Putting Capital to Work

There exist, on a simplified level, two main types of operators in the business world: 1) entities or people who have capital and want to put it to work and 2) entities or people who put that capital to work. Basically, Type 1 has money and Type 2 needs money to run a business, which should generate returns for Type 1. Again, I am grossly generalizing here, but it illustrates a few points.

Until recently, I had only thought of myself as interested in a Type 2 role (running a business), but the current state of the world has opened my eyes to the importance of Type 1.

In a boom, money is loose and easy to find. Capital in essence, becomes a commodity. If you are running a business as a Type 2 at a successful level, everyone is competing over you; everyone wants to invest in your business and put their money to work. Also, in a boom, business is generally good and it’s easier to find customers, charge customers, and ultimately make money. So during boom times, it puts you in a power position to be an entrepreneur putting Type 1 money to work.

In a bust, money is tight and hard to find. Capital is now a rarity. If you have capital (Type 1), everyone is competing over you. Business operators want you to invest in their company. They are willing to take lower valuations and worse terms just for some cash. It’s also harder to run a business when the economy is struggling; customers are harder to find, customers demand better pricing, and everyone tightens up. In such a state of the world, Type 1 sits in the power position.

I constantly hear how right now is the best time to start a business. Conventional wisdom today, at times, feels like it is purposefully contrarian. While right now is a good time to start businesses, especially in areas where incumbents are struggling or out of business, I think it’s a mistake to ignore the importance of having capital.

Right now, to me, seems like a better time to be investing in undervalued assets, investing in startups at low valuations, and putting money to work on much better terms than seen in a long time.

The conclusion is then fairly self-explanatory: I’d rather invest in many businesses at the bottom for cheap than start one business at the bottom. I’d rather operate a business in a boom than invest in businesses at boom prices. In a boom, entrepreneurs are in power. In a bust, capital holders are in power. Be in the power position.