Imagine these two pitches to investors:
A. We will get to $10m annual revenue with $7m costs and $3m Free Cash Flow. After that growth will be nominal. At best investors will value that $3m Free Cash Flow at some discount to the US Treasury 30 year return.
B. We will get to $100m annual revenue with $200m costs and losing $100m a year. After that we will go into hypergrowth to get to $500m annual revenue with $300m costs and $200m Free Cash Flow. Investors issue press release about funding the latest unicorn with lots of capital
Now imagine you are one of 8 billion people living on our planet. You want many more A pitches. Capitalism has failed us. What we need is a way to invest in 10 companies of Type A with an aggregate of $100m annual revenue with $70m costs and $30m Free Cash Flow. That is such a simple thing to do yet we do not have it. We have no way to fund sustainable capitalism.
This is why the pandemic killed small business while big business prospered – big business had a much lower cost of capital. Quiz – what would you prefer to invest in:
- 100 family owned hairdressers each making $100k annual profit ie $10m net aggregate profit.
- A rollup of 100 family owned hairdressers each making $100k annual profit, making a gross contribution of $10m less $5m of overhead costs ie $5m net aggregate profit.
Logically the answer is A but lenders and equity investors line up to fund B. Capitalism is failing at the simple task of capital allocation.
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