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You’re Interesting and I’m Optimistic
As an ENTJ Pioneer/Guardian (shoutout personality testing), I probably started Unqualified Opinions (it’s an audit and accounting joke) for selfish reasons. I wanted to know if I could say something interesting every day. And to be perfectly honest I started this around the time a few other people started similar things and I would be lying to you if I said that I didn’t consider myself competing with them.
I’m not healthy!
But I did outlast them and this rigmarole-whatever-it-is (I’ve called it a lot of different things along the way) has done okay and been a lot fun. It turns out that trying to find something interesting to say every day is a pretty great objective. Because doing so keeps one on high alert for remarkable people, ideas, and happenings, of which there is no shortage of supply in this crazy, mixed-up world.
Sometimes, of course, it’s easy to forget that. One thing that dawned on me recently is that we are still dealing with a lot of bad habits we formed during the pandemic. Mutual trust is low. We’re on our screens a lot. It’s easy to play a victim. This aforementioned crazy, mixed-up world has thrown a lot at us the past few years that might make it seem a little bit less remarkable.
But I was on a call with one of our investors recently and as we were wrapping up he said, “Thanks for the time. This is the most optimistic I’ve heard you sound in a while.” And that took me aback, because we and I certainly have our share of challenges and it doesn’t seem like less than we and I have had in the past.
Reflecting on that, I realized that despite the challenges, I might sound optimistic because I am having fun. And by having fun, one can better see what lies behind the challenges if said challenges get solved. Seeing that adds to the fun. And fun, as they say, is contagious.
One of the principal reasons I am having fun is because of this rigmarole-whatever-it-is…and that’s because of you guys. If you like getting this in your inbox half as much as I like getting responses in mine, then you might imagine how much joy having a two-year conversation with smart, remarkable people in the world has brought me (you too, Morgan!). That’s apparently being reflected in my work and demeanor, so thank you. It means so much that you read and write back. The world is an interesting place; never stop having a conversation with it.
With that, I hope you enjoyed season four (yes, I went out with a parting shot at Morgan…his book makes a great stocking stuffer…as does Brent’s!). Happy holidays. I hope you get to enjoy them with family and friends. Travel safely if you’re hitting the road. Vayamos.
– Tim
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This is a Big Problem
I said back in October that shedding some light on succession planning would “be a focus of our content efforts here at Permanent Equity now through the end of the year.” Well, it’s nearly December and absent a few stray thoughts in this forum, we haven’t published much of anything on the topic. You might be wondering what happened to doing what we say we are going to do when we say we are going to do it?
Well, our silence on the matter has not been due to lack of effort. I know that because in our content team meeting the other day we reviewed a heavily-sourced, 23-page Google doc that linked to 30 other Google docs each exploring a key question associated with succession planning. That’s a lot!
When we kicked off this project, we were aware that there was some “boil the ocean” risk here. After all, succession planning is a big topic with lots of nuance and no definitive answers. And in reviewing a heavily-sourced, 23-page Google doc that linked to 30 other Google docs it became clear that some of that had become manifest. So what do?
The impact effort matrix is a well-known project management tool that mostly works great when it comes to prioritizing things. For example, it’s easy to see that high impact/low effort items are quick wins that should be done now while low impact/high effort items are morasses that should be put off or outsourced. And usually low impact/low effort items are tasks that can be knocked out along the way. Where the framework breaks down, however, is when it comes to high impact/high effort opportunities, which is precisely where creating a definitive guide to succession planning finds itself in that matrix.
A danger of the impact effort matrix is consistently optimizing for quick wins and deferring big ones. Because big things are worth doing and big problems are worth solving. That’s what makes them big!
Yet if something seems so big that’s unachievable, that’s also a problem, so when there is something in the high impact/high effort quadrant, try to do two things:
Break it into a larger number of high impact/lower effort items.
Start shipping those sooner rather than later.
The reason this works is because feedback is an accelerant to progress, but you only get feedback if you do something and show it to others. And so rather than publish a definitive guide to succession planning, we are going to publish short takes on some of those key questions associated with succession planning (beginning in December). Then maybe just maybe a definitive guide to succession planning will come out of it.
Hey, it worked with the white paper…
– Tim
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Don’t Believe What You Read?
No matter how you feel about how the recent election turned out, I hope that you will remember that epistemic spillovers are a thing and try to remain objective about non-political decisions no matter who your decision involves. One person who will is Matthew, who responded that he loved learning about the idea, and also that it was an interesting complement to the idea of Gell-Mann Amnesia. Well, I didn’t know what that was so he pointed me in the right direction:
Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well…You read the article and see the journalist has absolutely no understanding of either the facts or the issues…You read with exasperation or amusement the multiple errors in a story, and then then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.
This hit close to home because I was immediately reminded of the long form analysis (and accompanying discussion) a guy did on Brent and Permanent Equity a year or so ago. When that came out, we couldn’t believe that (1) the guy didn’t talk to us and (2) how much in the piece wasn’t quite right. It was a great example of a “searing experience” with a media article where we had “meaningful personal knowledge” that was wrong.
Now, I don’t think there was any malintent here or anything like that. Rather that, when one doesn’t have deep expertise or personal experience in a subject, it's difficult to accurately report on details and the nuance. But if that’s true, why should we believe much of anything that we read (shoutout fake news!)?
