Back of the Napkin #1 - "The Perfect Business"

My good friend Brian Shih recently listened to this interview with Jeremy Giffon on the Invest Like The Best podcast, and thought it was in the top three best podcast episodes he'd ever heard. [1]

The episode is titled “Special Situations in Private Markets”, but don’t be misled – the interview is far more wide-ranging than the title conveys, covering everything from why people spend so much time doing things they don’t like doing, to how most advice is a racket, to The Beatles.

He shared it with me and we then had a long conversation about many of the topics Jeremy discusses during the podcast. Below is what was then written (I quite like his writing style so I'll leave the paragraphs alone!)

First some logistics. Seb and I are writing these together. When I asked him whether we should each write our own contributions for each piece, he unironically told me by writing together we would gain plausible deniability for any hot takes – we could simply claim ignorance or a failing memory on who said what. Very clever, but if you know either of us, you can probably safely assume the hot takes are his[2].

We’re planning to write one of these a week. We don’t know how long it will take to traverse the entire episode – the transcript is sixty-five pages long – but we’ll find out together. We’ll also be cross-publishing these on multiple sites, so feel free to follow along here on Substack, or Seb’s LinkedIn. And finally, if you have any suggestions, comments, or want to join in as a collaborator on a particular topic, please reach out! You can reach Brian on Twitter (or, I guess X) and Sebastian on Twitter and TikTok.

So without further ado, we present...

Patrick: [00:01:45] All right, Jeremy. So we're going to talk a ton about all sorts of different topics. You wrote an essay that I don't think you've published, but it's about the nature of a perfect business in your mind. Can you describe some of the elements of what you would view to be like the perfect canonical business?

Jeremy: [00:01:59] Yes. The perfect business for me is getting paid a tremendous amount of money for your words, just your advice. I really do think the old-school merchant banks and M&A boutiques like Lazard and Allen & Co. and some of these places are pretty close to the perfect business, where someone has decided that your wisdom is so worthy that they're just going to give you hundreds of millions of dollars for it. These businesses require no capital. They're hugely cash flow accretive.

You can generally build equity by investing in the deals that you're advising on.

Right off the bat, we open with a fascinating question: “What is the perfect business?”

What does perfect mean? Jeremy elaborates a bit more on this a little later on saying, “I guess what I'm after is leverage and the idea of basically being able to be compensated super highly for your words is pretty close to just speaking money into existence, which I think is very close to the perfect business.” For him, perfect means a business that requires no outside infrastructure, people, or capital; simply being paid for wisdom you spout from your mouth.

Speaking money into existence with Federal Reserve-like powers of fiat does sound pretty compelling, and ironically podcasting and the entire influencer economy are pretty close to this. Joe Rogan with a mic might as well be Jerome Powell. But how does this relate to leverage?

Naval Ravikant discusses three kinds of leverage: labor leverage, capital leverage, and what he calls “product leverage”.

Labor leverage is simple – getting people to do work for you, whether through coercion (building the Pyramids) or incentives (hiring 1.5 million full and part-time employees at Amazon). Capital leverage is also straightforward: borrowing money to increase returns but at the cost of increased downside. Your mortgage is a form of capital leverage, as is companies employing cheap debt to fuel stock buybacks. If labor leverage was the dominant form of leverage for most of human history, capital leverage has dominated recent decades as the world has become increasingly financialized. This makes sense because capital compounds, and critically can be converted into labor leverage.[3]

But there is a third form of leverage that Naval calls “product leverage”:

The most interesting and the most important form of leverage is this idea of products that have no marginal cost of replication. This is the new form of leverage.

This was only invented in the last few hundred years. It got started with the printing press. It accelerated with broadcast media, and now it’s really blown up with the Internet and with coding.

Now, you can multiply your efforts without having to involve other humans and without needing money from other humans.

This podcast is a form of leverage. Long ago, I would have had to sit in a lecture hall and lecture each of you personally.

Another way to think about product leverage is as a form of structural leverage – creating a system that builds on itself to create additional value. In the merchant bank / M&A boutique example, you still have to show up and do the talking to get paid. In contrast, a business with some lock-in or network effects might continue growing and generating cash, scaling super-linearly with the time you personally spend.

To achieve Giffon’s goal of speaking money into existence requires you to either be a central bank – something out of reach for most of us – or more practically, to wield some brand name or halo effect that makes people want to pay you for your words. It might seem like brand leverage is distant from true product leverage, but today we are seeing influencers with powerful brands transmute them directly into products they can sell. See: MrBeast.[4]

Giffon’s ideal business where you can get paid “a tremendous amount of money for your words” not only applies to merchant banks and M&A boutiques, but it also looks a lot like the influencer economy. It’s easy to hate influencers and question what value they create, but it turns out they might be running the perfect business after all.

[1] Sebastian: I’m curious what the other two podcasts are in Brian’s top three. I don’t really have a sense of what my favorite episodes of all time are, but certainly this was the first one that felt warranted an immediate written response against.

Brian: I just like hedging my bets which is why I didn’t say it was the absolute best. Rating individual episodes is not something I normally do, but this one really blew me away. Another top three one for me is Noah Yuval Harari’s interview on Freakonomics.

[2] Sebastian again - Pleading plausible deniability. Emphasis on plausible.

[3] The risks of leverage have been discussed plenty. Charlie Munger (of Berkshire Hathaway fame) once wrote, “There are only three ways a smart person can go broke: liquor, ladies and leverage.” He was referring to capital leverage, although considering the blitzscaling nature of some venture backed startups, labor leverage can be just as deadly. When a company has massive labor leverage, the speed and scale at which a company can go broke increases dramatically.

[4] MrBeast Burger may be the most famous example of this, but Avi Gandhi of the Creator Logic Newsletter details more of these amazing businesses. A recent example? YouTuber JackSepticEye created the Top of the Mornin’ Coffee coffee brand, converting his 30M+ subscribers into millions in revenue and 100K+ coffee orders. He’s been making gaming content for YouTube for a decade, and nearly all of his 5000+ videos start with him greeting viewers with “Top of the Mornin’”. Yes, he’s Irish.