Sign up below to get Unqualified Opinions delivered to your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
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
Sign up below to get Unqualified Opinions in your inbox.
The Wrong Golf Cart
One of the helpful things they do at Main Street Summit (put it on your calendar!) is rent a fleet of golf carts piloted by college kids to chauffeur attendees to the various venues around downtown Columbia, Missouri. This way if you’re tired of walking or cutting your schedule close, you can always hop a ride.
So it went as I was finishing dinner on the second-to-last night of the conference with some small business operators when I looked down at my watch and realized that if I didn’t hurry, I was going to be late picking my son up from swim practice. So I excused myself from the table and started speed-walking back to the office where my car was parked.
That’s when I saw the kid driving the golf cart.
He was going south and I was walking north so I waved at him. He acknowledged my wave, flipped a U, and came to pick me up. I hopped in and asked him to take me back to the office.
“Where’s that?” he asked.
This was strange. That’s because the office is where the kids pick up the golf carts to start their shifts. But maybe he knew it by another name, so I told him just to go to 305 North Tenth.
“Thanks for helping out at Main Street Summit,” I said.
“What’s that?” he asked.
Now this was really strange. Didn’t he know who he was working for? I gestured to one of the banners hanging from the streetlight. “That. That conference,” I said. “Isn’t that why you’re out here driving a golf cart?”
“No,” he said. “There’s a concert tonight, and I thought I could make a few bucks moving people around.”
That’s when I saw the instructions on how to venmo him taped to the dashboard.
“What are the odds?” I thought to myself.
Fortunately, he was a nice kid majoring in finance at Mizzou with aspirations of becoming a commercial real estate developer. We talked about that for a bit before he dropped me off at the office. I venmo’d him a few bucks and that was that.
The point is I figured it was a pretty safe assumption that on the second-to-last night of Main Street Summit every golf cart driving around downtown Columbia, Missouri, would have been working for us. It turns out that was not a safe assumption. And so it begs the question: If that’s not a safe assumption, what is?
Have a great weekend.
– Tim
Sign up below to get Unqualified Opinions in your inbox.
Expensive Education Problems
“You could design a better traffic calming plan for the high school.”
That was how the morning started the other day as my son and I sat waiting to turn left into the world’s most chaotic parking lot after we had been talking about activities he might undertake that he would (1) like and (2) be good at that would also be (3) interesting and (4) ballast on a future college application.
“I don’t think so,” he said.
“What kind of attitude is that? If you see a problem, solve it,” I said. Like Vanilla Ice,” I added.
“Who?”
“Vanilla Ice…the rapper…from the 1990s…‘Ice Ice Baby’...‘if there was a problem, yo, I’ll solve it…’”
There was vague comprehension.
Anyhow, the impetus for this (half-serious?) discussion was an article that appeared in The Wall Street Journal about the guru who can get your 11-year-old into Harvard. A profile of Jamie Beaton who founded a company called Crimson Education to coach wealthy children on how to get accepted into expensive private universities, the piece recommends strategically choosing areas where a student can excel and if you aren’t going to be a top performer in an activity “drop[ping] it and mov[ing] on to something else.” Beaton himself apparently quit piano and tennis to pursue debate and engineering.
I’ll reserve comment on the merit of this or any other advice for getting a good education (though Aristotle may have some thoughts and, oh, fine, work hard have fun), but say that the article is worth a read if you have a child with higher education in his or her future. I’ll also say that we have seen investment opportunities in a number of competitors to Crimson come across our desks and learned enough to understand their valuation expectations and that the word to describe what’s happening here is this: Bubble.
The article itself tells you why. There are now 10,000 college consultants in the US (up from less than 100 in 1990) working in an industry where there “are few regulations or barriers to entry,” observable fraud has been perpetrated (shoutout Varsity Blues/Rick Singer), and where customers are paying top dollar for a product whose benefit is almost impossible to measure (the article posits that many of Crimson’s customers benefit from selection bias and a halo effect).
