Annual Letter: Faster Than You Think (2024)

After looking at over 300 acquisition deals in 2023, I learned 4 things. I won't bury the lead. Most businesses for sale are vastly overpriced. That's fine. Ignore irrational sellers. Negotiate the deals worth chasing. Yes, and yes. However, the number of overpriced companies selling for under $10M — where I focus — is startling. I won't try to convince sellers to lower their prices. I will share my thoughts to potential buyers on why I don't think they should not buy most of what is for sale. But first, let's get back to those 4 lessons and my resulting beliefs. Async-first businesses are the future. Remote-first job wages are going to plummet. Most paying customers will prioritize personalization over inclusion. Investing in boring businesses is overrated (for me). Let's break each of these down in more detail.

Async-First Businesses

There is lots of talk on how and when AI will disrupt various industries. These discussions are great for driving media cycles. That's mostly noise. What isn't discussed enough is how to discount the enterprise value of a company based on the speed at which AI will reshape the cost structure of that business. Call centers are an easy example. In 18 months, almost every business will be able to afford a 24/7 bot-only call center. Once large companies see how well customers respond to this option, they will eliminate 80% of their human call center specialists. This is one line item on a profit and loss statement. The insight here isn't that large language models and text-to-speech models will get faster and smarter. That's obvious. The insight is that increasingly the customer and employee will interact asynchronously. This has obviously been available through email and chatbots. But real-time phone conversations, zero wait times, indistinguishable from speaking with an engaged customer service specialist is something new. This evolution is going to happen in low-touch marketing funnels, high-touch sales funnels, and other parts of customer support. The macro impact of these changes isn't just lower prices. The real impact is that very small companies are going to be able to compete with megacorporations. This will be especially true for companies selling digital products who also control their own distribution through direct customer engagement. The takeaway is that any business for sale that doesn't have a clear path to refactor into an async-first business is one I wouldn't buy. A quick counterpoint. There will be a class of customers who will reject this. There will be money to be made serving that minority of the market. However, you will have to charge that customer more to cover the cost of doing business the old way. Most customers aren't going to pay that premium. That's playing the game of business on hard mode. I would avoid it unless that's part of your company's core values.

Remote-First Job Wages

I invested in a productized service company that builds conversational software products using off-the-shelf AI models and tools. Cash on cash return for the business was amazing, but both myself and the operator knew this wasn't a durable business. While the business continues to survive, it is not thriving due to falling customer willingness-to-pay. It has a lifespan of 2-4 more years at the most. This is expected as platform companies continue to productize developer tools into customer-ready products. That's the path for almost every major technology shift we've had over the last 40 years. What was insightful from that business was how extreme copilot tools had made the team's offshore talent. Here's a deeper look. This business uses product designers and software developers in the Philippines and runs sales out of the US. On average, full-team members in the Philippines are paid $800 - $1,200 per month. Sales team members in the US are paid ~$60K base plus commission sales — which can take their comp to over $130K. All of these jobs are 100% remote. Early in 2023, every team member was given a ChatGPT Pro subscription. Developers were also given GitHub Copilot subscriptions. Copywriters and program managers were given Grammarly subscriptions. Team members were required to use each of their respective tools. In addition to these AI-first SaaS tools, there was also Loom for recording personal daily demos and Linear for task management. It took about 60 days for the team to deeply integrate these tools into their daily work. What remains an astonishing outcome is that developers in the Philippines are performing on par with US software developers earning $80K-$130K outside of big tech. That's ~10% on the dollar and the difference in this case is largely pairing team members with copilot AI-tools. My takeaway here is that as more of these tools make their way across knowledge worker disciplines and companies get comfortable with their employees using them, employees are going to have many more people competing for their jobs. And that competition will be willing to work for less. I suspect real wages for developers in the Philippines and designers in Ukraine will go up when they take these remote jobs with a multinational corporation or remote-first small business. We saw this happen in places like Mexico City. This is all bad news for American knowledge workers living in expensive cities and demanding remote-first work from their employers. This is a case of beware what you ask for. Moving forward, I'm not interested in any businesses for sale that don't have a clear strategy to pair offshore talent with AI copilots for a material portion of their remote-first workforce. This position is off putting to may. However, customers will drive this necessity. Consumer prices will fall or consumers will expect companies to deliver more with less. In either outcome, today's high labor costs won't survive.

