Michael Gerber got it wrong.
But he failed to identify the level of development AFTER the Entrepreneur.
The fourth level of entrepreneurial development.
He tells a fantastic story about the first three levels:
- Technician – baking the cakes
- Manager – managing the person baking the cakes
- Entrepreneur – building the cake baking system
This post is about the fourth level of development, the elusive level that is not taught in schools or even business books, the level of the financial elite.
This is the level of the Banker.
We are talking about the person in the exquisite suit, sitting on the top floor of those massive glass buildings in London, New York or Tokyo.
And yes, I know there is a dark side to the Banker, privatising profits and socialising losses, but in my opinion if you can’t beat them… it’s best just to learn how they win.
The Banker understands the importance of cash flow, the time value of money and human incentives.
The Banker is able to perform cash generating miracles with just a little capital, a hungry entrepreneur and their employed managers and technicians.
For the sake of our sanity, this definition of the Banker ignores the crazy financial derivative/bond/credit default swap trader and focuses more on Investment Banking, M & A and Private Equity.
This Banker sits on a “level above” the business and Entrepreneur, they use this perspective to advise on, value, buy and sell businesses with their own capital and that of their investors… earning a large amount of cash in the process.
I have spent the past 12 month learning A LOT about banking, private equity and hedge funds.
In fact, here is a comprehensive list of the books I have read/listened to, in order of recommendation:
- The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything
- The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess
- Business Adventures: Twelve Classic Tales from the World of Wall Street
- Flash Boys
- Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street
- Swing for the Fences: From Debt to Wealth in 7 Steps
- The Money Machine: How the City Works
- Liar’s Poker
- The Money Culture
- The Greatest Trade Ever: How John Paulson Bet Against the Markets and Made $20 Billion
- Barbarians at the Gate: The Fall of RJR Nabisco
- King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
- Other People’s Money: Masters of the Universe or Servants of the People?
Reading this complete list will change the way you look at entrepreneurship and the world… forever.
It seems to me that the best way to graduate to the Banker level is to move through the stages of:
Just as many of the most successful Venture Capitalists (read: Bankers) started their careers writing code in the 90’s, grew their businesses to Manage other coders, became an Entrepreneurs and then sold their business… and became Bankers.
You can also find Banker’s that start their career in the financial world and move over to become Entrepreneurs/CEO’s in large companies, such as Uber’s new CEO: Dara Khosrowshahi.
In summary, it has become quite clear to me that a level of financial sophistication is required to become Banker… but even a basic understanding of these concepts can improve your ability to build a successful business.
“So more specifically, how does this relate to your new project Tom?”
In short, we are starting a “private equity business for small online businesses” business.
We buy, grow and sell small online businesses.
This new business is call the Internet MBA Group.
The idea came about originally from trying to understand how to scale the small online business model. It is relatively low risk and an easy task to grow a eCom store let’s say, to $20k per month… but then how do you scale this $1m per year?
You could try to individually scale this business or even start a number of them yourself, but soon your time would be spent trying to get the companies to revenue generating, and when they do you could realistically manage 2-3 of them.
The private equity model uses funds in a Parent Company to buy majority stakes (51-100%) of businesses, ensures that the management team are appropriately incentivised, runs the business for a number of years and then exits through a private sale or IPO.
Applying this approach to the small online business world, a Parent Company would acquire a business (Child Company) say for $10k and incentivise a new or existing Manager with a profit share or equity in the purchased business. The Parent Company and Manager then work together to improve the business, with both the manager and parent company enjoying the increased cash flow, for the business to be sold onto a new buyer in the future.
Here the Parent Company is investing for both cash flow (from the more efficient business system) and capital gains (from the increase in value of the business system).
As the Parent Company’s human resources are not depleted by each Child Company, the amount of Children that your Parent could spawn, is now limited by your capital. Queue: fundraising.
Private Equity business raise large funds ($24.6bn is the largest ever) of investor cash to invest (sometimes alongside debt in what is called a Leveraged Buyout or LBO) into their acquisition targets.
So what does the Parent Company need to get really good at?
- Valuing small online business
- Growing small online businesses
- Operational efficiency of small online businesses
- Incentivising the right Managers to improve Child Companies
- Selling small online businesses
- (In the future) Raising money for a fund managed by the Parent Company
Fortunately, my 10 years of study and professional experience (outlined here) have prepared us effectively for each of these, but of course, there are improvements to be made.
And yes, I will be sharing EVERYTHING we learn about these 6 areas with the Internet MBA Tribe.
Though I have just one more question…
Are you more Steve or more Fred? = >