What I Learned Investing in 24 Companies in 24 Months
In this episode of The Game w/ Alex Hormozi podcast, Hormozi shares insights gleaned from investing in 24 companies over 24 months. He emphasizes the critical importance of building a skilled, ethical team over mere headcount growth. Hormozi asserts that proven industry experience and execution abilities are often better indicators of success than promising potential.
The episode explores prioritizing investments with recurring revenue models and strong customer retention. Hormozi discusses concentrating resources on top performers and strategically aligning investments with his team's core competencies in areas like customer acquisition and revenue growth. The conversation provides a behind-the-scenes look at evolving investment strategies built on lessons learned.
This is a preview of the Shortform summary of the Dec 11, 2024 episode of the The Game w/ Alex Hormozi
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1-Page Summary
People/team quality and fit
Alex Hormozi emphasizes the critical importance of building and maintaining a top-tier team of highly skilled, hardworking, and ethical employees over simply adding more people.
Prioritize quality talent
Hormozi insists that "better people," not more, should be the goal. Just a few exceptional team members can have an outsized impact compared to many less capable ones. He prioritizes rigorously selecting and retaining A players who contribute smartly, industriously, and with integrity.
Proven experience over promising potential
While exciting ideas hold appeal, Hormozi advocates favoring experienced, proven talent over burgeoning potential. He uses a surgery analogy - it's better to have an adept surgeon than extra assistants. Execution ability and track record maximize chances of strong returns over just ideas and potential.
Recurring revenue and growth models
Hormozi stresses retaining and growing the existing customer base, not just acquiring new ones, as key to stable, profitable growth.
Value recurring revenue
Companies demonstrating high customer retention are more stable and can scale efficiently. This provides a buffer for strategic new customer acquisition over desperation. Hormozi sees strong retention as an encouraging investment sign.
Leverage expertise to drive growth
Hormozi touts his team's expertise in enhancing customer acquisition and revenue growth as a key value-add, especially for service/software companies aligned with their strengths. They can leverage this competence to reduce customer acquisition costs.
Portfolio management and investment strategy
Hormozi shares insights on actively managing portfolios and evolving strategies with experience.
Focus on high performers
His team divested from most initial portfolio companies to concentrate on the top 6 performers, doubling down on them. Regular evaluation and reallocating resources to the best investments is critical.
Shift to fewer, larger investments
Over time, Hormozi transitioned to fewer but larger investments to dedicate more resources and focus for better returns. He explains moving from many smaller deals to "fewer, bigger checks to fewer better companies."
Leveraging expertise and competence
Hormozi stresses aligning investments with his team's core competencies to drive growth effectively.
Invest per expertise
He emphasizes software/B2B companies, where his expertise can generate higher returns compared to other sectors. Focusing on industries they understand deeply allows them to add tangible value.
Maximize strengths
Hormozi's strengths in customer acquisition and revenue growth are key advantages leveraged when evaluating investments. His marketing prowess pairs well with businesses having product-market fit and recurring revenue.
1-Page Summary
Additional Materials
Clarifications
- A players typically refer to top-performing individuals who excel in their roles, demonstrating exceptional skills, work ethic, and integrity. In a business context, A players are highly valued for their ability to make a significant impact and drive success within a team or organization. They are often sought after for their proven track record of delivering results and contributing effectively to the overall goals and objectives of the company.
- Portfolio management involves the strategic management of a collection of investments, known as a portfolio, to achieve specific financial goals. This process includes selecting, monitoring, and adjusting investments to optimize returns while managing risk. Effective portfolio management often involves diversification, asset allocation, and ongoing evaluation of investment performance. By focusing on high-performing investments and reallocating resources strategically, portfolio managers aim to maximize returns and minimize potential losses.
- Product-market fit is the alignment between a product or service and the needs of a specific market segment. It signifies that the offering effectively addresses a demand in the market, leading to strong customer satisfaction and adoption. Achieving product-market fit is crucial for the success of a business as it indicates that the product resonates with customers and has the potential for sustainable growth. It involves validating that the product solves a real problem for customers and meets their requirements effectively.
Counterarguments
- Prioritize quality talent
- While prioritizing quality talent is important, it can lead to a narrow focus that might overlook the value of diversity and varied perspectives that a more heterogeneous team might offer.
- High-quality talent often demands higher compensation, which may not be sustainable for startups or smaller companies with limited budgets.
- Proven experience over promising potential
- Relying too heavily on proven experience may stifle innovation and deter young talent with fresh ideas who could potentially offer groundbreaking contributions.
- Experience does not always guarantee future success, especially in rapidly changing industries where adaptability and learning potential can be more valuable.
- Value recurring revenue
- Overemphasis on recurring revenue might cause a company to neglect other profitable opportunities or innovations that do not fit the recurring revenue model.
