Alex Hormozi: What I look for to invest in companies [no bs]

The video is about the three-step checklist that Alex Hormozi uses to evaluate the value of a business opportunity when investing in companies.

This video by Alex Hormozi was published on Mar 25, 2022.
Video length: 12:10.

In this video, Alex Hormozi discusses the three-step checklist he uses to evaluate potential investment opportunities in businesses.

The first step is to determine the number of potential units sold, the second is to assess the potential profit that can be made from the service, and the third is to analyze the competitive dynamics of the landscape.

Hormozi provides examples of businesses that meet these criteria and explains why they are attractive investment opportunities.

• Alex Hormozi evaluates 10-20 businesses per week for investment.
• He uses a three-step checklist to evaluate business opportunities based on potential units sold, potential profit, and competitive dynamics of the landscape.
• He prefers course, e-learning, and coaching businesses because they can be transitioned into a more valuable enterprise model.
• Three lenses to evaluate business opportunities include increasing the total number of units sold, making the customer a more valuable outcome, and having a minimum of 80 gross margins for service businesses.
• Businesses with high gross margins include software and information/education businesses.
• TAM is not a good indicator for potential company size, and it's better to focus on the three lenses to evaluate business opportunities.
• Consumable components like community, accountability, and new problems created by the skill being taught can increase the stick of the client.

What I look for to invest in companies [no bs] - YouTube

Introduction

• Alex Hormozi talks to 10-20 businesses per week that he's looking to invest in.
• He uses a three-step checklist to evaluate the value of a business opportunity.
• The checklist is not based on dollars but on the opportunity.

Step 1: Number of Potential Units Sold

• How many people could potentially buy the service or product?
• TAM (Total Adjustable Market) is somewhat of a misnomer.
• Assumptions that would continue to make this trip.
• How long can we run this game?
• Is this indefinite?

Step 2: Potential Profit

• What is the potential profit that can be made from the service or product?
• Value that people are getting from the outcome.
• How much does it cost to deliver it?
• Two important components: value and cost.
• Some elements are extremely valuable but costly to deliver.

What I look for to invest in companies [no bs] - YouTube

Step 3: Competitive Dynamics of the Landscape

• Supply-demand or competitive dynamics of the landscape.
• Example: wireless cell phones.
• Example: crypto mining.
• Are there established people who are killing it that would try and price us out?
• How new is the space?

Conclusion

• Alex uses frameworks to make snap judgments on whether to pursue a business opportunity.
• He likes course, e-learning, and coaching businesses because they can be transitioned into a much more valuable enterprise model.
• He makes these videos to help people who were once broke.
• He hopes that people can use this checklist to make alterations to their business and incorporate it.

Three Lenses to Evaluate Business Opportunities

• Assess if the business can be applicable to more people to increase the total number of units or audience that can be sold to.
• Reconfigure the business to make the customer a more valuable outcome or to cost less to fulfill the outcome, increasing the gross profit per unit sold.
• Have a minimum of 80 gross margins for service businesses to cover all costs of doing business, including marketing, admin costs, payroll, HR, finance, and legal.

Businesses with High Gross Margins

• Software businesses have close to 100 gross margins because it costs one time to build it, and each incremental user is almost all profit.
• Information and education businesses have the same margin as software businesses, except they don't have the cost of development.
• Community, accountability, and new problems created by the skill being taught are other components that are consistently consumable in learning or e-learning type businesses.

Why TAM is Not a Good Indicator for Potential Company Size

• Facebook started as a college network thing called "Facebook" for a yearbook.
• Assessing the total addressable market (TAM) is not necessarily as good as people used to think in terms of assessing the value of the business.
• It's better to focus on the three lenses to evaluate business opportunities.

Conclusion

• Assessing business opportunities through the three lenses of applicability, reconfiguration, and gross margins is more effective than relying on TAM.
• Businesses with high gross margins include software and information/education businesses.
• Consumable components like community, accountability, and new problems created by the skill being taught can increase the stick of the client.

What Alex Hormozi looks for when investing in companies

• Businesses and founders expand in vision over time, so he looks for potential for growth beyond the current target market.
• Expanding the total addressable market (TAM) can lead to adjacent markets becoming more attractive.
• He thinks about the potential for growth on a short-term time horizon (3-5 years) and a long-term time horizon (20 years).
• He considers how to increase the value versus the cost of what the company is delivering.
• He looks for ways to enter a space that is more unique or redefine what the company is doing in a new way.
• By doing these things, he increases the opportunity size of what the company is pursuing and ultimately makes more money.

Watch the video on YouTube:
What I look for to invest in companies [no bs] - YouTube