Transcription
So you're starting up your company. You're looking and trying to decide, is this company going to succeed? Is it gonna fail? We started multiple successful companies, but the thing is, I don't start companies usually unless I know that they're going to be successful. So how do I, you know, how do you understand?
First, there's no guarantee ever that they will be successful, but I'm putting the odds in my favor, and that's really what you're trying to do. You're trying to make sure there is a plan of success. And I don't mean a plan of success meaning, oh, I'm gonna create this product and all these people are gonna run to my website and they're gonna love it and buy it. That's hopes and dreams, which are bad, but it's not a plan.
Now, most people when they're starting a business, they're trying to decide where their value is and how that's going to be priced, whether they can be competitive or not. And there's a few things just right off the bat that you need to look for. First of all, price, value, no competition. Okay, if you are in an industry that is price-driven, or a product in that industry that is price-driven, meaning you're just trying to get down to the lowest cost possible and that's your idea and you could sell it. This is a very saturated market. You're gonna have very, very low margins. You're gonna be 3% margins. You're gonna need scale to make that successful, right? It's not that it can't at all. That's not my game. You're usually competing with industries that have consolidated and they can get that scale, and that's why prices drive down because their margins have shrunk, and it's normally very large barriers of entry.
Now, value. You can come into the same industry and say, I'm not gonna compete on price. I'm gonna compete on value, right? So I'm gonna create something else, that product, that service that is currently in the market, and I'm gonna make it better, and people are gonna want that, right? And this is very subjective. And I, I do have kind of a problem with this. This is where you need to go, but let me, let me talk to you why I think it's subjective. Your value, what you believe is value, is not the customer's value. So many entrepreneurs are in love with their idea and nobody cares. So the first thing you got to remember, you're an entrepreneur, you're investors, right? Nobody cares. Nobody cares about your idea, right? The customers, the only thing that matters, the value that is attributed to them, it needs to stand out. Most of the time, the best way to do value-based businesses are in niches where you can clearly identify a gap, not broad market where you're just going out to everybody. And to, this is really important, if you have to really convince somebody of the value, the value is not there. That's why I like to go better here. No competition, or what I would say, you make your competition irrelevant.
Now, this is a strategy that I've done that has worked multiple times. That's where I either change the product, I change the service, the way that that service is delivered to the market, or some other means in that way, and the competition doesn't matter anymore. They just don't exist. And I know that there's value. There's two ways that we did this. I've done this, and I'm going to talk about it on a software side for a software product, and then I'm also going to talk about it on a consulting side that we've done. So in certain industries, particularly in the service industry world, you can create a market. Okay, now this is really good to do, and I've done this multiple times in insurance where I create a market, I control the market, so I don't have to compete. It just doesn't matter. Do you want access? Yes or no? This drives down my cost and it increases my acquisition because I can clearly define who I am trying to get, right? I know my customer, and they're very, very clearly defined, and I know that this product is for them. Then it's just, do you want it or not? Yes, no. And I can move on, right? Sign the paperwork. I can double, if not triple, my my acquisitions. Then it's just it's so easier my conversion rate because mostly I'm not buying them and can move on if they wanted or not. So creating markets, which sounds way big and way more complicated than it really is. And I'd love to get into how we've done that in the insurance world, but it's kind of proprietary and I don't want other people to do it, so I'm not gonna talk about it right now.
But the other way that I like to make competition irrelevant is you bring your customers first. Well, if you start with your customers, then you already don't need to worry about your competition. So we created a software product, okay? This is our property management system, our PMS. I know, and the property management system, okay, how it works is like any software system. We have users that pay, they use it to operate their individual assets, and it runs off their business. They pay us monthly fees. The great thing about software is they're easily scalable, right? Now, the bad thing about software is the start-up costs are huge. We raised millions to start this up. Now, I'm not doing it. It's not where I live. I'm a major investor, and we were part of bringing this together, us and a group of people, and that's why this is successful, and this is why we did it. I don't blindly invest in anyone.
So what we did is we had some major operators, okay? So let's say we have five, six, seven companies, which I can't remember our exact amount, but it was 10. Now, these companies all have multiple locations. Now, let's say our break-even point, our break-even point is it's called a hundred locations that are all paying for the property management company. So although a property management company needs a hundred locations to break-even. So what we did is we got enough people that we came together, said, let's create this, and guess what? We already have the hundred locations. So we are filling our own demand. Anybody beyond that is successful. So we look at it, good, even if we just use the company that we're building, we're gonna be successful. Like competition no longer matters because we are the owners of it. We're of course we're gonna use it. We're not gonna use anybody else. We're building it for us. That lowers your risk so dramatically because it almost can make it gone irrelevant. It's just now whether we can actually do the project or not, which we're very confident that we could do. So we created our own demand. So we had our customers, we had our demand, we created a product to fill us, and the ownership are the ones that are buying. We're our own customers. It's a beautiful thing.
I have always had this idea of build your own economy. And building your own economy to me has made a lot of sense. And let me show you a kind of how I've always pictured this in a real estate version. Dick, now let's say you have a city block in a perfect world. And city block, let's say this corner is a hotel, this corner is office, okay? Now, this corner right here is multifamily apartments, then we have commercials, then here we have a storage facility, and then in between you have residential, right? I call this creating your own economy because if you can at least bring the people together or own the shares within, you're creating your own demand. I can measure out exactly the units in the multifamily and the residential, and I know that I can get 10% of them. And that will tell me if I could get 10% of the people that we are together building with the developers, that that will equal 60% of my storage facility. Let's say that's my break-even point. I'll always build that asset because I already know it's gonna break even. And anything else I do on top of that is filled, right? The same thing with commercial office space, multifamily, the hotel, right? You're building your own, you're fulfilling your own demand. So it's not a question whether the demand is out there. It's not a question where how will people buy this or not. That's what you need to do in entrepreneurship. You need to lower the risks. You don't blindly go into markets. You fill demands that are known and measured. More importantly, fill demands that you have and you can cover it.
So anyways, kind of a ramble, I know, but it's been something kind of a guiding philosophy that we don't just walk into things, things blind. And I hope it shows you too that investing in entrepreneurship, it's not gambling. It's planned and well-executed plans that bring it to life, right? And the more you think that investment is gambling, the more that you think that entrepreneurship is gambling, the more you'll act like it is, and the dumber risks you're gonna take, right? We pass on endless amounts of projects. It's not that they're not good, and it's not that some of them haven't been hugely successful. But if I don't get it, and I don't see that the downside has basically been taken away, and I need huge multiples to make it work, I want 20 plus percent cash on cash returns. I want to double my money in a few years because I need to compound it out. I can't do those things and reasonably do it with low, what I see risk. I don't touch it. It just doesn't make sense for me to do.