Initial lessons from “The Profit”

Marcus Lemonis views small businesses from three angles when he’s deciding whether and how to invest in them:

People
Product
Process

Viewing each of these in isolation gives a very useful perspective, but I’d like to examine the typical interactions between them to create a generalized picture of how small businesses form, succeed, and fail.

Small business entrepreneurs are characterized by the following traits (with my estimations of percentiles in parentheses): irrational confidence/psychopathy (70-90), passion for their niche (80-100), high energy in general (70-90), average intelligence (40-70), and extraversion (50-90). Like most of us they are motivated day-to-day by a sense of obligation and habit, but their driving motivation is the feeling of empowerment they get from running and owning a business. This high-energy irrationality is very important for the success of any business, so I’m not knocking it at all. Rational people don’t put their life savings into an investment strategy with a 10% success rate that requires 60-hour workweeks.

If you doubt me, watch the show. In two seasons, not a single entrepreneur has any idea of how much their business is worth (either potentially or presently). If they were motivated by money, you’d think at least one of these folks could come up with a realistic valuation! But they consistently overvalue their businesses by an order of magnitude. Compare that to your knowledge of your own net worth—you might not know the number down to the last penny, but you probably aren’t going to guess ten times too high. So every time Lemonis makes them an offer, it follows the same script:

Marcus: I’m gonna write you a check for $X in exchange for a 50% share in the company.
Owner: Absolutely not! I was thinking more like $10*X. And there’s no way I’m giving you a controlling share.
Marcus: (Makes a rhetorical argument to convince the rhetorically minded owner. E.g. “You won’t have control of your business when you go bankrupt, and all of these people will be out of a job.”)
Owner: Okay, I’ll take your original offer.
Marcus: Now you have to remember that I’m going to be in charge and there are going to be changes. This is going to be hard for you.

The success of the business from that point forward always depends on whether the entrepreneur has the emotional capacity to allow Lemonis to change the Process. They all fight the changes and suffer emotional breakdowns from the temporary loss of their empowerment addiction, but roughly half of them recover and succeed. The other half self-destruct and undermine Marcus’ efforts to save them from themselves.

The entrepreneurs’ suite of personality traits produces a predictable origin story for a small business. The entrepreneur comes up with some idea for a product that generates a lot of local demand, so they start a business to make money off of it (but more for the rush of self-empowerment that comes from starting and owning a business), without knowing too much about the boring, nerdy, academic aspect of business (Process). Like the typical tinpot psychopath (with whom they share many similarities other than high IQ), this is a consistent Achilles’ heel for these folks. Thus, the Process portion of the business is almost always ad-hoc and, upon scaling up, completely dysfunctional.

In the last one hundred years, business processes have been optimized by nerdy academic types to a staggering extent. When Lemonis tries to rehabilitate these businesses with his money and know-how, he’s always playing two games at once: 1) designing processes appropriate for the business by drawing from his nerdy reservoir of knowledge and experience, and 2) providing tough love and counseling for the entrepreneurs who are going through withdrawal. His social perceptivity is uncanny—in another life the man would be a kick-ass detective.

These businesses are typically hemorrhaging money due to their ad-hoc processes, because the owners aren’t systems thinkers and they disdain hoity-toity book learnin’. Eventually the problems become so flagrantly obvious that 100% of the employees are immediately able to identify them when Lemonis asks them, and sometimes the owners can too (though many have bizarre, pathological blind spots here). When money runs out, the owners go into emergency mode and push harder on their broken system, which breaks it even more, which costs them more money, and the downward spiral accelerates. Even if the owners can identify their broken processes, these remain in place because there is no working capital to fix them.

This analysis should help you to understand why Lemonis’ skillset and approach work so well. Eventually, the entrepreneurial ex-owners who succeeded in overcoming their egoism learn that they prefer the feeling of genuine financial success to the egoistic feeling of business-as-empowerment combined with financial failure.

Advertisements

About Aeoli Pera

Maybe do this later?
This entry was posted in Uncategorized. Bookmark the permalink.

2 Responses to Initial lessons from “The Profit”

  1. UlricKerensky says:

    Your description of those who show up on those shows is not far off, and the exceptions prove the rule.

    Most of the business management and organizational material out there has certain….assumptions baked in that render it increasingly ineffective as a predictor of how organizations actually work. Those materials do work when you have a rational actor without an agency issue running the show, which is what you’re referring to above. Buffett and Munger had much the same process for many of the earlier deals before they just had too much money to invest and relied more on the product and barriers to entry.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s