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How operators can make great capital allocators
from product manager to people manager to money manager
Jason Andrew
March 29, 2024
I am a better investor because I am a businessman and a better businessman because I am an investor.”
A few episodes ago I referenced one of my favourite business books - The Outsiders. It’s about 9 different CEOs who transitioned from operator to capital allocator, creating enormous wealth for investors.
Capital allocation is a phrase thrown around a lot.
It’s difficult to make the leap from operator to allocator - few have done it well.
Here’s why.
Like every game, there are levels.
Shaan Puri describes the levels of the game of business as this:
An entrepreneur starts as a product manager
Then people manager
Then money manager.
This is an excellent framework and worth unpacking.
Level 1: Product Manager
For a person who starts and builds a company from scratch, their skill set is marketing, sales and product. The early stages of company building is fast and scrappy. Decisions are made quickly. Progress over perfection is the most important attribute for an entrepreneur.
Level 2: People Manager
Once you achieve “product market fit”, the entrepreneur's role evolves to people management. To grow a business, you need to grow people. The involves hiring, firing, coaching and developing people.
PS: I’ll be honest, whilst satisfying, it’s this level of the game which consumes and drains the most of my energy. A lot of my entrepreneur buddies also find this stuff exhausting.
Level 3: Money Manager
Once your business reaches a level of stability, CEOs need to level up again. They need to evolve their skill set from people manager to money manager.
This is where the game is divided between good CEOs and great ones.
Great CEOs transition to capital allocators. Easy to say, hard to do.
The transition is difficult because of this:
The skills and mindset that got you from 0 to 1 are completely different to get you from 1 to 10.
From a skills perspective, you need a strong level of financial literacy. You need to learn how to analyse businesses and opportunities. From a behavioural perspective, you need learn patience.
Investors sit on their hands for months, often years and still not do anything. They version of “work” is not investing itself, but rather thinking, reading and writing. This is polar opposites to the “move fast and break things” mentality - necessary to build a business from 0 to 1.
Investing is a game of patience and waiting for the fat pitch.
I think one of the most important things to do is not to play when you don't see a fat pitch" (…) I've always thought that the way to build a long-term track record is when you really see the ball, swing really big and when you don't see the ball, don't swing.
What’s common with the world’s greatest capital allocators is that they’ve mastered the game of business building and then capital markets.
Warren Buffett, Jeff Bezos, Elon Musk - these are all modern examples of operators turned investors. They’ve created enormous fortunes for stakeholders by mastering both hats.
In the world of private market and SMB investing, a hill that I’m willing to die on is that an operator first mindset will always have an edge over professional money managers.
The difference is that operators have learned from the trenches and see businesses through a lens of people, product and market - not from a spreadsheet and research reports.
At Arbor Permanent Owners, we have degrees, but we didn’t learn business from a textbook. We learned it from sleeping under the desk, the stress of unpaid invoices and the scramble to meet payroll. We've seen the impact of both good hires and bad ones. There’s no substitute for experience, and no faster way to gain it by building something from the ground up.
This is our sandbox. We like playing in the dirt.
Our respect for our fellow business owners is from this experience. We know just how much pain, hard work and risk went into building a company that customers love and keep coming back to.
If you’re a business owner that is exploring a sale and you care what happens next, please reach out - we’d love to talk.
About Arbor Permanent Owners
Arbor Permanent Owners is a holding company that acquires and invests in exceptional, private businesses, deliberately built for long-term success. Our goal is to be the long-term custodian and permanent home of Great Australian Small and Medium Enterprises (SMMEs).
We are actively looking for businesses with the following characteristics:
Business Model: B2B industrials: manufacturing and mission critical services
Business Size: $3 to $6 Million of EBITDA
Business Profile: Sticky B2B customer base
Business HQ: Australia
Whether you’re a business owner interested in working with us, or an intermediary with a deal to share, I’d love to hear from you. Please email us at [email protected]