A good answer to that is because we have to. We’re mostly hardwired to take things at face value and accept shortcuts because the world is a vast place, but learning as much as you can about it is worthwhile, so doing otherwise would be incredibly inefficient. Further, most things that are wrong (like facts about Permanent Equity) are either correctable or inconsequential, so it’s more efficient to let them slide until one needs to do otherwise.
Yet you can see the inherent danger of so much misinformation in the world when it comes to items that are not correctable and/or consequential. In these instances, accuracy and deep expertise matter, so we should take the time to understand them and get them right even if that’s inefficient. Further, there can be thin margins between being a mark, naive, a thoughtful inquisitor, a skeptic, a conspiracy theorist, and a quack, so stay self aware.
Also there’s the pickle of consequences and permanence being hard to predict ahead of time, so good luck with that part too.
– Tim
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Risk, and Other People’s Money
After I wrote about how timing when to take risk might matter more than what risk you’re taking, I heard back from Spencer who said that he’d love to hear more about the spectrum of risk (shoutout nerds). Because in addition to timing, he noted, “whose capital is at risk matters a great deal too.”
And he’s right.
Way back in season one when mere dozens subscribed to this rigmarole-whatever-it-is, I wrote about “Growth, and Other People’s Money.” The gist was that a small retailer that aspired to be a premium global consumer brand had taken outside capital from a big firm and used it to mash the pedal down on growth (advertising, inventory, etc.). What ended up happening as a result of that decision was a significant increase in sales, but a significant decrease in margins and free cash flow as inventory turns slowed and the company had to mark down product to make it move, which is obviously bad for the long-term value of the brand.
I concluded that every company faces inflection points and that what happens next depends on what the organization is optimizing for. Very often what the organization decides to optimize for ends up matching what its investors are optimizing for. And while everyone says they’re a “long-term” investor, people define that term differently. This is why one should figure that out before taking someone else’s money and choose carefully before you do.
In other words, whose money you’re risking absolutely matters when it comes to deciding what risks to take and when as does how much and historically that has had some interesting implications. For example, SBF (gross!) took some catastrophic risks with not only investor capital but also customer deposits to protect his company and therefore his reputation. Doing the math in his head, I suspect that reputational currency was more valuable to him than the other people’s money he put at risk.
In fact, there are lots of interesting insights in the literature about how people view different flavors of money in different situations even though it’s all money. What I mean by that is that a dollar is a dollar is a dollar and in a rational world that none of us live in the only bets one would make, regardless of source of capital, would be those with a positive expected future return. Yet house money is a thing. This is the idea popular in gambling but also prevalent in business that risking profits is somehow less risky than risking staked capital. And then there’s interesting observation that the safer regulators have tried to make banks by overcapitalizing them has led them to take on more risk. What are we doing?!
Another paradox we’ve observed across small businesses is that the owners best-positioned to take risk (experienced, financially well-off, and with no outside interests to answer to) are often the least likely to take it. And while it seems like loss aversion theory would explain that fact (why experience the pain of losing your own money when you can lose someone else’s?), what such an explanation misses is that by losing someone else’s money, you risk losing agency, which means you also risk losing everything.
For example, the retailer mentioned above lost someone else’s money buying inventory, but also damaged its brand in doing so, permanently impairing the value of any residual equity. That’s a big loss. And SBF, of course, went to jail.
So when it comes to risking capital, ask and answer the following:
What are we risking it on and why?
When are we risking it and does the timing make sense?
How much are we risking and is the potential return worth it?
Whose money is it and what happens if we lose it?
Then go for it. Maybe. You know, if the math checks out.
– Tim
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What Next?
We had a gentleman drop by our office recently to talk shop. He had sold a business then used that capital to buy a few small businesses and presently found himself in a position that he thought was maybe akin to where Permanent Equity was six-to-eight years ago. If that was true, and he wasn’t far off, his question was what should he do next if he wanted to start on the path of getting to where Permanent Equity is today?
We talked some about opportunity sets, deal flow, and raising outside capital, but then our CEO Brent gave what I thought was some pretty clarifying advice. Before you do it, he said, decide that it is what you really want to do.
The gentleman said that that was why he was here, but also what did Brent mean by that?
What you have now, Brent said, is a pretty good life. And where you want to go is a pretty good life. But getting from A to B is hard. You’re going to have to reinvest almost all of your earnings, build a team, make mistakes, and so on. And that won’t always feel great. So if you’re going to do it, make sure you really want to do it, so that even when it doesn’t feel great, you’ll stick with it.
This, of course, describes the catch–22 of the status quo, particularly if the status quo is a comfortable one. Preserving it is boring, but disrupting it is risky. So what do?
One thing that I believe it’s helpful for an organization to define and have is a north star. This is a singular objective against which all other objectives can be measured (as in “Would achieving that objective put us in a better or worse position to achieve our north star?”). That said, defining a singular north star objective is inherently tricky, so a start is even just having articulated aspirations.
