Episode 92 of The Operators is jam-packed with great insights and commentary. My top takeaways:
#1 If institutional capital is on your board, your strategy is cooked. You have to exit. And if you have to exit, then you have to look a certain way to the market to maximize your chances of success and valuation. The irony is that things like super high growth rates or high EBITDA margins get haircuts from the institutional buyers because they are viewed as unsustainable. ‘How are you going to keep growing at that pace? I am only paying for half that growth going forward. Your margin is so high because you have underinvested in the business. I am going to have to professionalize and upgrade this company and am not paying for your underinvestment.’
There’s a sweet spot you need to aim for and frustratingly, it’s always shifting depending on the market. Listen to the beginning of the pod for @JasonPanzer commentary on the conference he attended.
#2 If you don’t have institutional capital, you should be maximizing Free Cash Flow (that’s my advice). The Operators discuss the meme of OpEx minimization and whether that means you aren’t investing enough in the business. While acknowledging that your stage matters and you should do what is right for you, I think this point should be emphasized, underlined, bolded and in all caps. So, if you don’t have institutional capital, your goal and your stage are ALL THAT MATTER.
First, you have to stay in business and that means you have to generate cash. Second, keeping OpEx super lean means more of your revenue can turn into FCF. I run into few companies that are too lean. Third, everything is an investment and you should think of these decisions like bets. If I hire this person, how will they generate more cash in the future? If I buy this data infrastructure, how much incremental cash will it generate and when?
#3 A rare handful of brands will achieve meaningful exits (the @Operators all being in that rarified group). Too many founders are unthinkingly running an exit strategy and will end up after a decade with nothing. If you are hellbent on a big exit, then see #1. If you are unsure, focus on #2. The worst possible strategy is managing to an exit that is never going to happen. Running the FCF strategy #2, distributing cash regularly and sustainably will enable real wealth creation and ironically also give you exit optionality.
@9operators are back with this episode. It’s jam-packed with insights and worth a listen (more @JasonPanzer please!)