A Thesis on Value Creation

The Story Is Not the Business

The first thing we try to understand is very simple: does the business solve a real problem, do people want the solution and does somebody make money every time it is delivered?

It's amazing how far people can get without answering that properly. A company can raise money, hire a great team, create a beautiful brand and generate a lot of attention while still not knowing whether customers really want what it sells. In a strong market that can continue for a surprisingly long time because new capital keeps postponing the answer.

The story used to impress us a lot more than it does now. Now we prefer to skip to the boring part. Why did the customer make the purchase? Will they be a repeat customer? What did it cost to gain this customer? What is left after the product or service has been rendered? Does the company growth improve the economics, or does it just grow the company for the sake of growing? What would actually remain if one customer, one sales person or one channel of advertisement were to be gone tomorrow?

That doesn't mean we only want mature companies with ten years of audited accounts. It means that whatever can be proved should already be proved. If you can presell a product before producing it, do that. If you can deliver the service manually before building software, do that. If five salespeople can prove the sales model, there is no reason to hire fifty and hope the answer appears later. The world gives you many cheap ways to test whether you are right. Use them.

We don't like investing in an entrepreneur's calculation of what might happen if everything goes perfectly. Those calculations always look great. We want to see what has already happened and then understand which specific thing capital will change. If putting one dollar in reliably produces more than one dollar back, and we understand why, that is interesting. If the plan is mainly that the market will eventually agree with the founder, it is too early for us.

Product-market fit entails more than one metric and more than one line in a pitch deck. To us, it means that the business has begun to engage in a real exchange with the world. The customers are choosing the business for a reason, and the business has an understanding of that reason to an extent that allows for sustaining repetition. The business's economics are not entirely dependent on factors that can evaporate in the middle of the night.

The evidence will look different in different businesses. A consumer company may have strong repeat behavior, healthy margins and a product that works outside one advertising channel. A service business may have recurring relationships, low customer concentration and a way to grow without the quality collapsing. A software company may have retention, expansion and a sales model where the lifetime value is real rather than theoretical. The numbers are different, but the question is the same: is this a business yet, or is it still a thesis?

We invest in businesses, not in the hope that a business appears later.

Every Business Has Its Own Shape

This is probably the most important principle of our value-creation framework: every business has its own shape.

We think the main misunderstanding stems from the fact that the investment world likes to pack everything into tidy, little boxes. With venture capital, the expectation is that every start-up morphs into a behemoth. Private equity is about certainty and leverage. What do founders get told? Grow, raise, and cash out. The problem is that every company has a story to tell, and it doesn't care about the founder's narrative. Each company is unique with its markets and the rhythm at which it operates with its own natural way of achieving value.

Of course, the job is to create shareholder value. Saying that alone is so self-evident that it is almost pointless. The more useful question is how this specific business should create value, over what period, and what must be true for that to happen.

Some businesses should produce cash. A good service business, for example, is probably not going to become a technology company just because you describe it like one. It may still be a phenomenal business. It can have great margins, strong customers and produce a lot of cash for the people building it and the shareholders who own it. If that is the shape, then run it for cash. Do not give people distant equity and tell them to wait for an exit that probably won't happen. Share the economics that actually exist.

Some companies might be able to reinvest every dollar over a long period of time because the return on that dollar is clear and appealing. In that situation, withdrawing the money would not make sense. The company should keep compounding until the return on the next dollar to be reinvested starts to diminish. In this case, another opportunity may have appeared because of a temporary market. That company should remain very lean and avoid permanent overhead and take the cash when the opportunity is available, instead of making it seem like the opportunity will be there forever.

A reliable and long-term local service business has a different look. Customers often use the service for decades. The business' existing cash flow may provide a cushion for reasonable debt. Additionally, the operation can improve significantly by using better systems, pricing, marketing, and technology. However, a single local business is not going to become a trillion-dollar company overnight. A business model that aspires to be larger must show how the business transforms into a platform, how the business will conduct acquisitions, and why the newly combined enterprise is more valuable than the standalone local operations.

None of these businesses are good or bad because of their category. They are good or bad investments depending on the price, the people, the durability of demand, the available improvements and whether the capital and strategy match what the business really is.