We have a few of those at Permanent Equity and one is “to build a world-class investment firm in Columbia, Missouri.” Now, was this clearly articulated six-to-eight years ago when Brent and (the then smaller) team decided to reinvest earnings to grow our capabilities? I don’t know that it was or wasn’t, but those efforts then did put us on the path toward building that and it’s a path that, while difficult, has been more rewarding than less.
What’s interesting, however, is that neither the inputs nor outputs along that path have been linear or consistent. For example, initial efforts were around building capabilities. This required reinvestment, which reduced earnings and therefore weakened the balance sheet relative to the size of the organization. Then we made some effort to put the organization in a position to be able to sustain and opportunistically deploy those capabilities regardless of the operating environment it may find itself in (shoutout paranoid optimism). This meant retaining earnings to strengthen our balance sheet, which if you’re excited about growth and reinvestment, isn’t always the most exciting thing to do.
Yet both objectives, while opposite, are consistent with building a world-class investment firm in Columbia, Missouri. So what next?
Like the gentleman who dropped by our office, we probably find ourselves in a position where we might level up again. But before we do that, we need to take our own advice, define what that looks like, and decide that it’s what we really want to do.
– Tim
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Have a Bad Ass Weekend
Our Missouri law hawk Taylor was out of town at a board meeting in Oregon (shoutout Brian’s Cabinets, if you need beautiful custom cabinets anywhere near Bend call us…or hey, call us from anywhere, one of our growth objectives is to geographically stretch) when I had the difficult conversation with Holly about her boyfriend parking in our lot around back. Remember that it was fine that he did so, but the conversation was difficult because Gen Z Holly thought I was angry about it because I responded to her alerting me that this would be happening with a thumbs up and a sentence that ended with a period.
The point is that I wanted to make Taylor aware, because we both have daughters approaching that vintage and because he is significantly more of a curmudgeon and grammarian than me, that thumbs up are hostile and periods sarcastic and condescending. In other words, he (and I…we…all?) should be careful about using them.
Yet he thought that was ridiculous. How could something like a thumbs up mean its opposite? So I pointed out that language is a funny and relative thing. After all, something that is “bad,” to our generation, might be bad or good. But something that is “ass” is bad. Yet something that is “bad ass” is really good.
But, I said, imagine telling your mom that something you did was bad ass. She wouldn’t know to be proud of you for that.
As we get older we all have a choice: to be sticklers about what we think we know or open to what’s happening now in the world around us. But it’s also not either/or. If you keep the good from the one and mix it with the good of the other, well, that’s progress.
So have a great weekend. Or have a great weekend! Or maybe have a great weekend LOL!!!
(One of those does seem more fun; maybe Gen Z is onto something…)
– Tim
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Deflection and Direction
I have tried to stop writing so much about the u12-now-u13 girls soccer team because I didn’t want to start boring people, but I learn so much from coaching, so begrudge me this one…
The team is at the point where we know how to play, but can still improve at playing fast. So one of the constraints we impose at practice a lot now no matter what we’re doing is that the player can only take one or two touches on the ball before playing it on. That way, during a match, we should be able to move the ball around without the defense catching up to us.
Of course, this is nearly impossible to do if your first touch is loose. That’s because if the ball gets away initially, you need time and another touch or two to corral it and still another to send it on its way. But by then the defense will have arrived to make your life difficult.
So what makes for a good first touch?
Google’s Generative AI tells me that “a good first touch in soccer is when a player controls the ball well after receiving a pass.” (So smart!) It further recommends that to achieve this you both connect through the center of the ball while also using your whole body to cushion the impact. And that’s actually right. Because if you do one without the other, your first touch won’t be any good. To wit, we call connecting through the center of the ball without cushioning the impact “breaking the egg,” and when a player does that the ball caroms a few feet away. And cushioning without connecting means that you end up sort of weakly misdirecting it rather than controlling it, which also isn’t good.
Our team has started referring to those latter cases as deflection and the former as direction and in all cases we’d prefer to be directing rather than deflecting.
Where am I going with this?
Deflection and direction are an interesting pair of concepts. They sort of look and sound the same and if you’re casually observing something like a soccer match could even be confused for one another. The difference is that they result from very different levels of agency. Movies, for example, would not look the same if helmed by deflectors, not directors.
My point is that we all have a lot of stuff coming at us every day and an easy thing to do is deflect it i.e., move it on and away from us without actually getting a handle on the situation. And to the casual observer, and perhaps even to ourselves, that can look and feel like productivity. What’s more, you might even luck into great results every once in a while (I’ve seen some very fortunate loose first touches on the soccer field!).
Yet if you deflect too much, you end up in disarray and chaos. And so something I’ve started asking myself when an item comes across my desk now is “Am I deflecting this or am I directing it?” Because I know I need to work on my first touch too.
– Tim
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Not the Thumbs Up!
I learned the other day that Holly thought I was upset that her boyfriend parked in our lot on the day they went out to lunch together. Sure, we have finite spots, but it wasn’t a big deal, so I asked her why she thought that.
“Because when I told you in Slack that he was doing that, you responded with a thumbs up.”
An aside here about the thumbs up. I love the thumbs up. I think it’s a universally positive and reassuring gesture. In fact, one of my favorite cities in the world is Sao Paulo, Brazil, because when you’re driving there and you do something nice for someone, you get a thumbs up (and if you do something nasty, you get a thumbs down, which I also find delightful).
