Conversation

There are many variations of this, of course. The model I described above is pretty much the one

@awilkinson

uses; it's also the Berkshire model. Many more variations in amazon.com/Outsiders-Unco

3

In software, the two companies that are most famous for using this playbook are Robert Smith's Vista Equity Partners (uses a lot of debt) and Mark Leonard's Constellation Software (uses equity sales). Still, similar playbook: acquire defensible high FCF businesses. Use FCF.

1

4

Smith is operationally excellent, though. He has a team in Vista that slashes costs and moves engineering to cheaper cities. He then uses the FCF from the business to service the debt load. It's a more typical PE playbook. Only diff is that it's software — so high, high margins.

1

2

Leonard's trick is looking for 'vertical market' software companies. Think: power plant software. Who's going to throw out and switch their power plant software provider? Nobody. So it's got a moat. Same playbook, with variations: Constellation sold equity to fund purchases.

1

5

More info on Leonard: 25iq.com/2018/04/07/bus And Smith: 25iq.com/2018/03/23/bus Both from the inimitable

@trengriffin

.

1

2

Another solid book on this topic is

@farnamjake1

's The Rebel Allocator. It's written as a novel, so it's easy to read. Worth the 10 bucks! People in startups don't usually see this side of the business world, I think. But the playbook is public if you know where to look.

1

3

Good capital allocation is the secret sauce of business success and investment returns. How could what you spend money on inside a business NOT be of utmost importance?I looked for a business...

Whoops, totally forgot to link to it:

amazon.com

The Rebel Allocator

1

2

One possible reason people in startupland don't get the capital allocator playbook is that it's not really an operator-oriented worldview. Nearly everyone I've mentioned in the thread above sets up their org so that other people run their companies. They themselves do not.

1

3

So: Smith has an ops arm, Leonard, Wilkinson, Buffett and, urm, every CEO mentioned in The Outsiders delegated the operator function to someone else. They just ran capital allocation decisions.

1

2

Two more, just for fun: Jeff Bezos runs Amazon with bits borrowed from the capital allocator playbook. (Why does he insist on absolute free cash flow?) Barry Diller runs IAC similarly, but divests successful, FCF-producing subsidiaries after they hit a certain scale.

1