The mistake occurs when a business is forced to fit a certain model. Take a business that’s in cash-flow form and spend all the business’s cash on aggressive pursuits for a valuation that is unachievable. Or take a business operating in a genuine reinvestment opportunity for a decade and start distributing cash funds too early. One builds a permanent expense in a market window that may last two years. Or one buys a business that is run by a handful of people and assumes that the business's cash flow is the property of an institution.

Before investing, we want to know where the return is supposed to come from. Is it the cash the company will produce? Is it better margins? Better distribution? A stronger management team? A series of acquisitions? Debt being paid down? A company that becomes more durable and therefore more valuable over time? It can be more than one thing, but it can't just be a higher multiple in the future because we hope somebody else gets more excited than we did.

That is the distinction between having an asset and having a narrative.

People Matter, but the Market Still Has to Be There

We invest in people because products change. Great founders find ways to improve the business, add products, change channels, pivot when they have to and recruit people who are better than them. A company rarely ends up looking exactly like it did when the first investment was made, so the person's ability to keep solving problems matters enormously.

We particularly value people who have been brought down a notch by the world. They have lost something, made a mistake, had to start over, or seen a plan they were sure about fail. Not everyone who has gone through such an experience is great, but it does help them see the world more as it is. They get that being confident is not the same as being right and that the world doesn’t notice the effort you put into the presentation.

At the same time, a great founder can't create an infinite market. We'd rather invest behind an exceptional person in a growing, very large market where the company can be number one hundred and still become significant. A perfect founder in a tiny, stagnant industry is still fighting the size of the industry every day. People matter, but the wind matters too.

The weighting changes depending on the transaction. For minority investments, founders may be our primary consideration. We need to thoroughly believe that the founders are truly excellent and have an almost instinctive understanding of the customer. For control transactions, the business may be excellent even if the current leadership is exhausted or simply not appropriate for the next stage. The customer base, brand, product, contracts or distribution may still have value after a personnel change.

We recognize the value founders bring to a business, but we don't believe a business should depend entirely on its founder. There are phenomenal CEOs and Operators that have never founded a business. Sometimes the best course of value creation is going to be backing a founder. In other instances, it is best to aid the founder in addressing their weaknesses. In a case where control is given, that can mean the complete replacement of the entire team. The business needs the best people for the stage it is in, not the people who best fit the origin story.

Diligence should extend beyond the founder and the financial model for this reason too. You gain understanding by communicating with people in different job roles in a company. Why do top performers remain? Who has the ultimate authority to make calls? What takes place in the absence of a founder? Is there a trend of attrition among key personnel? Is there faith in the company’s direction, or is the lack of action purely a function of the inconvenience of leaving? What may appear to be a solid company from the board of directors’ perspective may look much different from the inside of the company.

The founder is important. The team is important. The market is important. We don't think any one of those can rescue the complete absence of the others.

Capital Should Follow Proof

Capital acts as an amplifier. That may sound overly simple, but it is exactly what we mean: money helps a good company scale what is already working, while helping a bad company avoid reality for longer.

When we look at an opportunity, we want to understand what the next capital actually does. Not what the company says it will do in a broad sense, but what changes in the machine. Does it buy inventory that already has predictable demand? Does it add salespeople after the economics of one salesperson have been proved? Does it finance an acquisition with existing cash flow that can support the debt? Does it build a capability customers are already asking for?

The best situations are the ones where you can test the important assumption cheaply and then move very fast once it is proved. We like big swings, but we don't think taking a big swing means starting with the maximum possible risk. You try the thing with as little cost as possible, see what reality says and then have the courage and capital to push when it works.

That's what asymmetric risk means to us. The downside is controlled, the evidence arrives quickly and the upside remains large. It's not a spreadsheet where the base case quietly assumes ten things that have never happened before.

Price matters just as much as quality. A great company can be a terrible investment if the price assumes that every good thing will happen. A mediocre business can become a very good investment if the entry price reflects what it is today and the improvements are things you can actually influence. We don't want to pay the seller for the value we still have to create after buying the company.

We also think that not all investments follow the same structure. Ordinary equity can be appropriate for certain situations. At times, a combination of primary and secondary capital may be appropriate when the specific need of the founder is both personal financial security and growth capital. Additionally, it is appropriate to use financing when the business has a consistent and reliable cash flow. Other times, a joint venture may be more appropriate when one partner has the capital and the other has the capability to execute and/or the means to access the market and services that cannot be purchased.

