In last week’s Moment I talked about how much more lucrative it has been for me to startup companies recently rather than acquire them. I went on to say that institutional investors, such as PEGs, have been generating less than 6% returns in the past decade, and this number would tend toward zero (at best) due to the return-killer combination of overpaying for deals while operating in a slowing worldwide economy.
Many of you thought I was talking about the old lemonade style of startup. You know the one: the Peanuts’ characters open a lemonade stand and no one ever buys anything.
Actually I was referring to creating Instant Companies. The Transformation Age gives us an unprecedented opportunity to create massive amounts of wealth quickly. In my book – Time Really Is Money – I describe “network orchestration” as the most effective business model in this new Age. This model is what enables niche conglomeration to work on a large scale.
Uber is one of hundreds of network orchestrators that reached unicorn status. Uber is also a niche conglomerate. Uber develops, markets and operates the Uber mobile app, which effectively makes it a network orchestrator. Uber is leveraging this intellectual capital to create a variety of lucrative (albeit large) niches. For example, Uber is mainly known for connecting drivers with passengers in an innovative way. But UberRush provides courier services and UberEATS provides food delivery. UberRush can even allow online shoppers to get same-day delivery of goods through both UberRush couriers and Uber drivers. Each Uber niche leverages the core intellectual capital of the company.
As a startup, Uber has created more than $50 billion in value in just a few years.
I chose to pay attention to such occurrences and created a unicorn in less than 3 years. But creating unicorns are risky and ultimately requires the founders to bet more than they can lose. I’m spending almost all of my time these days creating rhinos.
A rhino is a network orchestrated startup that gets valued in the $200-500 million range. These are instant companies that take 1-2 years to create. As a founder I expect to own 10-20% of the rhino once it begins operating. Rhinos take some capital to arrange, but nothing like acquiring mid-sized companies. The two rhinos I’m launching now have required me to invest less than $250k in total.
Let’s do the rhino math. By investing $100-150k, I can increase my net worth $20-100 million. In less than 2 years. I want to hear from people who can achieve these metrics in the acquisitions game. I’m really good at acquisitions, and it takes me 5-7 years to achieve a fraction of the rhino returns. And I have to bet way more $$$ upfront with acquisitions than rhinos.
I think most rhinos involve re-arranging a global value chain to make it more efficient. As I write this I’m creating a rhino that enables sellers and buyers of a certain product to connect with each other for the first time. My role is to build the system in which both sides will meet, clear the political/other noise that always seems to stand in the way of efficiency, and then structure extremely compelling value propositions for the parties. My math says this network will generate about $350 million in EBITDA in year 1. I expect to double this number in 3 years.
Talk about creating an instant company with little upfront investment. It’s a rhino to me because I get 10% of the profits for arranging the network. And I get these profits for as long as the network operates. I fully expect this network will last for 10-20 years, or until someone creates a better model.
So now you know how I work for $100k+ per hour, and why I no longer acquire companies.