But apparently my view of the thumbs up is outdated!
So I looked into the matter and learned that Gen Z views the thumbs up as “actively hostile” and an unsettling “passive aggressive dig” and that it’s rude to respond with one. Which is why Holly thought I was pissed. Then I thought about all of the people and things I had recently responded to with a thumbs up. One of those was a bunch of illustrations that SarahBethGDub had just finished and sent me for this whatever it is.
“Hey,” I slacked. “Holly just let me know that the thumbs up is a rude passive-aggressive dig. I didn’t mean it that way. I liked all of the drawings a lot.”
“No problem,” Sarah slacked back. “I’ve learned to translate it in my head.”
But then I found out that if I didn’t put an exclamation point (!) at the end of “I liked all of the drawings a lot” that Gen Z would view that as being a sarcastic comment.
WTF?!
Back when I wrote about seven reasons to sell, I heard back from an intermediary (shoutout Grant) who said that “by far the most common reason [business] owners want out is they can’t deal with younger generations” and find them exhausting. I hadn’t heard that as much and thought it was an overstatement at the time, but perhaps it’s true.
It’s important to say here that I don’t find Holly exhausting LOL!! (If I end a sentence with LOL and multiple exclamation points I’m told that means it’s heartfelt and genuine.) But I will say that generational differences are real and if not explored in good faith together can be impediments to the growth and development of an organization. (And they certainly shouldn’t be the catalyst to you selling your business.)
Our friend Steve Cockram says that if you are going to lead an organization that employs members of Gen Z, then you need to become a leader that people want to follow. That means appreciating the contributions of others, apologizing when you need to, and appropriately supporting and challenging in order to get the best out of your team. Of course, that’s good advice no matter who you find yourself leading, but it will only become more important as Gen Z takes on more and more senior roles in the workforce.
That said, I don’t think I can ditch the thumbs up, but perhaps I can add a few more exclamation points to my emails LOL!!
– Tim
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Is It Real?
I’ve said it before and I will say it again that the best part about writing something and sending it out into the world is that other people read it and write back. The reason that’s the best part is because I don’t have a monopoly on good ideas, frameworks, and heuristics and often when people write back they share with me something that tops the original. So it went when I heard from Steven after I wrote about trying to get good outcomes that matter.
The gist of that piece is that as you face an increasing number of challenges in businesses (or life, let’s cast a wide net), you need to pick and choose which ones to focus on. That means you need to weigh two items in tandem: the merit and the context. The merit is the idea that a good outcome is achievable. The context is the idea that achieving the outcome will result in measurable good.
At Permanent Equity we’ve boiled that down to two questions. First, can we solve the challenge? And second, is the challenge worth solving. Because if you are going to spend time doing something, you both want to be able to do it and to know that doing it is worthwhile.
Well, Steven said that he liked our two questions, but that he had a mentor that ran “every single significant strategic decision through three questions.”
Is it real?
Is it worth it?
Can we win it?
He further said that he finds these questions so effective at getting to the heart of a matter that he structures key communications to others around them.
I like it!
The added element of “Is it real?” is interesting here, and I received Steven’s note on the same day that I talked to a small business that needed to raise capital. It was down year-over-year and starting to burn cash, but holding out hope that a big box retail chain that it had been flirting with off and on through the years would pick up its product line and place a large order that would serve as a springboard to sustainable growth.
Now, winning that business is obviously worth it and the company had a credible plan to win it, but was the opportunity real? Big companies are fickle beasts and my experience is that it’s not fun to be a small company beholden to one. That’s because being in that position leaves so many things out of your hands and if something is out of your hands, it’s hard to know if it’s real. And if something's not real, it probably doesn’t matter that winning it would be worth it.
– Tim
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Learning and the Unlearnable
One thing that has been heartening to learn here recently is that I am not alone in being befuddled by succession planning. I know that because I have received lots of responses as I’ve written on the topic sharing thoughts, learnings, and experiences (thank you!). What’s true across all of those responses is that while many of you have spent a lot of time thinking about succession planning, none of us have it nailed down (or as Andy said, “Most companies…believe they have something, which when disaster strikes turns out to be nothing”).
Hopefully we’ll all get there eventually!
A thought that triggered a particular response was the idea that one reason successful CEOs may not be good at succession planning is because they may struggle to communicate why what they do works well. Alex, for example, wrote back that while this “may be a bit too far down the rabbit hole” (Alex, there is no such thing), “there’s an entire field of study around…extracting tacit expertise from folks who have reach unconscious competence and aren’t able to express what they are doing.” And he included with that thought this link to “Copying Better: How to Acquire the Tacit Knowledge of Experts.”
Tacit knowledge, as explained in part 1 of that series, is “knowledge that cannot be captured through words alone.” It’s helpfully explained as when someone with expertise tells you to:
Do X. Except when you see Y, then do Z, because A. And if you see B, then do P. But if you see A and C but not B, then do Q, because reason D. And then there are weird situations where you do Z but then see thing C emerge, then you should switch to Q.