The structure should reduce the ways we can lose without removing the upside that made the opportunity interesting. That's where creativity in deals matters. It's not creativity for the sake of looking clever. It's finding a way for the economics to work for everybody while protecting the downside if the original plan takes longer or changes.

We see leverage as just one of the many tools available to us. If a fantastic, resilient business’s cash flow can sustain the leverage under conservative projections, then we’ll happily use significant leverage. We do not want our investments to depend on an improbable turnaround to sustain the financing. Upside potential should come from the improvements, and should not be necessary to avoid a catastrophic outcome.

The same goes for reinvestment. Keeping all the profit inside a company isn't automatically ambitious. If the next dollar can produce an attractive, measurable return, reinvest it. If it can't, return it, reduce debt or put it somewhere better. Every business eventually reaches a point where more money doesn't produce the same result. Pretending otherwise is how growth becomes waste.

Distribution Is Becoming More Valuable

Our experience has taught us to think about distribution from many angles. At Starflow, distribution became vital. At Creed, distribution was key. We continually tried to analyze the shift of attention and who had the ability to impact behavior, and how we could monetize that attention.

What we learned is that attention and distribution aren't the same thing. Someone can have millions of followers and move nothing. Another person can have a much smaller audience and sell out a product because people genuinely trust them. A company can spend a fortune on marketing and still have no owned distribution. A business can also look boring but have customer relationships or retail access that a new competitor can't recreate with ads.

This becomes even more important in an AI-native world. If everybody can build software, create content, produce designs and run analysis at a fraction of the old cost, then building something is no longer enough. There will be more products, more companies and more noise. The scarce thing becomes the ability to reach the right people, earn their trust and convert that trust into profitable demand.

It's inaccurate to say distribution can be added after a product is built. Distribution impacts the kind of product you develop, the pricing, target customer, and selling cadence. In the consumer space, genuine retail distribution can escalate a product built as an e-commerce quick start to a full-fledged company. Still, distribution is ineffective if the product can easily be replicated the next day. The best integration of distribution and product is coupled with either a brand, data, customer relationship, or a long-term market position.

Relationships are part of this. People sometimes talk about networks in a very superficial way, as if knowing a lot of people is itself an advantage. It's not. A valuable relationship is one where there is trust, a history of creating results together and a reason for both sides to answer the phone. Those relationships can create deal flow, talent, customers, partnerships and access that capital can't simply buy on demand.

This is why we believe so much in partnerships. The right partner can bring something that would take years to build: unique access, credibility, regulation and policy knowledge, an exceptional operator or distribution through a person who genuinely moves a market. If the contribution is rare and impossible to buy, sharing ownership can make complete sense.

However, the truth is that most things, including company equity, can be purchased. Company equity is arguably one of the most expensive forms of payment for a company. Most financial, professional, and even day-to-day services can be compensated with cash. Therefore, you should not give up a permanent stake in your business for someone who simply performed a task that could have simply been paid for. A partnership should be more valuable and more meaningful than just a supplier relationship.

Value Creation Is Operational

We are operators and business builders first, rather than traditional investors. We don't get excited by the idea of putting money into a company and waiting to see what happens. There are companies where a passive investment is the correct decision because the business and team are already exceptional and there is nothing useful to add. But where we have an edge, it comes from seeing what can be changed and helping to change it.

When you work inside one company for years, it becomes difficult to see the whole thing. You have history with the people, you are dealing with whatever is urgent that week and parts of the business start to feel permanent simply because they have been there for a long time. Someone looking across different businesses can sometimes see the pattern faster. The job isn't to arrive and pretend to be smarter than the founder. The job is to see the opportunity or the problem clearly enough to help do something about it.

We think of active ownership as something close to a high-quality consulting firm, except the aim is not to create work or charge the company fees. The aim is to improve the value of the company we own. We sit with the founder, identify the biggest opportunities and challenges, set the right goals, and align governance and compensation around the same outcome. Then we bring in the right operator, partner, or specialist and help execute.

