Compounding Everything

I am not the first person to write about this but it is mindset that I believe in and use to great success.

Compound interest on money is powerful because when you are paid interest on your money, the amount you are paid is added to your total. This means the next time you are paid interest it is on a slightly larger amount of money than the first time. In this way, your money grows not just based on your principal, but your principal plus all the interest payments ever made on that principal.

This growth is exponential rather than linear. The thing with exponential growth though is that for a long time it looks very small, but if you stick with it, the growth is larger and faster later compared to linear growth.

What does this have to do with anything? One thing that I have learned is that this model of thinking applies to so many things beyond just money. In fact, I use this thinking on almost every project I work on.

Here are some examples to get us started. When you see someone graduating with a master’s or PhD degree, it looks almost superhuman. It is a massive achievement, no doubt, but it wasn’t all done right before graduation. It was done a little bit everyday for years. They achieved that because on a Tuesday two years ago they sat down and read a case for two hours. And the next day they worked a problem set for thirty minutes. And a few days later they met with a professor for an hour. Their small efforts compounded for years until they accomplished something extraordinary.

Here’s another example. When you are in the gym or on YouTube and watch someone lift a barbell with 500lbs on it, it defies belief. The truth is that that lift is probably only a few pounds heavier than a lift they did a few days earlier. Four years ago on a Tuesday they lifted 255lbs and a couple days later 260lbs.

In both examples, the ingredient you don’t see in the amazing results is the compounding efforts over time.

There are many things that I haven’t accomplished because I gave up too early before I understood this concept of compounding in everything.

For example, I used to do creative writing and I would submit my work to literary magazines to try and get published. For months I submitted and got rejected until finally one of my pieces was accepted and published. I stopped writing and trying to get published after this because it seemed like such a large effort for small results. The truth is that was the very beginning of compounding success that would have built on itself. Another lesson here was that I set my goal too small. Getting published in a literary magazine was too small a goal so when I reached it relatively early on, I stopped. The goal should have been much bigger like get published in the New Yorker or get a book deal or something even larger.

I feel like my work with photography and freelance web design also fall in this category of giving up after a little success , not recognizing that that success would compound.

Put your focus on the process, not the result.

Mike Blessoe

When I started saving money, I didn’t pay much attention to interest rates, because the absolute value of the interest payments was so low. It is hard to get excited about $30 a year in earnings. Now a couple decades later, these small rates are getting more interesting.

I am also finding that networking is working this way for me as well.

My fiance was not surprised to see that a Spotify playlist I completed recently had songs I had added to it three years ago.

Some activities like propagating plants and growing a garden I choose specifically because of these slow compounding effects. I feel like this slow natural pace keeps me grounded in an increasingly fast paced world. Some things, the good things, take time and care.

On a final note, this whole blog is based on this concept and would not exist if I didn’t believe it. I wanted to show from the point of having an idea to start a business to actually having a running business is a long slow process of compounding efforts and decisions. At this time I don’t know exactly how it will turn out, but I know that I’ll get there.

I have not read “Atomic Habits” by James Clear but my understanding is that it also discusses these ideas.

Networking

Networking is something I have been spending considerable time on in the last year. It was something that a year ago I felt like I was very bad at but saw the value in being good at it.

One thing that I have clarified in the last year is that Networking is not a thing. I think people imagine trading business cards at a Networking event, or delivering elevator pitches to strangers over drinks. Doing this I don’t think has a lot of value. This is an expectation of getting, not giving.

When I think of networking I am thinking about keeping in touch with the people I know, and when I meet new people, keeping in touch with them too. When I said I was bad at networking, I mean I was only proactively staying in touch with ten people and not remembering much about our previous conversations.

First, I made the decision to define my network as anyone who I would want to get a drink with or ask a favor of. Since I was starting with so few people, I decided to include everyone in that list from my parents to co-workers to childhood friends. By including everyone it made it simpler than thinking about my professional and personal networks separately.

I also decided that as I did things I am interested in, that I would meet people and stay in touch with them too. This includes everyone from extended family, to clients at work, to friends of friends at parties. I am much more likely now to email someone who is doing something interesting, follow up after a webinar, or pick up the phone and talk to a classmate.

The two things I needed my system to do was to remind me to reach out to people and keep track of what we talked about. I used a spreadsheet at first then switched to Uphabit. I went through my contacts and LinkedIn and found 50 people I knew I wanted to keep in touch with. Over the last year I have added until I am now at 130 and growing. As I went, I thought about who I was in touch with and if there were interests or areas of my life that I wanted more conversations in. I also thought about diversity in my network: age, professional seniority, gender, race, location, lifestyle, etc.

At first it felt awkward especially since it was new for me and because these people weren’t used to hearing from me. But I kept trying things and worked on it a little bit each day. It didn’t take long to see what worked and who was friendly and interested in keeping in touch.

I am starting to be more generous when keeping in touch with people. It is important to update my network on what I am working on and have accomplished. It is also very satisfying to start making connections between people and helping people achieve their goals by introducing them to people I know. I also continue to look further afield to people who I don’t know previously but seem interesting and would be good to know.

