I met with an entrepreneur who’s had early success in a highly competitive industry. The products his company sells are readily available from competitors, so there isn’t much differentiation. His company’s current strategy is to provide products for a low price. Its prices aren’t the absolute lowest, but they’re on the lower end of the spectrum.

As a founder, I operated in a market where price-taking was the strategy. The automotive parts we sold were readily available from multiple retailers, so there was no product differentiation. This led to lots of competition. Since we all sold the same parts, each competitor tried to take the lowest possible margin that allowed it to make a small profit. With small profit margins, the focus was on volume. A little bit of profit per order and a ton of orders can add up to a decent total profit.

This strategy can work, but it often requires scale. Companies like Walmart have proved it’s possible. Winners in this type of market are often hyper-focused on efficiency. The company that can operate with the leanest and most efficient cost structure can afford to sell for less than competitors. Lower prices attract more customers. More customers mean more volume, and more volume makes it possible to negotiate with suppliers for lower costs. If executed well, this strategy can create a flywheel that grows the company.

The entrepreneur I met with doesn’t want to be in a price-taker business forever. The lack of customer loyalty and inability to control margins concern him. He wants to move from being a price taker to being a price maker. And he wants to set prices based on the value created for customers. He’s exploring creating proprietary products and services focused on niche customer problems to accomplish this.

You can build a successful company being either a price taker or price maker. Having built a company that was the former, I want my next company to be the latter.

I set up an introductory lunch for two entrepreneurs in the same industry. I’ve been trying to make this happen for months, and I’m glad that this week, it finally did. One of these entrepreneurs is seasoned, with deep relationships and wisdom accumulated from years of experience and learning about the experiences of others. The other is new to the industry; he’s had early successes and is trying to build upon them to scale.

The lunch was a success. My being there as a trusted party helped each of them build trust with the other. The seasoned entrepreneur readily answered all questions and was transparent. He shared details about lessons learned from painful failures and explained how changing market conditions led to the strategy he’s pursuing going forward. He gave comprehensive answers to questions about the ways he overcame hurdles the newbie is facing now. He also shared his best-kept secrets, including tools he uses to access hard-to-find information.

After the meeting, the newer entrepreneur told me that the things he learned during that lunch will save him months of time and considerable money. Before, he was unsure how to overcome certain hurdles. He now knows exactly what to do and not do and the people to call for help in specific areas. He left confident and excited. If he gets stuck, he now has someone credible he can call who’s been in his shoes and who’s willing to help.

Meetings like this are important, especially for newer entrepreneurs. They can completely change an entrepreneur’s trajectory. I’m excited for both of these people and can’t wait to see what they do. As the newbie becomes more successful, I hope he pays it forward and shares what he learns with the entrepreneurs who come after him.

Last week, I finished reading At Random: The Reminiscences of Bennett Cerf. It’s Bennett Cerf’s autobiography, and it details how Cerf founded and grew book publisher Random House. Cerf was a colorful entrepreneur who lived an exciting life. Being one of the few people who influenced the distribution of knowledge by choosing what books to publish put him in a unique position. If Cerf and other publishers didn’t publish a particular book, the public never had the opportunity to read it. People were attracted to him and his influential knowledge distribution, which allowed him to build relationships with notable people, including U.S. presidents and movie stars.

Cerf founded Random House in 1927, and he died in 1971. Things have changed drastically since then. Companies such as Scribe Media and Amazon’s Kindle Direct Publishing now make it easy for authors to publish their books. More books are being published, but discovery is more challenging for books that don’t have significant marketing resources.

After reading Cerf’s book and thinking about how the industry has changed, it’s clear to me that people who curate and help others discover books can bring immense value to readers. Those who excel at this can build powerful magnets that attract others to them. By attracting others to them, they will likely also attract unique opportunities and build relationships with notable people like Cerf did. Said differently, curation and helping others with discovery is a way to create magnetic luck.

I had a great conversation with someone who archives and preserves documents for a living. A big part of their work involves digitizing documents and publications. A few takeaways from the conversation:

• Commercial-grade book scanners are the way to go. They can generate an image or text file, or both, when they scan a book.
• Discoverability is an important consideration. Tagging and metadata are important to enhancing discoverability.
• Ensuring consistency in the information collected across publications is important. Thinking through the metadata schema is an essential upfront exercise.
• Using distinct identifiers, i.e., authority control, helps keep data clean and enhances discoverability.  
• I need to learn what ontology is and how it relates to my project.  
• Open-source digital repository software programs such as DSpace are popular and have active communities.