Sometimes the needs are in sales or marketing, and sometimes you need a fractional CMO, COO, CRO, or CFO. There are times you need to fully hire a manager, form a strategic partnership, improve reporting, or establish a distribution channel. In some cases, a person is needed to be objective and say that a certain project is not worth the investment. Each company is different, and needs different things at different times. This is why the investor needs access to a broad range of skills and resources without imposing a permanent commitment to every business.

We think of the role as orchestration. Capital is one piece, but people, relationships, timing, information and execution matter just as much. We don't want to run ten startups. There are people who are much better CEOs than we are. Our job is to understand what success requires, vet the people who can deliver it and put the pieces together around the founder or the business.

The best intervention should eventually make itself unnecessary. Go in, solve the specific problem, build the capability inside the company and step back. Being active doesn't mean being permanently involved in every decision. It means being there when involvement can materially change the outcome.

It requires a focused portfolio. We don't think any investor can understand hundreds of companies well enough to help each one meaningfully. We'd rather see a huge number of opportunities and dismiss nearly all of them, while having the focus needed to contribute to the ones we actually select. The sooner we can eliminate potential weak opportunities, the more focus we have on potentially great opportunities.

Incentives Are the Architecture

Previously, we assumed everyone being skilled and amicable would mean alignment would naturally happen. That's not true. From our experience, we have observed how people react to what an organization incentivizes, what it puts up with, and if the goal that they work towards actually means something to them.

Our experience building Creed taught us this at a high cost. We made misalignments that could have been avoided. The lesson we took from this did not have to do with a particular compensation formula. It is that compensation has to align with the business.

In cash flow businesses, people are interested in cash flow. Providing people with equity that may become liquid at a future date (if at all) does not mean that they will think and act like owners. In businesses with a ten-year compounding ability and a legitimate potential path to become very valuable, long-term equity may be warranted. In a short-term market, the person who is closing and executing deals may need to be paid for those specific deals. The reward and value must be aligned in terms of time.

We believe the people who create the most value should make the most money. Not necessarily the loudest people, the people with the best title or even the people closest to revenue on paper. The person who improves the product, protects a major customer, recruits an incredible team or permanently changes the margins may create more value than someone who books unprofitable sales. The measurement has to be economic impact, not visibility.

This also means A-players have to feel the upside. If extraordinary people create extraordinary value while the organization treats them like a normal cost, they will eventually leave or stop behaving like extraordinary people. At the same time, keeping C-players because removing them is uncomfortable is unfair to everyone carrying the company. High standards and meaningful upside belong together.

Founder incentives matter too. We don't believe in starving founders as proof of commitment. Personal financial pressure can push intelligent people into stupid short-term decisions. In the right situation, allowing a founder to take some money off the table can create stability and make them more capable of thinking long term. The question is why they want the liquidity, what the company needs and whether they remain genuinely exposed to the future they are asking everyone else to believe in.

The principle applies to investors as well. If shareholders profit, those in charge of making investment decisions should profit as well. If shareholders lose money, the manager should not be allowed to win in any way. Alignment is not a single word in a presentation, it is a foundation in every decision made.

Holding Is Also a Decision

We have no interest in flipping companies just for the sake of moving quickly, and we have no interest in holding something forever simply so we can call ourselves a long-term owner. Great companies take time to build. Two years is usually not enough, and selling a genuinely compounding business because an arbitrary timeline has ended can be one of the most expensive decisions an owner makes.

But holding is still a decision. Every day you continue to own an asset, you are effectively deciding that this is still the best place for the capital from this point forward. The price you paid five years ago doesn't answer that question. Neither does the fact that selling would force you to admit the original thesis was wrong.

We've held investments for too long because the idea of selling felt like accepting a mistake. That's not conviction. Conviction is when the facts have been tested and still support the decision. Attachment is when the facts have changed but your identity is now connected to being right.

Sometimes selling is obviously correct. The market may be moving somewhere else, the team may have lost its energy, the risk may have changed or another owner may be willing to pay today for years of future improvement. Sometimes the correct answer is to keep the company and take distributions. Sometimes it is to reinvest everything because the opportunity in front of the business is still exceptional. There's no fixed holding period that can replace judgment.

We want to understand the route to liquidity before we invest, but we do not want that route to become a forced deadline. Cash can come back through distributions, debt repayment, a partial sale, a secondary transaction, or a full exit. What matters is that the return does not depend entirely on an imaginary buyer arriving at exactly the right moment.

