One of the things I like to think about when evaluating a business model is the cost of scaling it. For example, if a company is in the business of manufacturing and selling widgets, to grow sales it would need to produce more widgets and then sell them. A cost is associated with each additional widget sold. To produce and store more widgets, it would need to incur costs to increase production and warehousing capacity. These investments likely must occur before the number of widgets sold can increase. The widget company has high replication costs, which impacts the scalability of its business model (unless it has unlimited cash).

Conversely, if a company is a software-as-a-service (SaaS) business, it’s selling a software product that’s delivered digitally over the internet. Incremental sales don’t require producing more software. People can just buy the existing software at will. The software company can increase sales without incurring replication costs (for simplicity, I’m ignoring costs for R&D, sales, marketing, etc.). In an ideal world (which business isn’t), the software company has low, very low, or nonexistent replication costs, which means the business model is highly scalable.

Businesses with low replication costs and the potential for infinite scalability are intriguing. As I evaluate business models through this lens, businesses that don’t appear attractive on the surface become interesting opportunities, especially if their product or solution could be distributed digitally.

I’ve been chatting with a friend for months about something we’ve both noticed: there are people who excel at their highly technical profession because of years of training and experience and who would like to be entrepreneurs. We call them practitioners. They often continue to work for others because they don’t understand business. They’re aspiring entrepreneurs, but they don’t have the skillsets necessary to be successful entrepreneurs. They understand a problem and how to provide a solution to it, but they don’t understand how to build a business around that understanding because they haven’t been exposed to business concepts.

The more I’ve thought about this, the more I think these practitioners could be great cofounders. They have deep expertise in their craft and the problem it solves but large gaps around monetizing it. They’re very aware of their gaps and want help filling them, but they don’t usually have entrepreneurs in their network—just other practitioners. An ambitious practitioner paired with a hungry hustler who gets things done and understands business could be a combination with a high probability of succeeding.

I’m going to think more about this and discuss it in more detail with practitioners who have entrepreneurial aspirations.

Yesterday’s chat with fellow entrepreneurs was great for all the reasons I gave yesterday. I learned about the amount of financial leverage new entrepreneurs are using to start their companies. Using financial leverage is normal, but I was surprised by the amount. These founders are receiving 100% financing from banks for all their start-up costs. No business plan and no entrepreneurial experience required, either.

This blew my mind. It reminded me of the years leading up to the global financial crisis (GFC), when homeowners were able to take out 100% of a home’s price as a loan from the bank. They didn’t have to put anything down, so they didn’t have any skin in the game. Some homeowners were given stated-income loans, meaning their incomes were verified. What my friend described yesterday isn’t exactly the same as the GFC, but made me think of that period and the ensuing carnage.

One of the entrepreneurs yesterday shared that he’s starting to see these new entrepreneurs struggle. Inflation has materially increased start-up and construction costs, so new entrepreneurs must take out larger loans to get the company going. These larger loans have higher interest rates, compared to the previous fifteen years, so the amount of cash required to service the debt payment is materially higher. Prices these entrepreneurs can charge customers haven’t risen materially, so they can’t offset the higher debt costs unless they build a business that can service materially more customers (which requires higher start-up costs and more debt). Some of these entrepreneurs are having second thoughts and considering selling their businesses at a discount to wash their hands of the problem.

It was super interesting to hear about this from operators at the ground level of this industry. It makes we wonder if there’s too much leverage in the system that many people aren’t aware of.

Today I had the chance to catch up with a friend who was in town. I brought another friend with me and he brought a few friends who were in town with him. As we all chatted, the conversation turned to people’s interests, and it became apparent that everyone was an entrepreneur. From that point on, the conversation went into overdrive and everyone’s energy level went through the roof.

Over a few hours, we educated each other on the details of various business models and industries. We shared book recommendations, insights learned from building businesses, and long-term strategies, and we made introductions to others who could help.

Today reinforced what I already knew: that entrepreneurs love talking about business. Many don’t get the opportunity to talk about their business outside work. They long to talk about what they’re passionate about but can’t because most people can’t relate. When they come across someone else who loves to talk about business, a magnetic pull draws them together. The resulting conversations are the equivalent of pent-up energy being released. They’re intense, educational, and fun.

I’m glad I had the chance to catch up with my friend and the other entrepreneurs today. I enjoyed the high-octane conversation!

