James Sinclair’s Business Philosophy Part 3: How to become an Investor-Preneur
What is it the top entrepreneurs and business owners are doing to achieve successful growth?
They’re thinking to themselves: “If I’m going to put some time, effort, money and energy into an entrepreneurial idea, can I scale this business?”
You need to think like an Investor-Preneur. Here’s how you can do just that, by scaling your business up.
What is a scalable business?
There’s a hungry audience
Your business is scalable if it can easily do over £1 million revenue without you even thinking about it.
In fact, one of the things I always say to people is: “You’ll know you’ve got a scalable business if - if you had access to all the best people and unlimited funds - could it become a billion-pound revenue business overnight?”
If you can answer that with real sincerity and truth, you know you’ve got a business you can scale.
Lots of entrepreneurs are running microbusinesses that are very difficult to scale. You want to avoid those.
Choose businesses that can scale. I just find it much better.
Lots of people have got restaurants with only 40 covers. They can’t make money out of that. If you’ve got a restaurant with 350 covers, that’s a model with economies of scale.
Once you’ve got that right, you’ll find people want to help you run ten restaurants with 350 covers – although restaurants are very difficult businesses to make money in.
Is the business capital-intensive?
Once you’ve invested your money to grow the business, do you need loads more capital to grow it?
Say you’re running a cruise line, a hugely capital-intensive business. You need more billions to buy more ships to run the business.
If you’re an entrepreneur and you’re planning to sell your business, choose ones that are not too capital-intensive.
However, there are some pros of capital-intensive businesses. They do protect you against competition. Not everyone can start a cruise line tomorrow.
I like businesses where there is a high chance of high-price-tag profitable sales.
Apple and Disney are the best at this.
Disney has struck the right balance between higher and lower-price tag sales. (Credit: Unsplash)
You can spend £10,000 with Disney on an all-inclusive package holiday, or you can just spend £7.99 a month on Disney Plus. There are also price points in-between to get you hooked on the Disney drug – whether that’s buying the toys or outfits, etc.
They’ve got those high price tag sales as well – the cruise lines, the big hotels, the big Disney parks. When you’ve got all those, that’s really helpful.
Build businesses with a chance for residual income
I love the phrase: “We want a little bit of money from a lot of people a lot of the time.”
That comes back to our Disney methodology. They’re getting monthly money through Disney Plus – from everyone, including my family and tens of millions of people around the world.
Apple has it with all its streaming services and Apple Music, alongside its high-price products.
Netflix has it too, but that’s all they have. They don’t have the big, high-price profitable sales that Disney and Apple have.
When you’ve got both. Mamma mia! Bada-bing bada-boom, you’ve got cash in the bank.
Avoid “me too” businesses
I learned this in my first entrepreneurial career, when I was a kids’ entertainer, swapping time for money.
Back in my “Jimbo the Partyman” days.
Then, I started hiring out bouncy castles. But I soon realised, for £500 or £1000, people could start up and compete with me.
That makes it a race to the bottom to try to get customers who will buy from you on price alone.
Avoid being in a “me too” business. Try to go as high a barrier to entry as possible.
If you’re a qualified dentist, you need to find other experienced dentists who are able to compete with you. That makes you a higher barrier to entry. It gives you leverage to charge accordingly.
If you want to charge better prices and have less competition, the rule of thumb is to be as high a barrier to entry as possible.
However, there are ways to mitigate competition if you are a “me too” business.
For example, if you’re selling burgers and chips, you’re a “me too” business. For a few thousand pounds, people can compete with you. But McDonald’s has found a way to use branding to leverage themselves as the absolute go-to place to be.
If you put a McDonald’s selling burgers and fries next to an independent doing the same, McDonald’s will always win the day because of its huge brand power. That makes them incredibly high barrier to entry, selling a very “me too” product.
Awards, testimonials, being famous and using the leverage of social media can help you win the day.
Avoid Low-Margin Businesses
You don’t want to choose businesses where there’s no margin. It absolutely shocks me to my core how many business owners get into scale economy businesses.
They want to be the next Lidl and Aldi, but those businesses are doing billions in revenue and making wafer thin margins.
If you’re an SME turning up to £50 million, margin should be the game for you.
Yes, you want to offer value for money - but if you haven’t got margin, you’ll just be turning money and not making it.
So many businesses are working to 5 to 25% margins. You’ve got to turn a lot of money if that’s how small your margin is.
Go for good margins - anything 50% plus. You will see a much more enjoyable life. You can deliver much better customer service and invest in research and development.