Alex Robertson of Tiger Management, a high profile hedge fund that invested in Crimson disagrees, saying that what’s happening here makes sense because of supply and demand. “You’re talking about massive interest in demand and not that many more seats” is his quote.
And while it’s probably true that there are more people that want (and would pay for) a Harvard degree than can get one, that begs the question “What is the point of education?” (and again I’ll defer to Aristotle). But clearly it should not be a luxury good. A diploma isn’t a Birkin bag. It’s not something you only qualify to overpay for after cozying up to a related party and spending an unconscionable amount of money on ancillary products and services (though Hermes has every right to make someone do that for a leather accessory).
The world has seen this before. Any space where costs are rising faster than outcomes are improving is ripe for disintermediation and that’s where I think education broadly finds itself today. I’m not sure exactly what that looks like, but it certainly looks like there’s a problem and someone (or someones), heeding the words of Vanilla Ice (because wisdom can come from anywhere), will solve it.
– Tim
Sign up below to get Unqualified Opinions in your inbox.
Success in Succession
A topic we’ve been talking about a lot at Permanent Equity recently is succession, both for ourselves and our portfolio companies. Because if we’re going to have 27-year funds, we need to be prepared for unfortunate events to happen (and, yes, even more unfortunate than me pulling my hammie).
In fact, we’ve already had to implement succession plans at a handful of our portfolio companies, but to be candid the results have been mixed. And certainly mixed enough to say that we don’t have a foolproof approach to succession planning.
That said, I don’t think anyone does. I was reminded of this over the summer when Starbucks fired the fourth hand picked successor to 3x Starbucks CEO Howard Schultz. This was a guy who had trained under Schultz directly for six months and ostensibly knew what he was getting into. And then again when Disney announced a new head to its succession planning committee after they did such a good job picking Bob Iger’s replacement last time?
Because if multi billion-dollar companies like Starbucks and Disney can’t get this stuff right, what hope do any of us have?
Trying to answer that question is going to be a focus of our content efforts here at Permanent Equity now through the end of the year. Not only do we enjoy exploring topics we haven’t yet solved, but I have a particular soft spot for areas where supposed expertise seems to yield worse results than randomness (and, yes, a person off the street might have fared better than Orin Smith, Jim Donald, Kevin Johnson, Laxman Narasimhan, and Bob Chapek). Further, in reviewing the literature to date, it seems that everyone agrees that succession planning is a must-do, but few agree on how to do it.
My hope is that an outcome of this work is clear thinking about what a succession plan should be and who should be in charge of making it.
For example, Warren Buffett of Berkshire Hathaway made famous the idea that he had a name (or names) in an envelope that in the case of his death or incapacitation should be opened. But is that enough of a plan and is Buffett the right person to pick his successor? Perhaps one of the reasons Schultz’s successors failed at Starbucks is because they were chosen by Schultz because it may be the case that the very traits that make one a fantastic CEO also make one a terrible succession planner.
Further, what if succession plans are overreaching by recommending who the successor should be and instead should just identify what a successor needs to do? While potentially less actionable, limiting the scope that way would also make a succession plan potentially less bad. Because if you have a plan, unless you’re vigilant with metrics, it can take a long time to see that plan was actually a bad one – a fact that trips us up from time to time.
Anyway, lots of questions, fewer answers, but a topic we’re aiming to shed some light on. And, of course, I/we would love to hear your thoughts.
– Tim
Sign up below to get Unqualified Opinions in your inbox.
Good Outcomes that Matter
I was doing research for a panel discussion I hosted at the recent Main Street Summit (you should come next year) and so I found myself reading the annual letter published by Max Anderson. Max is the cofounder and managing partner of Saturn Five, and the reason I was reading his letter was because Max was going to be part of said panel discussion and it’s always better, if you’re hosting a panel discussion, to know something about the people you’re talking to.
