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Part 3  Who will fund projects that end our obsession with growth at all costs.

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:

  1. 100 family owned hairdressers each making $100k annual profit ie $10m net aggregate profit.
  2. 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.

Some subjects are too complex for our short attention spans, so we do 4 posts one week apart (see here for 2,3, 4 some may not be published yet), each one short enough not to lose your attention but in aggregate doing justice to the complexity of the subject. Stay tuned by subscribing.

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