Apple can afford to invest a lot into its research and development because of its good profit margins. (Credit: Unsplash)
Take the iPhone. It probably costs around £300 to make, and Apple sells it for £1,200. That’s why when you go into an Apple Store, you get great customer service, the place looks good and there’s enough margin in there to invest into research and development to bring out increasingly better products.
Will people want to buy it?
Two things here: will people want to actually buy your product? Is there a hungry audience for your product?
If you’re selling hot dogs, do it at half time in a football stadium with 70,000 hungry fans. You’re going to generate sales instantly – now – not build a pipeline that might work in 6 months.
If you’ve got visions of grandeur that you want to do space tourism in the future and want to be the person who’s going to move the world, that’s okay. But you want to start with businesses that give you instant cash flow.
The sky’s the limit for people like Sir Richard Branson - literally - thanks to cash flow. (Credit: Unsplash)
Sir Richard Branson of the Virgin Group started selling records from a phone box. People gave him money on day one. It took him until his 70th birthday to start doing space tourism on the back of instant cash flow businesses.
That’s where you want to be.
Make sure you test the marketplace. The best way to do this is to see if you can get free deposits for your product or service before you even launch it.
Check out my full blog on finding a hungry audience.
There’s also another buyer you should be thinking about. This is the real acid test to working out if you’ve got a great business.
Do private equity, venture capitalists, or investors want to buy your business when you exit?
That’s really what you want to be thinking about from the very beginning: “I’m building my business to sell, even if I have no intention to do so.”
read more: How your business should look in 10 years
I think that’s why lots of people in the UK like investing in buy-to-let property. They know they’re going to buy a property which will generate them monthly income and there will be a list of buyers wanting to purchase their asset.
I don’t like property investment anymore, but there are a lot of people that do. Subconsciously, they buy into it because they know that if they want to get out, someone will buy the property from them.
That’s what you want to be as a successful business owner. Who’s going to buy this thing from me, should I wish to exit? That’s vitally important.
I started a leisure business which was an indoor play centre. I looked around and thought, “If I want to exit, who’s going to buy this?”
“It’s going to be another one of me – another one-man-band.”
Entrepreneurs don’t want to pay anything for businesses. Investors will give much bigger returns.
I realised my model wasn’t good enough to sell or for profitability. So, I added on day nurseries to the indoor play centre. That made it a much better investment.
Venture capitalists and private equity want to buy into care. Banks love funding care – they don’t really like funding leisure and hospitality quite as much.
I re-engineered the model to get leisure and care in one building. That makes it so much more attractive to sell.
How much will I need to scale the business up?
If you want to scale a business up in terms of people and infrastructure, you want to know how capital intensive it will be at the outset, because that’s what an investor would do.
Entrepreneurs go, “It’ll be alright, we’ll make more money and we’ll see the opportunities come.”
They use optimism.
I am that guy, but I do better when I think with that investor mentality, fused with the entrepreneur. Hence, the Investor-Preneur.
Is there a need for the business?
Great businesses have these key aspects:
Love
Want
Need
In my experience, most businesses have just two of these things.
Take restaurants, for example. People LOVE going out for dinner, they WANT to go out for dinner, but they don’t NEED to go to a restaurant because they can eat at home.
Supermarkets, on the other hand: people LOVE food, they WANT food, and they NEED food.
A real acid test is to look at the businesses that were allowed to trade during the pandemic. They were all “want and need” businesses, which continued to thrive.
If you can choose businesses that possess all three traits, you’ll find you’re in a really good position.
The iPhone is a classic example of this. People LOVE their iPhone, they WANT their iPhone, they NEED their iPhone.
If your phone broke today, I reckon you would stop whatever you’re doing and change your plans to repair it instantly. You may even go and buy a new phone – because you LOVE it, you WANT it, and you NEED it.
A lot of my businesses are hospitality and days out. Sure, people LOVE days out and WANT days out, but they don’t NEED days out.
Another of my businesses is childcare. Parents LOVE their children to be educated, they WANT their children to be educated, and – because they’re going to work to earn money for their family – they NEED their children to be educated.
If you can find “love, want and need” businesses, you’re on to a real winner. You’ll find those are the businesses which get funded the easiest.
Will it be easy to find management?
Remember: E + M = S
This is the absolute secret of business: entrepreneurship + management = success.
If the business is too management-driven, you’ll find no one else is moving it forwards. But if it’s too entrepreneurial driven, you’ll find there are no systems and processes. You want a nice, equal balance.
When an entrepreneur knows they’ve got really good management in the business, they’ve got such power to go on and move more mountains. If you can’t find management, that’s going to be really difficult.
Lots of businesses start with a new idea or USP and there’s no management around to help. Finding management is key – especially when you want to sell your business, because buyers are buying into management more than anything else.