- Some business models or industries do not lend themselves well to recurring revenue, and insisting on this approach could limit a company's market or growth potential.
- Leverage expertise to drive growth
- While leveraging expertise is generally beneficial, it can create blind spots or a lack of innovation if the team becomes too insular or resistant to outside ideas.
- Overreliance on a specific area of expertise might make a company less resilient to changes in the market that require different knowledge or skills.
- Focus on high performers
- This approach may lead to neglecting smaller or less immediately successful ventures that could have long-term potential or strategic value.
- It can also create a high-pressure environment that may burn out employees or lead to a culture that is intolerant of failure, which is an essential part of innovation.
- Shift to fewer, larger investments
- Concentrating resources in fewer, larger investments increases risk exposure; if one investment fails, it can have a significant impact on the overall portfolio.
- This strategy may miss out on the diversification benefits that come with having a broader range of investments, which can mitigate risks and provide stability.
- Invest per expertise
- Investing solely based on expertise might cause a company to miss out on promising opportunities in emerging fields where the team currently lacks knowledge but could potentially gain a competitive edge.
- Markets and technologies evolve, and expertise in a current field may become less relevant, so flexibility and willingness to learn new domains are also important.
- Maximize strengths
- Focusing only on strengths might prevent individuals and organizations from addressing and improving their weaknesses, which could be critical to their overall success and sustainability.
- It may also lead to overconfidence and a lack of critical self-assessment, which is necessary for continuous improvement and adapting to new challenges.
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People/team quality and fit
The podcast featuring Alex Hormozi highlights the significant impact that employee quality has on business success and the importance of prioritizing top-tier talent.
Invest in and prioritize top-tier talent over adding more people
The most valuable employees are those who are highly skilled, hardworking, and ethical, as they can have an outsized impact on the business compared to less capable team members.
Alex Hormozi underscores the critical role that top-caliber employees play in a company, noting that a small number of exceptional team members can offer outsized value, while many others may not significantly advance the business's objectives. Hormozi’s mantra, "We don't need more people. We need better people," resonates with the ideology of preferring quality over quantity. He insists that smart, ethical, hardworking individuals are the cornerstone of creating a prosperous enterprise.
Recruiting and retaining the best talent should be a central focus, as the quality of the team is more important than the quantity.
Hormozi emphasizes the importance of thinking ahead about the high standard of A players and consistently maintaining that caliber in current hires. He reiterates, "We don't need more cooks in the kitchen. We need better surgeons," discussing the necessity of having highly competent individuals rather than increasing headcount. Hormozi argues for rigorously selecting team members who not only contribute smartly and industriously but also embody integrity, as intelligent yet unscrupulous employees can be detrimental, potentially sabotaging the company’s interests.
Favor experienced, proven talent over promising ideas
While exciting ideas can be enticing, it's better to invest in businesses and teams that have already demonstrated success and traction.
Hormozi makes the case for preferring established and experienced talent over burgeoning ideas. He describes a group project scenario wh ...
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People/team quality and fit
Additional Materials
Clarifications
- A players typically refer to top-tier employees who are highly skilled, hardworking, and ethical, and can have a significant impact on a business compared to others. They are individuals who consistently perform at a high level and are considered crucial for the success and growth of a company. The term is often used to emphasize the importance of quality over quantity when it comes to hiring and retaining talent. In the context provided, A players are seen as the cornerstone of creating a prosperous enterprise, with an emphasis on recruiting and maintaining individuals who embody excellence in their work.
- In the context of the text, the surgical teams analogy is used to emphasize the importance of having a small, highly skilled team over a larger, less experienced one. ...
Counterarguments
- While top-tier talent is crucial, diversity in skill levels can foster mentorship and growth opportunities within a team.
- Adding more people can sometimes be necessary to scale operations, even if they are not all 'A players.'
- Focusing solely on recruiting top talent may create a competitive and high-pressure culture that could lead to burnout or a lack of collaboration.
- The quality of ideas should not be undervalued, as they can lead to innovation and growth, even if they come from less experienced team members.
- Overemphasizing track record might lead to a conservative approach, potentially missing out on high-potential, innovative talent.
- Ethical behavior is essential, but different cultural and personal values can lead to different interpretati ...
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Recurring revenue and growth models
Hormozi emphasizes that businesses need to prioritize retaining and growing their existing customer base over solely focusing on acquiring new ones. This approach leads to more stable and profitable outcomes.
Seek businesses with strong revenue retention and compounding growth
Hormozi highlights the many benefits of businesses that demonstrate strong revenue retention.
Businesses that can retain and grow their existing customer base are more stable and profitable than those that rely solely on acquiring new customers.