We’ve probably all found ourselves at one time or another on each side of that conversation, and what the piece ultimately concludes is that to transmit and receive this type of expertise requires long-term apprenticeship and frequent post-mortems. Applied to succession planning, call this the Willy Wonka Golden Ticket approach (hat tip, SarahBethGDub).
But an interesting question to ask is whether the goal of succession planning should be to prepare the next CEO to emulate the previous CEO at all? As I wrote last week (because I think it’s true), if someone who wasn’t Steve Jobs tried to run Apple just like Steve Jobs, even if that person behaved exactly as Steve Jobs would have, it would likely be a failure simply because that person wasn’t Steve Jobs. After all, having an idea, for better or worse, is different from having the credibility to present it.
Responding to that thought about Steve Jobs and Tim Cook, our CEO Brent said, “Yes. And I think it’s in line with the idea of ‘refounding’ an organization for it to be successful. Each organization needs a singular leader casting vision and not just a manager of what they think the former leader would do.”
Where does that leave us? Well, if you want to learn domain expertise in areas without clear pedagogy or universal truth, you need reps and feedback alongside someone who has been there and done that. But while being a successful CEO is certainly an area without clear pedagogy or universal truth, that still may not be enough to make you a successful successor. As for what will, hopefully we’ll all get there eventually.
– Tim
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Be Careful
Kelie, our phenomenal Director of Talent (you can hire her too), relayed this story on X nee Twitter recently:
At Main Street Summit one of the golf cart drivers (Mizzou student) called me over asking how to start a golf cart. I suggested he turn the key. There was no “starting noise” so we were both stumped. I called Tim Hanson over for his advice. “Have you tried pushing the pedal?” he asked.
And that worked! The cart moved forward, Kelie slapped her forehead, and the student apologized for never having played golf.
Responding on X nee Twitter, Sarah, who managing edits this rigmarole, said “This is the most Tim Hanson interaction I’ve ever heard.”
And then Nate, a longtime reader of this rigmarole and friend of the firm, replied “Y’all better be careful or you’ll end up in his newsletter…”
And here we are.
But let me be clear: I was not being judgmental! If one hasn’t played much golf, then it’s understandable that one might not know that gas golf carts don’t audibly idle because when a golf cart is being used to play golf it’s important that it be quiet when not in use since the golfers are presumably golfing.
That said, did I find it pretty funny that all the kid had to do to make the golf cart go was push the pedal? Sure.
Which brings me to a broader point that I hope has come across ever since Sarah began managing editing this rigmarole. Namely, that absurd things happen and people often act incomprehensibly, so you have a sense of humor about that if you are going to constructively deal with all of the inanity in the world.
But! (And this is the key piece.) In all cases, and I still work on this since we are all works in progress, it’s better to laugh with it rather than at it because we’ve all either been there or will be there in time and eventually. So know that everything I say here comes from a place of joy if only because it has to…even if all he had to do was push the pedal.
Have a great weekend.
– Tim
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I’m Still Not Pissed
You may remember the “not pissed” person from season 3 who had identified a problem that we weren’t in a position to solve. The takeaway was that this person was right, but not right right now. Because in a perfect world, we’d solve every apparent problem. But the world, as we all know, is not perfect. We have finite resources, trade-offs, opportunity costs, and oh-so-many other contexts, and that’s why many problems can go unsolved for some period of time.
This reality came to light in another context again recently when I got a call from someone we know running a business he’d recently acquired. He had the opportunity to make an aggressive investment that he was pretty sure would pay off great. The context, though, was that the business was already mildly levered from the original transaction and he’d have to borrow more to fund this investment. While he was friendly with the bank and thought they’d play ball, the maturity on his line of credit was around the corner. The worry was that if he borrowed and made the investment and it didn’t play out as he expected, the business might violate some covenants on the debt and the bank might non-renew the line of credit. This would put the business in the precarious position of now needing to do everything it could to get back into compliance and those efforts could be counterproductive with regards to helping the new investment pay off.
I told him I didn’t think he should do it, which frustrated him (but he was “not pissed”). That’s because he was “pretty sure” the investment would immediately start paying off great. Given that context, what was the move?
“Well, how pretty sure are you?” I needed to know.
“Pretty pretty sure,” he said. “Like 75%.”
“But not 100%.”
“Not 100%, no. And there is a chance, due to circumstances outside of my control, that it could go really poorly.”
“Ok,” I said. “If it goes really poorly, are you betting the company?”
“No, not at all,” he said. “But I would need time to recover.”
And that was the key point. When we dove in there, he estimated that the business might need 9 months to get itself back onto really sound footing and that while it was doing that, it didn’t need to be risk managing a concerned bank that might pull or change the terms of its funding. So where we landed was that while this was a good investment risk to take, it wasn’t perhaps a good investment risk to take right now. From an order of operations standpoint, the path forward was to renew the line of credit and then take the investment risk. Then if the investment went poorly, the business would still have the time it needed to course correct before an outside actor could change its course.
This is a simplified example, but it’s to demonstrate the point that when it comes to taking risk, timing matters. One aspect of that is asking are we prepared to take this risk? And I think that’s pretty commonly done. But another is asking that if we take the risk and it goes poorly, will we have the time we need on the other side to recover? This, I think, is less common, but more important. Because if you have the time you need to recover, you may not need to be as prepared, which might lead to more risk and therefore potential more reward.