A friend told me about a book he just read and shared a quote from it that stuck with me. It’s from Stanley Marcus, former CEO and chairman of Neiman Marcus:

The road to success is paved with mistakes well handled.

Spot on! It’s impossible to be successful and get everything right on the first try. Mistakes (and the learnings from them) are inevitable and part of the process. What’s important is how mistakes are handled. Handle them well and the probability of success increases. Handle them poorly and it decreases.

Today I was listening to an interesting conversation on YouTube that included several VC investors. It touched on a variety of topics, but one that stuck with me is why, from a talent-availability perspective, now is the best time to start a company. Here are some takeaways:

• The cost of talent is lower internationally than in the U.S. This labor arbitrage isn’t new, but managing international teams is easier than ever now. A company can build an entire team that’s international, which materially reduces expenses and burn.
• AI is helping teams be 20%–30% more productive, which means that small teams are efficient and fast. This could allow small teams to reach hundreds of thousands or millions in revenue.
• Large public tech companies’ headcounts are projected to be flat or negative, which will lead to an abundance of technical talent being available. They were talking about the Silicon Valley area, but there could be a case that this is true in other places too.

I agree that talent availability has changed from what it was three or more years ago. Whether we’re entering the golden era of talent availability is another question. I’m not sure, but time will tell.

If you’re interested in listening to the talent-availability part of this conversation, you can go here.

The most successful people, especially founders, are lifelong learners. They have a curiosity and thirst for knowledge that’s on another level. This is well known and something people often talk about. Successful people explore and apply new things.

One trait I’ve noticed that’s closely related is their tendency to adopt new tools and methods. Most of these people are focused on something they care deeply about. In the case of founders, it’s solving a problem. And they’re always trying to find a better way to do what they care about. This often leads to an attitude of open-mindedness about trying new tools and ways of doing things. When they find a promising one, they figure out how it can help them do what they care about more efficiently and incorporate it into what they’re doing.

This doesn’t mean they love trying every latest gadget or guru philosophy; it means they’re not set in their ways when it comes to how they do the thing they care about. They’re married to a destination (what they care about) but willing to explore a more efficient path to get there if one presents itself.

I had a good conversation with a founder friend recently. We discussed people who wait for opportunities to fall in their laps and people who find nonobvious opportunities and a way to be part of them. For a founder of an early-stage start-up, hiring the latter type is usually better.

During our exchange, my friend described the second group as people who show “purposeful progression in life.” I like that because it’s simple. Has someone identified an objective, and are they proactively taking action to move toward it, even if no clear path exists? If yes, they’re not just progressing, they’re progressing purposefully.

Are you progressing, progressing purposefully, regressing, or standing still?

I’ve been helping a founder with a fundraising round. It’s been a few months, and the round was moving toward the finish line. With investors lined up and lawyers finalizing documents, everything looked good for the transaction to close on time. Then one of the investors pulled out unexpectedly, putting the entire transaction in jeopardy. Luckily this founder had never stopped pitching other potential investors and had built a good working relationship with the lead investor. He has a solid list of potential investors to replace the one who dropped out. He was able to have a constructive conversation with the lead investor and agree on a strategy to close the transaction. It took an extra day—not bad given the eleventh-hour dynamics—but the transaction closed and the funds cleared the company bank account.

Fundraising is tough, full of all kinds of twists and turns. A transaction isn’t done until the money’s in the bank. Before then, anything could happen—and something often does happen at the last minute. Don’t get comfortable. Continue working on open items until the transaction is officially closed and the wire clears your bank account. When the wire clears, then you can relax a little and celebrate.

Yesterday I shared my thoughts on Jeff Bezos embracing wandering. In the video I referred to, Bezos talked about something else that I’ve been thinking about: cost reduction.

To Bezos, cost reduction means inventing a better way of doing existing work. When you invest in a better way, you make doing that work less expensive, which makes the world richer. He used the example of the plow. The invention of plowing made farming less expensive and more efficient, which made the world richer (by making food more plentiful and less expensive).

Space flight, Bezos said, is a solved problem, and he’s focused on dramatically reducing its cost.

It’s interesting that Bezos arguably has built a trillion-dollar company (Amazon.com) by focusing on cost reduction and could build another massive company with Blue Origin by turning the same focus onto a different industry.

If you want to check out this section of the interview, look here.