He stresses that businesses with good retention rates among a subset of customers are an encouraging sign for investment. High retention implies stable and compounding growth, which is more sustainable than a pure focus on new customer acquisition.
Prioritizing revenue retention allows the business to scale more efficiently and profitably than a pure customer-acquisition-driven model.
Hormozi points out that focusing on revenue retention is more efficient, allowing a business to scale profitably. This is because retaining customers over time reduces maintenance costs and potentially expands margins. He considers this a key metric when assessing investments.
Leverage expertise to enhance revenue growth
Hormozi sees the acquirer’s expertise in driving customer acquisition and boosting revenue growth as a key value to portfolio companies.
The acquirer's ability to drive customer acquisition and revenue growth can be a key value-add to portfolio companies.
Having successfully utilized organic growth strategies, Hormozi speaks of his stren ...
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Recurring revenue and growth models
Additional Materials
Clarifications
- Hormozi's expertise lies in driving customer acquisition and revenue growth, particularly in service and software businesses. He focuses on businesses with strong revenue retention and compounding growth potential. His strategy involves leveraging internal resources to accelerate growth in companies with demonstrated product-market fit and recurring revenue. Hormozi's approach emphasizes the importance of retaining and growing existing customer bases for stable and profitable outcomes.
- Revenue retention is the ability of a business to keep existing customers and continue generating income from them over time. It is crucial because retaining customers leads to stable and compounding growth, which is more sustainable and cost-effective than constantly acquiring new customers. By focusing on retaining revenue from existing customers, a business can scale efficiently and increase profitability by reducing costs and potentially expanding profit margins. This emphasis on revenue retention is a key metric in assessing the long-term health and success of a business.
- Revenue retention and compounding growth are interconnected concepts in business. Revenue retention focuses on keeping existing customers and their recurring revenue, which forms a stable base. Compounding growth occurs when this retained revenue continues to increase over time, creating a snowball effect. Essentially, the longer a business retains customers and their revenue, the more it can benefit from compounding growth, leading to increased stability and profitability.
- The role of an acquirer in driving customer acquisition and revenue growth involves leveraging their expertise and resources to enhance the performance of the companies they invest in. Acquirers can provide strategic guidance, operational support, and access to networks that help portfolio companies scale their customer base and increase revenue. This involveme ...
Counterarguments
- While focusing on existing customers is important, new customer acquisition is also essential for business growth and diversification, preventing overreliance on a limited customer base.
- High retention rates are beneficial, but they may also indicate a potential plateau in growth if not complemented with strategies for acquiring new customers.
- Revenue retention is crucial, but it may not be sufficient for businesses in rapidly changing industries where innovation and customer acquisition are key to staying relevant.
- Efficient scaling through revenue retention is ideal, but it may not apply to all business models, especially those that require significant upfront investment in customer acquisition to achieve economies of scale.
- Expertise in customer acquisition and revenue growth is valuable, but it must be adaptable to different market conditions and not solely rely on past strategies that may become outdated.
- Pairing internal expertise with businesses that have product-market fit is strategic, but it also risks creat ...
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Portfolio management and investment strategy
In a dynamic discussion about effective portfolio management, Alex Hormozi shares insights into the practice of actively managing investment portfolios and how strategies evolve over time with experience and resources.
Actively manage the portfolio to focus on high-performing investments
Hormozi highlights the importance of regularly evaluating the performance of portfolio companies. His team’s efforts led them to divest from the majority of their initial 24 portfolio companies, focusing only on six, some of which they doubled down into.
Regularly evaluating the performance of portfolio companies and reallocating resources to the best-performing ones is crucial.
He shares that the value of these founders’ equity has increased on average 13 times since partnering with his team. Hormozi's approach involves actively managing the portfolio and focusing attention on companies that demonstrate the highest performance. This focus helps allocate resources more efficiently.
Cutting ties with underperforming investments, even if they are generating some revenue, allows for greater focus on the most promising opportunities.
Moreover, Hormozi discusses the necessity of parting ways with companies that are performing just okay. By reallocating efforts towards high performers, Hormozi's team ensures a greater focus on the most promising opportunities. Through a time study, he realized that much of the team’s efforts were spent on struggling companies, and he decided to refocus the team’s time towards companies yielding better returns.
Shift to fewer, larger investments over time
Over time, Hormozi has transitioned his investment approach to making fewer, larger investments. This shift has allowed his team to offer more focus and resources to the fewer companies they invest in, which increases the likelihood of achieving outsized returns.
As the acquirer's experience and resources grow, the strategy has shifted towards fewer, larger investments rather than a larger number of smaller deals.
After an intense phase of making ...
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Portfolio management and investment strategy
Additional Materials
Counterarguments
- Diversification is key to risk management, and focusing too heavily on a small number of high-performing investments could expose the portfolio to higher risk if those investments falter.
