fbpx

Tag: Investor

Chasing The Perfection Hype

When investing in any kind of asset (blog, e-commerce store, real-estate, stock etc), do not chase the perfect asset. When you chase the perfection hype, you pay top dollar for acquiring the asset. In the days to come, you realize nothing is perfect and so isn’t the asset that you just purchased.

Then you incur costs for repairs, maintenance, improvements etc for the asset to live up to its perfection hype. This makes your purchase very expensive as not only you paid a higher multiple for purchasing perfection, but also spent more money later on once it didn’t live up to it’s hype.

Instead, you could simply go for assets with visible imperfections. Any asset you buy with visible imperfections will have those priced in too which would get you the asset for a more affordable multiple.

As an example, if there is a niche Amazon FBA store with all relevant products it will sell for a higher multiple than a general Amazon FBA store. I understand why niche stores are better positioned in some cases, but in reality both niche and general stores have imperfections.

Niche stores are less diversified and hence positioned badly to weather a storm like COVID-19 when some categories get hit more than the others. General stores in comparison have visible imperfections such as that many products in the store belong to different categories. Although it may seem as an imperfection to some, it’s also a feature; the store is better diversified to weather a storm.

When buying an asset like a general store, the visible imperfection of having products spread across various categories is priced in. It is why it sells for a cheaper multiple. One could take advantage of this when buying assets and get this general store with visible imperfections. Not only the niche store has imperfections as well, it’s also a lot more expensive. Only in rare cases, it would prove to be a more fruitful purchase such as you sell it later as strategic acquisition.

Assets with visible imperfections can also be improved such that they no longer have any visible imperfections. By doing so, you can quickly increase the value of the asset.

What I Learnt From Accelerator’s Rejection

In 2013, I and Saad were invited to the bay area by a large seed accelerator. The business was doing great. We were posting not only insane revenues, but equally great profits. We were also posting decent growth month over month. In a way, we didn’t need the seed funding. But we did need the acceleration. And our goal was to get the right mentorship to grow our business beyond what we were doing already.

But we were rejected. They said no and we didn’t understand why. This is the email they sent us

I’m sorry to say we decided not to fund you guys. We were very impressed by your numbers so far. But what deterred us was that this is basically an arbitrage business. You don’t have users in the sense that e.g. Dropbox has, and thus no lock-in with them. Which means you make money for a while, perhaps a lot of money for a long while, but then conditions change and your revenues dry up.

Over the next few years, it started to make more sense to me. As the business did go down, the revenues actually did dry up, and I tried to see the things that they had said.

They were right and I was wrong and unless I acknowledge that, I can not be right in the future. I learnt a great deal from this experience. I understood the importance of having a lock-in with users as opposed to simply having users. With this knowledge, I can finally build businesses that will last longer.