– Tim
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The #1 Use Case for AI
I wrote earlier this week about the Tim Cook profile I recently enjoyed reading. In addition to the timeless business lessons it offered, I appreciated the revelation that Tim Cook’s number one use case for AI is to summarize long emails. The amount of time that saved, he said, “changed my life.”
But wait, I thought to myself. You’re the CEO of a $3.6 trillion company. Why might you just not ask people to send you shorter emails? Or even if you didn’t want to seem so overt-cum-confrontational, at least tell people that because you receive so many emails, because you’re the, you know, CEO of a $3.6 trillion company, that if they send you a long one, to at least summarize it with a few bullets at the top?
This occurred to me again as I was reading through the strategic plans that our portfolio company boards of directors had submitted for 2025. Consisting of articulated strategies and action items, the intent of these documents is to make sure that everyone is on the same page about what is to be done next year and about how to measure progress against achievement. For the most part, I thought everything was directionally correct, but what struck me across the board was how often more words were used when fewer would do. And not just “do,” per se, but provide greater clarity of intent. It’s one thing to “Build cross-functional capabilities on the marketing team,” for example, and another to “Hire a copywriter.”
Of course, it matters which you are actually trying to do, but if your intent is to “hire a copywriter,” then say that. There is no need to dress up clear intent with complexity.
Yet the fact that Tim Cook’s number one use case for AI is to summarize long emails speaks to how often in writing (and conversation) we all do just that. After all, it’s ingrained in us in school that length (in the form of minimum word or page counts) somehow correlates with quality.
But nothing could be further from the truth. Short, provided it’s thoughtful and considered, trumps long every time. This isn’t a novel observation, of course. We’ve known it for at least 400 years, with Blaise Pascal writing in 1657 that his was a long letter because he did not have time to write a shorter one.
This makes sense. After all, it is far more difficult to distill something than to explore it. Yet here we are, 400 years after Pascal, with people sending Tim Cook long emails and Tim Cook quietly using AI to make them shorter.
– Tim
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Remember Bad Presidents
Back on Presidents’ Day of this year (which I punctuated incorrectly at the time and that’s on me), I pointed out three things, two of which I will repeat here because they remain germane.
One: My former direct report Morgan Housel says that the most controversial piece he ever wrote based on reader feedback was this one. Called “The Best Presidents for the Economy,” it presented historical data about how “the stock market, corporate profits, GDP, and inflation have done under every president since Teddy Roosevelt.” While those tables have disappeared from that article, here’s the updated data on real GDP growth:
Like Morgan did, I will simply leave that there and let you “create a story around it as you wish.”
And two: When it comes to politics, “epistemic spillovers” are a thing. What this means is that if you agree with some politically, you are more likely to take their guidance and advice on other matters even if that person has no relevant knowledge in that domain. This leads to “suboptimal information-seeking decisions and errors in judgment.” Keep that in mind and try to remain objective about non-political decisions today, tomorrow, and every day after no matter who your decision involves.
That all said, I hope you voted for a reasoned choice all the way down your ballot. I’m not always an enthusiastic voter (it’s hard to be one after you’ve lived and worked in DC!), and I will be glad when this rigmarole that sucks all of the oxygen out of the room and pushes up CPCs for real businesses is over, but I’m glad both my and your opinions matter. Here’s to bright days ahead.
– Tim
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What Makes Special
If you haven't yet read this profile of Apple CEO Tim Cook, I recommend it. In a world where succession planning is hard, whatever Apple figured out way back when has worked out and then some. Maybe it's because (not to be crass) Cook’s visionary predecessor Steve Jobs wasn't around to “offer assistance” or maybe it's because Jobs's last advice to Cook was to do what was right, not what Jobs would do, and Cook listened. But any explanation probably oversimplifies the factors that have helped Cook have an incredible 13-year run in his role.
Of course, the world didn’t always view Cook so favorably. After I asked for your thoughts on successful successions, I heard from Kyle who said that not long after Apple picked Cook he heard the inspirational Simon Sinek speak on the matter. Sinek thought Cook was a terrible choice and gave him “24 months before being fired.” Opining on that, Kyle said that maybe one way you know you’ve picked a good successor is that everyone thinks you’ve picked a bad successor.
I rolled that point over in my head on a long run and wondered if maybe there isn’t something to it. That’s because it seems logical to believe a good successor is someone who will run a business like its predecessor did. But it’s probably the case, and I understand that I’m trafficking in the world of counterfactuals now, that someone who wasn’t Steve Jobs that tried to run Apple like Steve Jobs would have failed spectacularly for many, many reasons. But even the fawning profile linked above notes that while Apple seems less “magical” today under Cook, it’s “more predictable” and “a whole lot more valuable.”
As for why that is, a lot of ideas in that profile resonated. Some highlights:
"Every day, every product."
The person most vested in your stuff is you. If you can't be bothered to use it, why should the world?
"Not first, but best."
You get better outcomes when time is your friend, not your enemy.
"Innovation is everything that happens after the idea."
What's special is the work of turning something that's never been done before into reality.
"The more curious you are, the smarter you get."
I wholeheartedly agree.