- Regular evaluation of performance is important, but it can lead to short-term thinking and potentially overlook investments that may require a longer timeframe to realize their potential.
- Cutting ties with underperforming investments might not always be the best strategy, as some companies may be on the verge of a turnaround or could be valuable for strategic synergies with other investments.
- Larger investments can lead to higher returns, but they also represent a higher concentration of risk; if a large investment fails, it can have a significant negative impact on the overall portfolio.
- Experienc ...
Actionables
- You can use a simple spreadsheet to track and evaluate your personal investments or projects, marking the performance of each on a scale from 1 to 10 every month. By doing this, you'll have a visual representation of which areas are thriving and which are not, allowing you to make informed decisions about where to invest more time or money.
- Create a 'focus fund' where you allocate a set amount of your savings each month, but only invest in one or two opportunities that you've researched thoroughly and believe have the highest potential. This mimics the strategy of shifting to fewer, larger investments and can be applied to financial investments, personal development courses, or even side projects.
- Develop a personal 'investment thesis' that outlines what you're look ...
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Leveraging expertise and competence
Alex Hormozi emphasizes the importance of aligning investment strategies with the acquirer's core competencies to drive organic growth and achieve high returns on investment.
Invest in businesses aligned with the acquirer's core competencies
Hormozi strongly prefers businesses that align with his expertise, particularly service and software industries, reflecting a focus on the need to invest in sectors where in-depth knowledge and competencies can add tangible value.
The acquirer has particular expertise in B2B and software businesses, which can generate higher returns on investment compared to other sectors.
Within Hormozi's portfolio, there is a significant emphasis on software businesses, hinging on the understanding that such investments can yield higher returns due to the experience and expertise his team possesses in B2B and software domains.
Focusing on industries and business models that the acquirer understands well allows for more effective value-add and growth strategies.
Having a well-defined area of expertise allows Hormozi to enhance the companies he invests in by focusing on sectors he knows inside out.
Prioritize opportunities that maximize the acquirer's strengths
The choice to prioritize investments is not just about industry relevance but also about leveraging competitive advantages such as customer acquisition and revenue growth.
The acquirer's ability to drive customer acquisition and revenue growth is a key competitive advantage that is leveraged when evaluating potential investments.
By channeling resources into businesses with proven product-market fit and a recurring revenue model, Hormozi leverages his strengths in sales and marketing to foster both growth and value creation.
Pairing the acquirer's resources and expertise with businesses that have demonstrated product-market fit and recurring revenue can create significant value.
Hormozi looks for businesses with products that are already desired by c ...
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Leveraging expertise and competence
Additional Materials
Clarifications
- An acquirer's core competencies are the unique strengths, skills, and capabilities that distinguish them from competitors. These competencies are essential for driving growth and creating value in acquired businesses by leveraging the acquirer's expertise and experience in specific industries or functions. Understanding and aligning investment strategies with these core competencies can lead to more successful acquisitions and higher returns on investment. By focusing on businesses that match these core competencies, the acquirer can effectively utilize their strengths to maximize the potential of their investments.
- B2B stands for "business-to-business," referring to companies that sell products or services to other businesses rather than to consumers. Software businesses are companies that develop, sell, and support software products or services for various purposes, such as productivity, communication, or specific industry needs. These types of businesses often focus on creating solutions tailored to the needs of other businesses, leveraging technology to improve efficiency, productivity, and operations.
- Product-market fit is the alignment between a product and the market demand for it. It signifies that a product effectively meets the needs and desires of customers in a specific market segment. This concept is crucial for the success of a business as it indicates that there is a strong demand for the product being offered. Achieving product-market fit involves creating a product that customers truly want and find valuable, leading to satisfied and loyal customers.
- A recurring revenue model is a business strategy where customers are charged at regular intervals for continued access to a product or service. ...
Counterarguments
- While focusing on core competencies can be beneficial, it may also lead to missed opportunities in emerging markets or sectors where the acquirer has less experience but could potentially achieve high returns with the right partnerships or by acquiring new expertise.
- Specializing in service and software industries might limit diversification, potentially increasing risk if these sectors face downturns.
- The assumption that software businesses inherently yield higher returns may not always hold true, as success in software also depends on market saturation, competition, and the constant need for innovation.
- A deep understanding of specific sectors is valuable, but it can also create blind spots or biases towards certain business models, potentially overlooking innovative or disruptive newcomers.
- Prioritizing customer acquisition and revenue growth is important, but it should be balanced with a focus on long-term customer satisfaction and product quality to ensure sustainable growth.
- Relying heavily on competitive advantages in customer acquisition might not be sufficient if the underlying product or service does not continuously evolve to meet changing market demands.
- The strategy of pairing resources with businesses that have a proven product-market fit and recurring revenue may not always be the best ...
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