Introductory Resources

As I am talking to people more about this business idea and the market of buying and selling web businesses, having a resource of good introductory articles and podcasts has become more necessary. Here is what I have so far but this will likely be a work in progress.

Small Monies

This was going to be a post about selling my textbooks on Amazon but they would only let me sell 2 out of the 5 I wanted to. After looking at other options I landed on eBay. The complexity of getting started caused me to get stuck before listing anything. There is more to do here selling things in my house but it feels time consuming. Maybe I should focus on local listings.

Instead here are some other things I am doing to maximize my income.

I am also maxing out all possible work benefits, beyond the obvious ones like 401k match and charitable giving match. Tuition reimbursement is started and should be completed this summer. Also developing a pipeline of job referrals by posting job recs at school. Steadily expanding that effort. I will also participate fully in the ESPP program starting this summer.

The third thing I will be starting soon is trading covered calls on my investment portfolio. This could lead into additional options strategies but for now will accept the additional premium for investments I am holding anyways.

Talking about buying businesses

A classmate and friend introduced me their friend who is about to close on a business purchase. It was excellent to hear his journey and made me feel more open to making my own path. He also helped me legitimize my ideas and desire to pursue them. He busted myths like not being able to search part time and not being able to do a search just in your local community. It was very cool to talk to someone with a similar passion about niche technical things. It also made me want to talk to more people about my idea after it passed his sniff test.

I created a concept deck and pitched my business idea to my entrepreneurship class at school. Practicing the pitch really helps tighten the idea and preempt common questions. I got good feedback from the class and the professor thought it had large scale potential. One person joined my team to help work on the project. She has good complementary experience to mine in alternative investments and is very excited about the idea.

The more people I pitch the more interest I get and the more my network grows. Other classmates have offered to introduce me to people in their network and I am spending more time in my network going back to to talk to people now that I have an investing theory and a business idea.

The last interesting development has been researching SBA loans in this space. Regardless of the business plan that comes out of this class, I will personally buy something within the next 12 months. The class will be focused on an investor model that opens up the fund/portfolio to more people looking for passive income. I will also buy a business or two and if a classmate or two wants to participate, it is a good way to test the theory.

One Year Update

My ten year goal index card

Almost a year ago, I wrote about defining my ten year goal during a class at business school. I was excited to read it recently and discover that I am already on track at year one. I am working for a new company and am well on my way to refining what I need to start my own business.

I expected to be working at a small startup to learn about small businesses, but I actually made the opposite move. I think there is still a lot to learn from my new company and some things that will help me with the startup.

My next steps on idea refinement will include a class next term on launching a startup. I expect to get a lot out of this class and use it as a launching point into the accelerator at school or into independent study focused on the business.

I also had a breakthrough this past weekend on what type of business I want to pitch during this class based on buying and selling web businesses. It actually just crystallized for me which felt good after thinking about it for so long. I think the persistence and research is paying off.

There are two other things I have kept up with since that class that have had an impact. First is I have been keeping a weekly journal where I first list the things I have control over in my life, then I writing about something recently that felt like winning, how it made me feel and where I can recreate that feeling. This is to increase my promotional versus preventative mindset. I think it does help long term and might seem subtle, but being reminded of that mindset feels good and obviously keeps me doing it.

Second has been really impactful and that is actively working on expanding and enhancing my network. I knew it was an area of weakness for me and the that course at school was a wakeup call. I started working on it by tracking my contacts in a spreadsheet and planning regular touch points. As I remembered or met new people I added them to the list and would text or email weak ties every 2-3 months. I eventually looked into “PersonalCRM” tools and chose Uphabit which has been great.

I have seen tremendous progress. I am much more eager to reach out, send a quick note, make a connection, and share than I used to be. I think it is a hugely positive change and has made me feel a lot more connected and capable. One thing that I was reminded of is that if you work on an area of weakness, you often don’t end up average at it but can actually end up better at it than average. It feels like this will end up as an area of strength for me with continued effort like I have been doing.

Side Hustle Research, Part 2

I almost considered editing my last post on Side Hustle Research because these thoughts came so quickly after I published. The Side Hustle Podcast led me to a very exciting topic that is bringing together a lot of goals and seemingly fitting a lot of pieces of this journey. I found the Empire Flippers Podcast, Her.ceo, and finally Web Equity Show which was the most exciting to me.

There are a group of entrepreneurs and investors who are looking at small online businesses as an asset class. The idea is that why start an FBA business (for example) from scratch when you can buy one that already has cash flows. Many start-ups fail, so buy one that didn’t. This also aligns with the article Debt is Coming by Alex Danco. When annual reoccurring revenue (ARR, the key measure for online businesses) is predictable, it becomes like an fixed income asset and is more amenable to traditional financing like debt. What we are talking about with this model is not just one web business, but many, making up a portfolio, delivering predictable monthly cash flows.