At $3.6 trillion, Apple is the world’s most valuable company and it seems that one way they got there is by using their stuff, making it better, working hard, and asking questions. And maybe that isn’t magical, but it is special.
– Tim
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Take Risk Together
A funny thing that happens in our line of work is that we buy a business from someone who intends to retire and they stick around longer than expected. This isn’t because they are financially stressed and need the job or because the business can’t function without them, but rather because after we get involved, and this is not to toot our own horn, the work becomes fun again.
See, when your net worth and your livelihood and your time is all tied up in one and the same thing, that one and the same thing becomes stressful the longer you do it even though it was once invigorating earlier in life. After all, the closer one gets to retirement, the more one has to lose and so we often meet entrepreneurs with lists of initiatives that they would undertake if they were younger and willing to take more risk but instead have mothballed in the name of safety and security.
But the fact of the matter is that taking risk is fun. This is why whitewater rafting is a thing. And cliff diving. And roller coasters. I could go on…
Yet as an entrepreneur grows more risk averse, it may be that that entrepreneur doesn’t have to stop taking risk, but rather find a partner with whom he or she can start taking risk together. We love being that partner for people, and this is why I think that when we buy a business from someone who intends to retire they often stick around longer than expected. Because with some risk off the table and a friendly partner to take risk together with, now the risk is fun again.
If there’s something you want to do, but don’t want to do it alone, think about doing it with others. And if that’s you and the context is a durable business earnings between $2M and $20M annually, please call Emily.
Thanks in advance and have a great weekend.
– Tim
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The CEO Died
As I’ve been mentioning, we’ve been doing some work and research on succession planning and it was in the course of those efforts that our managing editor Sarahbethgeedub came across this table summarizing a number of unexpected CEO deaths.
Among other data points, you’ve got the company, the CEO, the date, the cause of death, and how the company’s stock price reacted. And looking at this got me to thinking: Which one of these guys was the best CEO?
Certainly it wasn’t Gerald Pencer. It’s a cold shot to die from cancer and have your company’s stock rise 8%. I looked into Pencer’s tenure at Cott (now Primo Water) and it was a period of debt-fueled aggressive growth strategies that pumped up the top line, but destroyed a lot of shareholder value. With his passing, the market clearly hoped for a sea change in strategy.
But on the other end of the spectrum, it probably wasn’t Mark Hughes either. With Herbalife dropping 12% when he suddenly died from a drug and alcohol overdose at the age of 44, the market was recognizing the influence of his vision and marketing zeal on the company he founded. But it also indicates that he got succession planning all wrong or not at all, which is among the most important things a CEO can do for an organization. And Herbalife ended up being taken private within two years because it was still bereft of leadership.
So the ideal reaction is probably that the stock dropped, but not too much. Which means that you’ll be missed, but also that the organization you left behind was prepared for your absence. By that measure, the winner (maybe not the right word?) here was Jai Nagarkatti of Sigma-Aldrich. Nagarkatti spent his entire career working for that company, rising through the ranks. Upon his death the board implemented its succession plan and elevated the CFO to CEO with the market viewing it as a non-event.
Of course, it sounds depressing that the world might (or should) view your death as a non-event, but I think it’s a sign that when you died at least your ducks were all in a row. Because while we’re not all going to be heads of publicly traded companies, we’re all heads of something, and I think an interesting way of thinking about what we do everyday and how we spend our time is asking if we were to die unexpectedly, what would happen to the stock in that thing. If its price would go up, that’s bad. If its price would go down a lot, that’s bad too. But if it would go down, but just by a little bit, maybe that means your ducks are in a row.
Nobel Prize-Winning Influencers
Here at the office we were excited to find out that Janelle Gray, one of the folks over at Scratchmade (i.e., the people who help make Capital Camp and Main Street Summit such successes), recently released her first EP on Spotify. Described by Janelle as being in the singer/songwriter aesthetic, it was a “random” project several years in the making. So congratulations Janelle and give it a listen.
It was in the course of hearing Janelle describe how the project came to be that I learned that Spotify pays artists $0.004 per stream. This seemed like a low number to me, so I ran the math.
Janelle’s most streamed song is “Almost a Broken Heart,” which is three minutes and 56 seconds long, which I’ll round to four minutes. The median salary for a full-time US worker is about $60K (again, round numbers). So for Janelle to earn a median annual salary from her hit single streaming on Spotify, it would need to be streamed 15 million times. At 4 minutes long, that’s 60M minutes of listening, which is the equivalent of about 114 years.
And I thought that was kind of an interesting juxtaposition; that people would need to spend more than 114 years listening to Janelle’s music in order for Janelle to earn one year’s average salary from it. Further, that seems like a lot. I think Janelle would be over the moon if “Almost a Broken Heart” was streamed 15M times.
But before I bemoan the economics of Spotify for artists, I have to admit that there are others who seem to be doing quite well on the platform. The most streamed artist looks to be Taylor Swift, with nearly 100B listens. If she’s earning the same $0.004 per stream (and I suspect her team is savvy enough to have negotiated more), then she has pocketed a cool $400M from the platform, which is many, many times the median salary for a full-time US worker and probably several more orders of magnitude greater than what “Almost a Broken Heart” will generate.
