What’s Your Secret Formula?
Back when I explained how we set out to brew the world’s best cup of coffee, I shared three paradigms that might help one achieve success at anything:
You’re only as strong as your weakest link, i.e., the best you can do is your worst input.
The whole is greater than the sum of its parts, i.e., your inputs are all better together.
Go big or go home, i.e., your best input is your biggest driver.
Soon after, I heard back from Paul who said, “That’s great and all, but how do you know what your best and worst inputs are? There are only so many in your coffee example, but in a business there could be tens or hundreds.” And while it’s true that revealing how to brew the world’s best cup of coffee was a deliberately simple example, that doesn’t mean that more complicated use cases are lost causes.
Way back when, I shared Permanent Equity’s secret formula, a legitimate mathematical equation that makes clear the relationship between the variables that contribute to our success as a private equity investment firm:
Clearly, if Permanent Equity is succeeding, it’s because we have capital and deal flow, have done a good job analyzing businesses and negotiating terms, and have added value post-close. And if we want to do even better, we can look at this equation and decide where we want to double down.
If, on the other hand, there comes a time when Permanent Equity is not performing well, it will likely be because we’ve fallen down in one or more of these areas. As for which it might be, if we’re tracking what we should, that should be pretty clear in the numbers. And once we know that, we can decide if we want to try to fix what’s not working, double down on what is, or rejigger the equation. For example, if we’re not adding value post-close, well, that problem not only won’t get solved by having more deal flow, but probably gets made worse. Raising more capital, however, might solve deal flow challenges because when people know you have access to capital, they tend to bring you opportunities to invest it.
So what I said to Paul was if you’re trying to achieve something and you’re not sure why it is or isn’t being achieved as you would like, write it down as a secret formula and then analyze each contributing variable independently. As you do so, you may find that each can be further broken down into sub-variables – keep doing that until what you are trying to achieve has been set equal to a finite number of controllable inputs.
Because when that’s done, you should be able to see what matters, identify what is and isn’t performing as expected, and then start the hard work of deciding what to do about it.
