a business is worth; and
- how to build tools to study them
Over the last few months we have come across many music businesses, from rehearsal studios to bars and nightclubs all the way to the newest generation of startups. Some have been available at a bargain, others are solid businesses, some have promise with a few tweaks, yet others are transformational ideas with lasting impact if executed well.
More broadly, I have found the same true for startups across other industries, there are ample opportunities to support good ideas with strong teams and quality execution.
However, the key challenge for me, either in investing our money or recommending to friends who have asked, is speculative money and the people who manage them, from the venture capital end for startups to the big fund level for publicly traded companies. My biggest concern in investing in a startup is the harmful effect speculative money will have down the road on the life of the founders and said startup.
When I tested these concerns with friends from similar careers, they shared observations of their own. There is an allure to ‘growth at all costs’ and ‘move fast, break things’. It is not difficult to see why.
The general wisdom across the pond is “have an idea, find a team, build a prototype, test with people = $25–35m valuation”. Which, in plain English, means show a working concept and somebody will bet you will be a big business one day. Except, they want their money back one day before. So spend everything given as quickly as possible so bigger investors bet you will be a bigger business one day. Rinse and repeat, on track to become a unicorn.
Sounds great, except the startup is losing money for each new customer because nobody stopped to build a business along the way.
So when (not IF) the music stops someone will be left without a chair. And most likely, it will be some combination of the founders, employees, customers, the investors who stuck around and other businesses that started as positive consequences of the startup’s growth. A familiar tale that will likely play out more times this decade.
As more institutional money is created (a direct effect of stimulus starting in 2008), money managers have to find ways to invest it. Instead of finding new ideas, it is more efficient to invest in ideas found by other managers with similar investors. This creates a divergence between price and value because more and more money is spent on a finite collection of ideas.
Value is what something is worth, price is simply what the last person agreed to pay for it. When value > price, we call it value for money.
The startup decks I have seen focus on equity for marketing, the biggest market sizes and all possible exit options, because all speculators care about is who they will sell the startup to next, and how. The founders may or may not want to build a business to own for life, it never comes up in conversation.
== Unicorns
A unicorn is a startup with a price tag > $1 billion. Prices can be, and are, manipulated using discounts, aggressive accounting and marketing fuelled growth but they may not increase the value of the startup.
Customer lifetime value only matters if the startup lives long enough to begin with.
== Business vs startups
Valuing a business is different from valuing a startup. Valuing a business means estimating the total value created over its lifetime, quantitative and qualitative. Lifetime is a long and multi-dimensional journey, specially when you build in a global crisis once a decade.
The only business I have worked in is over 200 years old and counting. Let that sink in, for an entire minute, all 60,000,000,000 nanoseconds of it.
Businesses do not live that long by accident, and rarely as an afterthought. They are organic beings, just like us, and grow in phases.
== India, Apple and Investment Banking
There is a brand of business, far away from the high-octane world of ‘unicorn-building’, which offers my first point of learning. It is found in the smaller towns and cities of India. It is one I have seen through our parents and their peers, and through friends who have taken over family businesses and grown them or started new ones alongside.
These ventures are not started to catch the eye of a famous speculator, but to reliably provide for the food, housing and education of the families they support, both owner and employees. They last 3–5 decades without going bust, before being passed on to the next generation, should they choose to accept the mission.
It is a principled approach to business, aspirational yet pragmatic. One without the luxuries of investor money, split voting rights and tax efficient structures.
So they find ways to do simple things differently. The owners don’t burn out, they enjoy their success amidst their loved ones (albeit with joint family disputes in previous decades) and the business builds a group of loyal customers over the years.
This may seem neither noteworthy nor inspirational but watch the movie Mission Mangal to understand the principle in a more universal language. For those that haven’t, here’s the TL;DR version:
ISRO puts a spacecraft in Mars’ orbit when conventional wisdom suggests it cannot be done. They replace a big fuel tank with physics. The idea comes to a mother saving gas when frying food.
I have not checked firsthand the factual accuracy of the inception for it matters less. This happens every day and I see it in all walks of life around me.
At an individual level, they are driving change in the biggest businesses today, the growth mindset at Microsoft being one example. At a societal level, game theorists might call India’s towns as collaborative tit for tat. Anyone can be petty, malicious and spreading gossip on a given day but, on the whole, everyone helps each other without checking if sweat equity is on offer. At a global level, jugaad made its way into dictionaries in the last decade.
The idea is simple: What do we have today? How can we make the most of what we have today?
Scarcity and imagination inspire new ways to do things better. This is commonly seen in middle class families, from squeezing toothpaste tubes to extending the life of clothes by wearing them only at home. It boils down to questioning the default and thinking for oneself.
Which brings us to Apple, my second point of learning, with “Think Different” built right into their DNA.
Apple products are neither always first nor the most popular but they feel a world apart because of the many simple things being done differently inside. These differences work together to create an experience that feels magical to loyalists. I know for I am one of them.
One quote that has stuck with me is:
“People who are serious about software, build their own hardware.”
As I have thought about it over time, a derivative for the modern age has emerged.
“People who are serious about business, build their own technology.”
The ability to do things differently is what differentiates any business from others. It may be in the product (on-demand services), in the distribution (mobile apps) or in the operations (subscription pricing).