Money Stuff Matt Levine also pointed out that you can make money arbitraging the cost of Spotify relative to your royalties if you listen to yourself nonstop (but I think they put a stop to that so Janelle, if you’re reading, don’t do that).
What’s relevant is that I think this dispersion in outcomes is significantly wider than the dispersion in effort to create or quality of the products achieving them. In other words, while the relative quality of something like songs being put out into the world is linear, the relative commercial successes of those songs follow a power law, with the factors that contribute to the relative commercial successes of those songs in many cases being unpredictable.
I don’t know that this is a problem, but it is a reality, and one that seems to be being exacerbated by the ability of the internet to create momentum for an idea, person, or thing without regard to merit (though perhaps an influencer will one day win a Nobel Prize). At the risk of waxing poetic about the old days, I think there was once optimism that the internet would enable longer tails and more exposure for good ideas that perhaps didn’t previously have access to a platform. But now as the internet has been “optimized” and the platform noisier and more expensive, the “middle” in areas like arts, politics, sports, and business seems to be getting hollowed out. Yes, the tail is longer than before because anybody can put something out in the world, but it’s also flatter because the world’s attention, enabled by technology, is being gobbled up by fewer and fewer actors.
Again, I don’t know that this is a problem, but it is a reality, and it will be interesting to see where that leads us.
– Tim
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Some Succession Success
I wrote last week about our plans at Permanent Equity to try to shed some light on succession planning in order to do it better ourselves. In fact, we’ve also made this a priority for our newly minted company boards, so it was a topic of discussion at our recent Operators Summit, where we hosted all of our portfolio company CEOs here in Columbia, Missouri, for a couple of days of discussion and fun.
Unbeknownst to me, our operating team had already begun working diligently on this topic and circulated to our CEOs a questionnaire that they would like filled out and then kept up to date so in the event of emergency, there was documentation in place to inform what we might do in the event succession was necessary. In the interest of open sourcing our way to better business outcomes, this is what we wanted to know:
Where am I key?
What is my influence?
How ready is my team?
An interesting nuance that came up in the course of discussing how to answer these questions was whether this should be more of an “in an emergency break glass” document or a long-term oriented transition thought piece.
Our hopeful answer to that was “Well, can it be both?”
Of course, you usually can’t optimize for the short- and long-term simultaneously, but since problems can arise at any time, it’s helpful to be able to pivot at any time. Time will tell if documenting the answers to those questions will enable us to do that with our portfolio companies, but I certainly believe this is a case where something is better than nothing.
I’m also interested to see the answers that come back. One of my suspicions about succession planning is that a reason it often doesn’t go so well is that successful CEOs may not be able to communicate why what they do works so well. When I was talking about that fact with Ryan, one of our operating partners, he equated it to trying to recreate one of your mother-in-law’s famous recipes. While she may pass along the ingredients and instructions, it never comes out quite the same, does it?
– Tim
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Real Intelligence
We hosted our portfolio company leaders here in Columbia, Missouri, recently for our annual Operators Summit, and one of the discussions we had was around how we might better leverage technology to help make our (relatively) small businesses more efficient. It was then that I learned from Kevin, who runs our ridiculously cute and resoundingly fierce children’s clothing company Rylee + Cru (I know the kids in your life need some holiday style), that artificial intelligence (AI) was now handling some 40% of customer service inquiries and that that number had increased from just 10% in a few short months.
Someone else, listening in on the conversation, asked if his in-house customer service team, seeing this trend, feared for their jobs? But Kevin said no, that they loved the AI because it enabled them to spend more time solving the customer service inquiries that required depth of touch. And that I thought was an interesting observation.
See, customer service is one of those domains where I think the barbell applies. In other words, there are very few medium customer service problems. Rather, there are small problems that are best handled quickly and complicated problems that are best handled carefully. Further, while handling the small problems quickly can show up almost immediately on the income statement in the form of revenue retention, it’s handling the complicated problems carefully that can create tremendous lifetime value and turn your customers into zealots who will proselytize for your brand. Since we all want those, giving your real customer service people the capacity to do that is a big win!
After all, AI is called artificial for a reason: it’s not real (and it’s still bad at math). So an interesting thing to think about is which problems in your business might require real intelligence.
For example, looking at the data, AI would have no problem identifying sales or margin shortfalls and even making recommendations, trained on data, on how to fix them. But what if the root of the problem was that one of your salespeople had developed an addiction or that someone on the finance team was stealing from the company? Those are real problems.
Having implemented our new boards of directors, I find myself sitting on the board of Scratchmade, our newly-named events company that was born out of all of the building we did to host Capital Camp and Main Street Summit. Clayton, who runs that operation, and I were talking the other day about how we might continue to grow that business, and I said that I was so long-term optimistic about the opportunity of an enterprise that seeks to deliver genuine, memorable experiences to people that make us more real and more human. After all, I said, trillions of dollars of capital have now accrued to businesses that make us less human, which is how I think of social media, so why wouldn’t some percentage of that find the opportunities that do something so much more valuable?
Because in the end, that’s my hope for AI. That it can take away from us the things we spend time on that make us less real and less human, so, like Rylee + Cru’s customer service team, we can spend more time on the things that make us just that.
– Tim