Issue #19: Building your Competitive Advantage

“When you’re learning how to be an investor [as an associate] they kinda teach you how to box. And then you get into the ring and the other guy has a gun, and you think what the hell…? Figure out how to get a gun” – Dan McMurtrie (@SuperMugatu)

Not sure if you can tell yet, but I’m a big fan of Dan McMurtrie and learn a ton from following him on Twitter. During a recent podcast episode with Erik Torenberg, he said the above quote which has stuck with me.

I started thinking about what a “gun” is in small company acquisition and how you can get one. In the episode the gun was described as some advantage one has, either structural , informational, behavioral, or some combination of the three. None of these are mutually exclusive and each one relates to another. These advantages present themselves within the small company acquisition world. Some investors are structured to allow good behavior. Others are very well known for their work and get great inbound, proprietary deal flow and information. Identifying what guns can be built within this space is fairly straightforward. It’s building them that requires nuanced discussion. 

Structural advantages are the easiest to build if you’re creating a new firm, but hard to change once you’ve been operating for a number of years. Building from scratch requires research on different models available while paying attention to what your target acquisitions need. This is not a stage to rush through as it is much harder to undo an existing structure later than to wait until you have the right one before starting. 

I want to go over informational and behavior together as they are related. Having better information can allow you to behave differently than others without that information. In a similar way, positive behavior over a period of time can build a reputation which leads to an informational advantage as people come to you and not others. These advantages take much longer to build than a structural one. I also believe they can be the strongest and longest lasting. 

Behaving properly in the marketplace isn’t complicated. Be respectful of owners’ time, follow-up when you say you will, be honest about terms you are offering owners and what that means for them, be a responsive and clear communicator, and during every interaction remember that the world is small and stories of poor behavior travel much faster than positive ones. Good reputations are built over years and can become powerful guns while poor ones can stick to you during your whole career. There’s truth to Warren Buffett’s quote saying, “It takes 20 years to build a reputation and five minutes to destroy it.”

With a good reputation through positive behavior over time comes added trust from actors in your space. If most are aware that you work fairly, swiftly, and with minimal B.S., they are going to want to work with you and share more information. Dan McMurtrie later said in the podcast that winners in markets build momentum and advantages such that they keep winning and catching up as an underdog becomes more and more difficult.

Building a gun as an investor in small company investing is not hard conceptually. In fact, the ideas are pretty simple and are not new or innovative. But perhaps that is why they can become such powerful advantages for those who understand them. The power of executing simple ideas consistently over time is frequently underestimated. I view the podcast as my gun construction project. It will take many years to build, but once constructed it will very powerful and compound on itself for years to come.

How are you building your gun? And I’m looking for a response here. What do you believe is the long-term advantage you are building? How are you doing it? Are you already a few years in and, if so, what did you do to build it and what helped the most? Feel free to reply to this email or reach out. I’m looking forward to learning more.

Capital Notes

  • Capital Camp has been releasing a few presentations from last year’s event and on Tuesday they released one with Trish Higgins and Will Thorndike being interviewed by Brent Beshore. It was fantastic and I tweeted some notes I took from the video if you want a quick summary.

  • More Tim Ludwig, this time tweeting about raising his first three search investment funds.

  • Collaborative Fund released a really good article about writing cold emails.

  • More Dan McMurtrie, this time talking about starting his hedge fund. This was a discussion more about how to behave in finance and in your career than the actual mechanics of starting a hedge fund. Really enjoy this.

  • Eric Hornung gave me the idea to create a Spotify playlist of micro private equity podcasts, which I’ve created if you’re interested in following.

  • Finally, here are 5 common mistakes small companies make when trying to sell their company.

If you found an interesting article, podcast, or interview that I missed, please let me know, I’m always looking for interesting stuff.

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I’m always looking to connect with folks interested in this space, don’t hesitate to reach out.