Funding 10 years of research by a group of mad scientists locked in a lab is a better use of cheap money than recycling old ideas to take advantage of cheap labour. At its worst, dragging on old ideas can cause serious harm, seen with aircraft models extended beyond their intended lifespan.
Furthermore, science and technology offer a path to re-industrialise economies, at less cost to the planet than mining and greater per capita income per square km for densely populated societies.
I spent the last 2 years learning how to build software so Karan and I would have the option to build our own tech when we started in music. Today, we have started working on tools that will help us build better businesses, and enable better products over their lifetime.
Which brings us to my professional career, my third point of learning. Naturally I do not speak on behalf of, or represent, my former employer in any capacity, but that does not stop me from learning from them or applying what I have learned going forward.
Contrary to popular opinion, investment bankers don’t invest money or do any trading. They advise on corporate finance, a discipline that helps businesses make better long-term decisions. They also execute decisions made by the shareholders, management and board of businesses, including access to money of the relevant type (aka M&A and Capital Markets deals).
I know this sounds a mouthful but this is the simplest yet complete description I could come up with. If someone finds a better one, please pass it on.
This is a superpower when deployed by the special forces (not me, those I have learned from). When wielded for good, it helps inventors plan for Mars by understanding the cashflow from electric cars and commercial rocket services. When wielded for evil it can be a weapon of mass destruction, forcing countries into poverty to pay for mountains of debt to build shiny infrastructure.
On the right side of the brain, I learned when to not do something or walk away, to plan for contingencies, to measure opportunity costs, and to act decisively in time compressed, information poor situations.
Over the years I have helped others simplify businesses by selling assets, grow them through acquisitions, protect them from unwanted advances, and raise money where required. Over and over, the principle has been the same:
Do the right thing, every single day, in good times and bad, and all the other times in between.
Principles are the foundation of lasting businesses. Know who you are and what you stand for, be resilient and antifragile.
When applied to a valuation, it is found in the values of the brand and gets accounted for in goodwill. When applied to a crisis, it is the leadership a business shows when it does not wait to be told what to do, it thinks for itself and is able to act with conviction.
When applied to a money business, it becomes mission critical because money decisions is where we all feel most vulnerable.
Should I buy life insurance for my family? Is this mortgage too much? Do I trust this person with my money? Should I cash out my pension?
These are decisions that require calculating trust and life in money terms, an unpleasant experience in the best of times. In a crisis, a money business has to be (and look) a fortress, certain to survive the chaos and open for business every single day. It requires prudence, fairness and the ability to admit mistakes and fix things, fast.
How does a business achieve all this consistently over decades?
Do the right thing, every single day, in good times and bad, and all the other times in between.
== Macro
When money is cheap, prices go up and the value of logic goes down. When money is plenty, hubris throws logic out the window.
When an economy gets de-industrialised, more money is spent betting on the price of everything and much lesser increasing the value of anything. To loosely quote from a movie (with a telling title):
“Someone made fire. Someone was first. I don’t mean the idiot who found a burning stick and kept it going. I mean the person who could make fire.”
In a business, the desire to make fire again and again fades as it gets further away from the founder who was first. In publicly traded ones, the reward fades even faster as it threatens to disrupt the very business that will make fire.
Until recently, over 20% of Tesla shares were owned by people betting on Tesla to fail. Think about it, a team wakes up every morning to invent new technologies, requiring hours of skill, deep work and imagination, all while knowing their work is partly owned by people who want them to fail. Better yet, these temporary owners now have more money to continue betting on failure long into the night. It does not matter if Tesla succeeds many times, as long as it has one spectacular failure (preferably on video).
Good thing SpaceX is not publicly traded, they would have to sync rocket launches with after-market hours.
I do not intend to judge anyone, most money managers have orders from their investors and they are executing them (probably) to the best of their ability. There are others as well who are also geeks about gadgets and products and love what they do.
I simply choose to find ideas which can be kept away from speculators and grown into lasting businesses which will improve the world around us.
As someone said a while ago:
“If you set a vector off into space, and you change its direction just a little bit at the beginning, the difference is dramatic when it gets a few miles out in space.”
== Announcement
Founders and inventors are passionate people, who have ideas every day and will give everything for the chance to present them in the best light to the most people. I know because we are working hard for the same chance.
They deserve a better quality of money to pursue their ideas in the spirit they were inceptioned.
Through a combination of opportunities and curiosity, I have spent a decade studying, advising, buying / selling on behalf of, raising money for, building tools for and learning how to manage, specifically money businesses. 10,000 hours of practice is cute, 100-hour weeks of work gets one there in roughly 2 years (ask a lawyer, they count).
This journey has provided a holistic view which allows me to try new ways to do simple things better. Some of these may work, others will need iteration, and plenty will fail. But we intend to persist and create a better way.
A friend recently remarked:
“You don’t invent the light bulb by iterating on a candle.”
And so, I am starting a new money business today. The company, which is yet to be named, shall be known in the interim as “The Dull Investment Company”.
Our principle is simple: Create products that inspire, and build businesses that enable.
Our first product will soon be in beta and can be found at heretohelp@ddmtechnology.co.uk.
== Outro
Someone recently said:
“There is an overallocation of talent towards finance and law. Basically, too many smart people go into finance and law.”
They are right, and today I am doing my bit to start changing that.
Another person much longer ago said:
“The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.”
To our parents, thank you for letting us be unreasonable all these years, we intend to continue in that vein for many more to come.
== END OF TRANSCRIPT