Although he may not be the first guy you think of when it comes to starting a business, I think we can all agree that Warren Buffett knows business.
Even though he’s considered an investor, many of the most important lessons I’ve ever learned as an entrepreneur came from him, including this one:
A good management record is far more a function of what business boat you get into than it is how effectively you row. There’s no extra credit for a degree of difficulty…lower your degree of difficulty.
Translation: some businesses are just better/easier than others, so be careful about which you choose to spend your time on!
One of the most important decisions you can make as an entrepreneur is to really thoughtfully, deliberately determine a set of criteria for the specific characteristics of the kind of business you’ll invest your time and energy into before you start.
And if it’s too late – if you’ve already started your business – then NOW is the next best time to do this exercise!
This is critical because every business model is different, and will require very different resources and lead to very different outcomes – which impact your life!
To use an obvious example:
The entrepreneur that builds a $4 million/year restaurant leads a very different life than the entrepreneur that builds a $4 million/year software business that runs almost on autopilot!
One is hiring and firing 100+ employees each year, dealing with product that can expire every day, spending massive hours at the restaurant whether they want to or not…and most likely not taking home much money.
The other has a very small team, the revenue per employee is massive, the business can be run from anywhere, and they are making a ton of money!
It almost doesn’t seem fair, does it?
That’s why you must develop a clear set of criteria for any business that you will start or operate, so you can be smart about evaluating business opportunities – not only for their financial potential, but how they’ll impact your life.
Otherwise you could spend a decade or more of your life working hard on something that is never going to produce the outcomes you are looking for.
I learned that lesson, which is why I developed my criteria.
My criteria for any business I’ll start or run:
Rule #1: I am less concerned about building a company to be a gazillion dollar public company than I am about building a business that allow me to live my ideal life, which will be optimized for the amount of freedom it creates, the amount of money I will personally make, and the impact I can have on things that I care about. Rule #1 must be considered at all times.
- Lifestyle integration – I build a business to support my life, not consume it.
- No services without technology or product to provide leverage – I love service businesses, but they don’t create enough asset value or scalability unless accompanied by some sort of tangible product or technology.
- Create once, sell many times – creating is hard work. I want my hard work to continue to pay dividends for years to come.
- Customers, not clients – I don’t want anyone to feel like they can call my cell phone at night!
- Mobility to operate anywhere – travel is a passion of mine. I want to be able to operate my business while traveling for extended periods of time.
- Very clear way to market and sell rapidly – ideally through existing channels already primed to sell for us
- Clear value proposition – the value of what I’m selling should be obvious and powerful to my customers; it makes everything so much easier.
- Leverages online and social – two massive trends that give a business massive leverage; silly not to take advantage of them.
- Gross margins over 50%; net margins at least 20% – strong margins are the lifeblood of any business.
- Creates a sellable asset – the big win comes from building an asset you can eventually sell.
- Selling something people want vs. something they need but don’t want to buy – SO much more fun.
- Not a people-intensive business; should be able to design in 90% automation – automation is the closest thing to magic for lifestyle entrepreneurs, and I want to leverage it as much as possible.
- Can easily find someone that will be able to successfully run it for me – if I want to do something else with my time.
- Should be a ‘STAR’ business (Book: The Star Principle) – it should be differentiated and have the potential for fast growth.
- Should have a ‘brand with an edge’ – a well-developed brand is incredibly valuable and fun to create.
- People think it’s fun – I enjoy businesses that other people enjoy/want to talk about much more than businesses that are in stuffy industries.
- Shouldn’t suck energy – should create it! When I’m working on my business, I should be gaining momentum, not wearing myself out.
- I think it will still be interesting to me 10 years from now – the likelihood is I’ll be in this business for a long time; it should be something I can see still being interested in a decade from now.
- I can’t shut up about it! My passion and enthusiasm is perhaps the #1 driver of success in my business; I should be on fire about it or not do it! The is easily evidenced by how much and how loud my mouth runs on about what I’m doing!
Develop and document your own criteria
You may look at this list and think I’m crazy; that there should be something about ROI and exit strategy. That’s ok – develop a set of criteria that’s good for you – not me or anybody else!
Your criteria will most likely change over time. When I was younger and living in Silicon Valley, I thought the definition of success was raising venture capital and going public.
Now, I’m almost allergic to the idea of trying to build a public company.
That may change 15 years from now, but for now, lifestyle is my #1 priority. Every major decision at make at my business take Rule #1 into account.
I highly encourage you to document your own set of criteria as quickly as possible. It will be one of the most important things you do as an entrepreneur – I promise!
I hope this helps you!
All the best,
Mike Cooch
LVRG