Personalization Over Inclusion

There has been much media coverage over the concept of "go woke, go broke". The other side of the argument is that we need to celebrate diversity, equity, and inclusion in how we both promote products and staff companies. I believe both sides have it wrong. The misstep is that most of these arguments are trying to parse these social issues through the lens of megacorporations that aspire to sell their product or service to everyone. Selling to everyone is becoming more challenging in a world where culture wars are radically polarizing customer segments. Here's an example. Hollywood has a concept called the four-quadrant movie. It is a film that appeals to all four major demographic quadrants — both male and female, and both over and under 25 years of age. Think comic book movies or tent pole summer blockbusters. Outside of established franchises, it is becoming increasingly challenging to make a profitable four-quadrant movie. Navigating the cultural waters and producing an entertainment product for everyone is hyper risky. We see the poor financial performance from Disney and Warner as real proof that creating homogenous entertainment products that can be sold to everyone is a losing strategy in today's cultural climate. I have an alternate view. Culture-centric companies should avoid growth at all costs. They should also not attempt to cross-pollinate customer segments within the same brand. This is bad for public media companies. This is great news for small businesses who are intentionally serving one audience. Those small businesses would be better served financially by leaning into a specific audience at the expense of alienating another. On a longer horizon, I think it will become increasingly cost prohibitive to serve all customers with a culture-centric physical product (e.g., alcohol, apparel, CPG, media, etc.). This will flip for digital products. But it won't be about DEI or ESG in external branding, products, or services. The social accommodations those efforts attempt to provide are built for a world where there are real costs in making the next bottle of beer, pair of jeans, or CGI film. These traditional products take thousands of humans to create and have COGS greater than $0. In the digital world, we can be whoever we want to be, wear what we want, talk like we want, and hang out with whomever we want. This was part of the metaverse appeal that many older folks missed. What people really want is hyper-personalized. They want a world built for them. Megacorporations can't economically pull this off with physical products. Traditional media companies can't pull this off with their existing production processes. This is going to be one of the areas where generative AI actually delivers. And the COGS to deliver this will rapidly drop to $0. People who want a world built just for them will have that option. People turned off by this concept will never need to step into this hyper-personalized world. As an investor, I'm bearish on big media companies navigating these changing times. There are pockets of promise — sports is one area. From growing pro lacrosse, pickleball, and soccer leagues we're seeing certain entertainment products that bring people together in the US continue to flourish. As I evaluate companies trying to sell to everyone — I'm only interested in the deals where the company is selling a commodity or utility that is unlikely to get caught up in the culture wars. Otherwise, the company needs to be segmenting their portfolio of brands by customer segments that share very specific values. Companies like to talk about living their values. Those values only add to the enterprise value (EV) of a company if that company is willing to go out of business to protect their stated values. That's the competitive advantage moving forward.

Boring Businesses Are Overrated

It is really fantastic to see the new wave of business influencers helping aspiring business owners navigate what entrepreneurial options they should consider. There are some areas that are definitely not for me — like franchises. Still, I get distracted. For example, Codie Sanchez got me riled up and looking into the "boring business" category. It makes sense for Codie to push that message. It plays to her background (finance and sales) and there are a lot of people that could find success with her system. There are plenty of benefits with boring businesses. First, the market is already validated with years of bank statements and tax returns. Second, a boring business is likely to be a more durable business. Third, you need fewer specialized skills to run a boring business as long as you buy the right business at the right price. You'll need to build skills around people, process, and product — which are required for any business. Still, there are two considerations. Very small businesses (<$5M) many times require the buyer to also operate the business. So you're buying a job. Additionally, buyers with highly-specialized skill sets may not find an appropriately-priced business for sale where they can leverage that skillset as an advisor. Neither of these are deal breakers for people who are earlier in their career or don't want to use their specialized skills moving forward. I've spoken with buyers who want to break up with their old professional life. While these aren't deal breakers for many — they are deal breakers for me. I'm not trying to buy a job. And I have a specialized skill set that I love and also happens to be valuable — building software companies. It would be silly to stop building and investing in software (what I already know) in exchange for all the headaches that come with owning these boring businesses. That doesn't make them a bad asset class to own (in general). However, that makes them a horrible asset class for me — now that I've learned what it takes to own them and how little cash they produce (relative to cash invested and the free cash flow software can produce). Again, that doesn't make boring businesses bad. But they're not for me. The insight I've taken from looking at these boring businesses is to dig deep and figure out what game you want to play. Then ignore the deals and the people who aren't going to help you win at that game.

This Cycle Is Accelerating

Customers generally want the world to revolve around them. The insights above highlight parts of the toolkit to profitably serve customers with those expectations. It is not surprising that many of the businesses for sale don't meet my requirements (async-first, hyper-personalized, offshore talent enhanced with AI copilots). That's led me to pass on most of what's in the market. But I'm still looking. I do not invest other people's money (OPM). I invest my own funds. I don't lever up my deals. My approach is guaranteed to make me less money than most alternatives. It is less risky, but doesn't require permission from others for me to execute. And it gives me something most investors lack — freedom to move however I like. That's worth the trade for me since I get so much joy from allowing myself to live a wandering life. I feel blessed and lucky that my weird path has still managed to make me millions of dollars. The world is crazy.

As we move into 2024 there are a few spaces that have captured my attention more than others. My short list is: aging in style, automated customer experience, GovTech, outdoor enthusiasts, PropTech, solopreneurship, and virtual creators. I'm keeping my eyes on these spaces. And if a boring business pops up in B2B services, home services, or micro SaaS — I'll still give it a look if it can take advantage of the insights I've raised. That said, my broad take is that many of today's businesses are going to $0. They're not going to make the transition through this next cycle. And this cycle is going to be fast. Single digit years — not decades. To that end, I'm being patient. And in the meantime, I'm focusing more on myself.

I have a mantra and north star. My previous mantra was: Know thyself. Make things. Stay free. I made a revision this year. My updated mantra is: Be myself. Make things. Stay free. This is a small, but important tweak. Knowing myself doesn't demand enough action. Being myself forces daily action. My north star is to: Use my learning transformations to inspire others to move through their life without permission. To that end, I'll end this year's memo with this. The world is changing faster than we think. Stay ready.