Not dissimilar to Permanent Equity, Saturn Five is a private equity firm that buys and operates “Main Street service companies” in pursuit of building a “diversified family of cash-flow-generating small businesses.” Laying out his investing principles in that letter, Max noted that his number one objective is to “Find a horse worth riding in a race worth winning.” He defines this further as buying companies good enough to compete and win in a market large enough to support attractive growth.
That not only resonated with me, but rhymed with something we’ve recently been saying at Permanent Equity. That is to focus our time, effort, and attention on things where we can move the needle and where the needle is worth moving. Because what these aphorisms have in common is the observation that opportunities have two parts: 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.
The reason we’ve been saying that around Permanent Equity recently is because we have an increasing number of problems as our own diversified family of cash-flow-generating small businesses grows (another thing we say at Permanent Equity is that we’re in the business of fighting entropy, which is both indefatigable and undefeated), and the thing about problems is that they are all time-consuming to solve, so in a world of finite time and resources and in recognition of opportunity costs, when you have an increasing number of them you have to be strategic about picking which ones to tackle.
So now when we’re invited to help solve a problem we ask (1) Can we help solve it? and (2) Is it worth solving?
The question of worth is, of course, a tricky one and always a moving target because there are a lot of ways to measure benefit and reward, but if you’re evaluating anything, evaluate the merit and the context together. Because I think we’re all universally in pursuit of good outcomes that matter (though I don’t mean to speak for you).
– Tim
Sign up below to get Unqualified Opinions in your inbox.
Questionable Capital Allocation Decisions?
I admitted recently that I’m cheap (but not as cheap as Morgan and despite me writing that in public he texted to say we’re still good), so it might have seemed out of character to buy a scoreboard ad at Mizzou promoting Unqualified Opinions. After all, I wrote way back when that if Permanent Equity ever bought a Super Bowl ad, it would probably mean that Permanent Equity had lost sight of what made it Permanent Equity.
The point was and is that it’s a privilege to be in a position to allocate capital, so if you find yourself in one, you should do it wisely.
But buying a scoreboard ad at Mizzou to promote Unqualified Opinions is a questionable capital allocation decision, at least when you look at it in a spreadsheet. That’s because, since Unqualified Opinions isn’t trying to convert you into any kind of paying relationship, the ROI on paying anything to acquire Unqualified Opinions subscribers isn’t very good.
Why’d I do it?
Someone told me way back when to never borrow to buy a depreciating asset. And that’s good advice. Another recommended saving aggressively, but also never holding cash in excess of what’s needed for an emergency fund when there are appreciating assets one can buy instead (remember it’s time in the market, not timing the market, that matters). And that also makes sense. But a third, acknowledging those two recommendations, advised me to think long and hard about how I might think about spending on memories and experiences within the context of that guidance.
In accounting, when it comes to spending, there are two kinds: expenses and expenditures. Expenses are things you pay for that you also consume in relatively short order and therefore provide minimal long-term benefit. These are deducted from revenue on the income statement in order to calculate profit. Your net worth typically goes down when you spend on an expense.
Expenditures, on the other hand, are things you pay for that become assets on your balance sheet because they are expected to provide value for a long period of time. Buying a home, for example, is most likely an expenditure. Your net worth typically stays the same or goes up when you make an expenditure.
So which is buying a scoreboard ad at Mizzou to promote Unqualified Opinions? Here’s where context matters…
The opportunity to buy a scoreboard ad at Mizzou only arose because my son’s swim team needed sponsors to help fund a meet they were hosting for 60-plus teams from across the state. Despite working hard to find some, they were falling short of the necessary number. And that makes sense because if you’re a business viewing this as an expense rather than an expenditure, it’s a questionable capital allocation decision.
For me, though, there was also the opportunity to help fund the valuable experience of the swim meet for my son as well as the chance to have the shared experience (with our content team) of creating a scoreboard ad with a dot in a spreadsheets hat floating in the pool in a flamingo inflatable. And that’s a memory that will always make me laugh.
And what are valuable experiences and memories that will always make you laugh? Those are pretty valuable assets to put on your balance sheet.
Welcome back to season 4.
– Tim