This is another reason the shape of the business matters so much. A cash-flow business can pay you while you own it. A high-growth company may reinvest for years and create almost no liquidity until an exit. A temporary opportunity may need to return capital quickly because nobody knows how durable it is. The investor needs to know which game is being played before deciding whether the outcome is good.

Cautious and Fast Are Not Opposites

We want to move fast. Opportunities do not wait for investment committees to become comfortable, and a lot of value comes from seeing something before it becomes obvious and then taking massive action. But moving fast after the important work is different from rushing because everybody else appears excited.

FOMO makes people reverse engineer the process and say speed is good because they love the opportunity and create a logic that justifies it. We have made this mistake too. The requirement to make a prompt decision does not excuse poor diligence. It only means a good system to filter bad opportunities has to be implemented.

Unproven ideas with unrealistic calculations are usually an immediate no for us. So are businesses where the entire return requires assumptions the company has never achieved. We want disagreement in the decision process. We want operators, investors, financial people and specialists to look at the same deal from different sides, because most bad deals look good if everybody evaluates them using the founder's framing.

It is not possible to get rid of all risk, nor is that the goal. When trying to eliminate all risk, you tend to eliminate all interesting returns as well. The goal is to know and understand the risk beforehand and know what you can control. Then you can be sure if you're wrong it does not harm you in the long run.

We like the idea of being cautious but fast. Cautious in what we believe, how we price it and how much we can lose. Fast once the evidence, structure and people are in place. The two are only contradictory if diligence is treated as a slow administrative process rather than a way to reach the truth.

AI should make this better. A huge amount of junior investment work is collecting information, organizing it and running analysis that can increasingly be done by a small team with AI. That doesn't remove the need for judgment. It makes judgment, relationships and operating experience more important because the basic analysis becomes cheaper and more available to everyone.

In the last decade, a global network combined with creativity and the ability to turn ideas into action let individuals produce outcomes equivalent to those of much larger organizations. We have sufficient digital fluency to track the movement of attention, technology, and behavior. We have also built enough businesses to know the new thing needs to generate revenue, keep employees, and endure tough markets. That combination is important. The future will put a premium on people with knowledge of the changes occurring in the world while also having a firm grip on what will remain unchanged.

What We Actually Believe

We don't think a company is interesting because it belongs to the right category. A business is a solution to a problem and a system for delivering that solution profitably. It can be software, a physical product, an experience or a service people have needed for fifty years. The category matters less than the demand, the economics and what can be made better.

We want to back exceptional people, but only where the market is large or growing enough to reward them. We want product-market fit and real proof, but we also want to understand what capital and active ownership can change. We want to pay a price that makes sense for the business as it exists, not a price that gives the seller credit for all the work still left to do.

We want to understand the downside before we get excited about the upside. We want to test cheaply and scale aggressively. We want people to participate in the value they create, using compensation that matches the business rather than whatever structure is fashionable. We want partnerships when they bring something money can't buy, and we want to pay cash when cash can buy it because equity is too expensive to give away casually.

We think distribution will become one of the largest competitive advantages as building becomes more accessible. We prefer the term relationships to networking as we believe they are created through repeated results. We believe an investor’s utility lies in their ability to provide the requisite capital, people, distribution, governance, and judgment in a way that is relevant to the company and the problem it is facing.

We also believe every business tells you what it wants to be if you are willing to look at it honestly. Some should compound for decades. Some should produce cash. Some should be improved and sold. Some should be built around an opportunity that may not last. The investor's job isn't to force all of them into the same story. It's to understand the shape, align everything around it and keep asking whether the facts still support the decision.

The world will keep producing new technologies, new sectors and new ways to make money. Some will be real and some will be hype, and usually the most dangerous moment is when the two look exactly the same. We know we won't get every decision right. Nobody does. What we can do is stay honest about what has been proved, what we still do not know, what could make us wrong and what work is required to create the value we are underwriting.

Money is a factor, but it is certainly not the most important factor. The most important factors are your judgment, the ability to distribute, the ability to maintain relationships, the ability to take action, and the ability to arrange people to collaborate on an opportunity. Money amplifies those factors, but it should not be considered an alternative to those factors.

The point now isn't to become afraid of risk. It's to take better risks, for the right reasons, in businesses where we understand how the value will actually be created.