There are two additional aspects here that are exciting to me. First is that you can buy these businesses for relatively cheap and have full operational control over them. Second, they are currently selling at 2x multiples. This means potentially big returns on no growth, with direct control over making growth happen. These are generally businesses that sell products on amazon, or generate ad revenue through publishing content and range in size from profits of hundreds of dollars a month to hundreds of thousands of dollars a month.

I will be taking a course at school next term called Launch Your Startup and these are the concepts I will be bringing to that class. It could end up being a holding company or an accelerator or an escrow company for purchases, not sure yet. But this idea connects for me strongly with Entrepreneurship Through Acquisition / Search Fund and with my Ten Year Goal of making my friends rich. This idea will require investors small investors and the management and operation of small businesses. It is seeming like a very good fit.

Search Fund Accelerator

I have not spent enough words writing about the impact of Search Funds has had on my thinking. I first wrote about Entrepreneurship Through Acquisition six months ago, but my research in the meantime has continued.

The Columbia Entrepreneurship Through Acquisition Club Resource Page has many great articles and my research spread from there. The basic concept is to raise two funds. First is a small fund to support you for one to three years while you search for a small business to buy. Once you have found the business, you finance the purchase through raising equity, and a combination of bank and seller debt. You then run the business as CEO until exit, usually within five to seven year to Private Equity.

This concept was so exciting to learn about I became obsessed, consuming all information I could find and talking to everyone who would listen. To me, it seems like such a wonderful opportunity to experience many exciting aspects of business in a short period of time: company research, due diligence, acquisition, management, growth, exit. At at the end is the opportunity to make life changing money. Your investors have real opportunity to make money as well, since it requires smaller sums than traditional Private Equity and companies are usually bought at 4-6x multiples. This to me seemed like the way to exit the corporate world, and get real business experience.

This model also brings with it a small community of investors, operators, alumni, and funds. It seems like a passionate group of people. Through the club at school, I got to meet fund and accelerator operators who had been through this process and in the community for years. I felt like I had discovered something special that fit with so many of my goals and skills.

The approach that I found the most interesting was the Search Fund Accelerator of which there are less than a handful. In that model you join a cohort of searchers and have the backing of the accelerator during your search. The accelerator also manages the fund for the purchase and has actual mentors for you while you manage the business.

My only concerns have been around how to actually pull it off. Could I live on a much smaller salary for the years it took to purchase the business? Could I move out of New York City if I found the right business elsewhere in the country? Would the numbers work out to make it worth the effort at the end rather than getting a higher paying job for seven to ten years?

Side Hustle Research

I have done some preliminary broad research on potential side hustles and have a couple options that I will research in more depth.

My research followed a particular path but led to interesting results. I found the Mad Fientist blog through a reread of Simple Path to Wealth. From there I found the Side Hustle Show podcast, which led me to two potential business ideas:

First, is options trading which I am researching through Option Alpha and through my Capital Markets course at school. I like this as a side hustle because I am already very interested in investing and naturally motivated to spend time researching, building models and strategizing. Since I am in an MBA program currently, I have more resources and support to learn than I would otherwise. I am also interested in treating this like an income generating business rather than speculation or long term savings. There is the potential here to generate consistent and somewhat predictable income. The downsides are there are some inherent risks in trading, there is a steep learning curve, and it requires significant capital to generate income. I can easily start with a model that will generate $100/mo but scaling that to $1000/mo requires 10x more capital. There is no multiple or exponential growth potential in this business.

Second, is selling products through Amazon FBA and potentially sourcing those products from foreign manufacturers. This space seems interesting but potentially crowded. Good news with that is there are many tools and guides to get started and be successful. I have mentioned in previous points that I like the idea of reselling or retail in niche. FBA and eBay seem to be good options if you can find consistent inventory. The most consistent and predictable way to source inventory seems to be by working with manufacturers to establish product lines, rather than retail arbitrage or online arbitrage. There are also interesting opportunities for consulting and wholesale since this has attracted many small businesses.

I am starting a new job so progress might be slow but the new job does present more compensation and potentially lucrative stock options. I will be able to increase my savings rate and investment rate of return.

Separate the Long Term and the Short Term

In an earlier post, I was thinking about a side gig to make a little extra money and get experience running my own very small business. After initial online research was discouraging, I decided to put this off and focus on school. Now I am more comfortable with school and am revisiting this idea. The numbers I laid out are still a motivator and potentially good goals. Being able to pull a profit, then 1000/mo, then 4500/mo out of a side hustle business would be great.

In Infinite and Elusive, I was struggling with picking a business to pursue. For the long term big picture I solved this with ETA. What this solved for me was that I could be an entrepreneur who is primarily interested in running and growing a business without caring what that business actually does (usually what people think is most important to an entrepreneur).

For the short term side hustle, I decided to speak with all my friends and acquaintances who I know have side hustles to get ideas and to hear how they got started and what their first steps were. This has been informative, motivating and has helped strengthen those relationships. The research I did on franchises I was able to share with a friend who is interested.

I started focusing on reselling type businesses. I think they appeal to me because they represent an opportunity to capture value that other people overlook. They also usually have a time and patience component which appeals to my personality.