I emailed the following italicized note (minor edits) to some colleagues at Little Engine Ventures over a year ago (mid 2018). I started a blog post shortly thereafter to share it with others but then paused. Was it really worth sharing? Maybe our situation was too unique? Sometime later, it still appears timely. I also think there are some timeless principles here. (Mikel jokes that I write too much on my phone. Perhaps.) I publish it now (early 2020) because of some recent convictions. I hope it helps others.
I am concerned about how we form organic expansion plans within LEV portfolio companies. I have trumpeted “decentralized operations” but have gripped the balance sheet tightly. I sometimes lean on the accelerator and I have tapped the brakes. Once, early on, I even grabbed the steering wheel. These actions may introduce unwarranted risk. They may also keep us out of the ditch.
I started this email earlier this week and am now finishing it from a lobby of a Quicklube. My apologies for grammatical errors.
The assessment of risk and subsequent actions of small business managers is as diverse as the plants of the earth. Some grow fast and then whither in the cold. Others hug the ground and spread. Both trees and moss are beautiful to me. I don’t think there is one right way. There are lots of ways a business can succeed. I want to allow for that within LEV. There are some themes however that don’t work. I’m trying to help us avoid those.
The concept of diminishing marginal returns might be among the most dangerous to an entrepreneur. It assumes the future is known, and this is never true. It also compels a manager to squeeze out whatever he can from current resources without devoting time to exploration. I don’t want managers to stop squeezing current resources, but I also think I may need to add in some more conditions to guide the decisions such that they align with the overall excellence we all seek for LEV. Exploration is huge when forming organic expansion plans. Or, should I say, when you are growing organically?
First, there are many assumptions to be made in business on a daily basis. The best method I have found is to move cautiously when the information is unclear. And, I’ll define “caution” as small increments. (i.e. If you are in a pitch-black room it would be unwise to run.)
Conversely, one should not expect the room to brighten simply by waiting in place. A little movement may produce exponentially more information upon which the direction of the next move can be decided. This is how our businesses should grow with maximum safety. It’s not with deep, detailed plans.
Then, one must decide how quickly to accelerate. Acceleration is the rate of change of velocity per unit of time. In business, as in physics, an object requires more force to accelerate. I believe this force originates from the leader. I am among the leaders but not the only leader. I have a style that works for me. I want each leader to find their own style.
A Formula One race car acceleration is much greater than an Indy Car because of its gears. It must burst through numerous curves. It’s a joy to watch but the method burns a lot of fuel. The Indy car also burns a lot of fuel careening at top speed all the time. A Prius doesn’t win drag races but conserves and minimizes energy for use elsewhere. While I personally enjoy the thrill of a race, LEV is not a race car. It’s a coupling of little engines geared together like a Swiss Army knife for maximum utility in the most compact size.
As Tom Murphy said, “The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
I’m not about making LEV the biggest fund ever (longest train.)
I would like to keep it coupled forever (arrive at the station.)
I also like being the best… which I believe we can… provide access to the long tail of small business ownership. (Arrive first=win.)
And finally, accomplishing this with the least amount of invested cash (least fuel.)
I believe we are aimed in the right direction and making significant headway. This week, a manager of a significant value investor, family office told me there are only two firms aimed at this space and we have built our machine to optimize energy utilization.
I agree with him that we are rare and it is thanks to folks like you. I also want to point out that we are far from done. We have to exploit the “professional management” with an eye on systemizing entrepreneurial and owner mindsets. We do not want our organic growth initiatives to introduce risk that centralized capital allocation could have avoided. This lean approach needs detailed principles on precisely how and what constitutes wise reinvestment.
Sent from my iPhone
Sent from my iPhone