The conversation gave me a glimpse of what archivists do and how they think about their work. It was helpful regarding my personal project, which is looking more like a data project.

After writing about the Newhouse family’s estate tax strategy and taxes being a successful entrepreneur’s biggest expense, I wanted to share what I’ve learned about qualified small business stock (QSBS) and the tax strategy around it.

To be clear, I’m not a fan of avoiding taxes or tax scams. You can go to jail for stuff like that, and it’s never worth it. But the tax code is complicated. Many aspects of it are designed to encourage entrepreneurship, but people aren’t aware of them. I know about QSBS only because I have a few friends who sold companies and benefited from it, minimizing their taxes.

Why is QSBS a big deal?

Eligible shareholders of qualified small businesses can get up to a 100% exclusion from capital gains taxes when they sell their company. Translation: you can pay zero taxes on the gains, up to certain level, when you sell your company.

What are the criteria for a business to qualify for the QSBS tax exclusion?

• The business must be incorporated as a C corporation in the United States (LLCs and S corps don’t qualify).
• Company gross assets must be $50 million or less before and at the time the stock was issued.
• Eighty percent of the company’s assets must be used for qualified trade. Businesses such as real estate and farming are excluded.
• Stock must be purchased directly from or issued directly by the company. Secondary purchases and stock transferred from other shareholders don’t qualify.
• Stock must be held for at least five years to get the maximum benefit from QSBS tax exemption.

If a company qualifies for QSBS, how does the tax exemption work?

If the criteria are met, each shareholder is excluded from paying taxes on gains of up to $10 million or ten times their basis. The simplest example is that if you launch a company, meet the QSBS criteria, and sell it, your gains on that sale, up to $10 million, are tax free. Gains above $10 million are taxed at capital gains rates.

More complicated scenarios can result in the exclusion amount being significantly more than $10 million. In this example, the founders converted a company to a C corporation years after launching, when company assets were $40 million. This meant their stock basis was $40 million and they got an exclusion of ten times that cost basis—that is, up to a $400 million exclusion. The entire $400 million isn’t excluded, which the article covers, along with other details, but you get the idea. It can get even more complicated with stacking and other factors.

QSBS is part of the tax law and something all founders should be aware of. If your goal is to build a company and exit after more than five years, QSBS is something to consider in your tax strategy.

This isn’t tax advice, and everyone should do their own research to figure out whether QSBS applies to their situation. I just wanted to make more people aware of the exemption.

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

Cumulative metrics (since 4/1/24):

• Total books read: 33
• Total book digests created: 12
• Total blog posts published: 189
• Total audio recordings published: 103

This week’s metrics:

• Books read: 1
• Book digests created: 0
• Blog posts published: 7
• Audio recordings published: 0

What I completed this week (link to last week’s commitments):

• Read the autobiography of Bennett Cerf, founder of book publisher Random House

What I’ll do next week:

• Read a biography or autobiography
• Locate a second commercial-grade book scanner locally
• Finalize talking points for the next podcast series

Asks:

• None

Week two hundred thirty-seven was another week of learning. Looking forward to next week!

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

What I struggled with:

• Locating a commercial-grade book scanner took some work, and gaining access to one has been more challenging than I expected. I’ll need to get creative and scrappy.

What I learned:

• Large companies store a lot of data, but often it’s not structured or organized. To reap the full potential of AI, companies are realizing the need to structure and organize their data—a massive undertaking.
• Google’s NotebookLM has become very popular in the last two weeks, even though this tool has been out for months. The new feature that sparked this wave of attention is the ability to “listen to a conversation about your sources.” You upload your own documents and NotebookLM creates a podcast conversation between two people. The conversation is an analysis of the content in your uploaded documents. The AI is doing two things. First, it’s synthesizing the content in your documents. But what people are energized about is listening to the synthesis in a storytelling format. Hearing a story is the way most people learn best. This feature leans into that facet of human nature and makes NotebookLM appealing to a broader audience.

Those are my struggles and learnings from the week!

I recently met an entrepreneur who started his business earlier this year. It’s gone from zero to over $5 million in monthly revenue in just nine months. By the end of 2024, he’ll likely be doing $9 to $10 million in monthly revenue, well over a $100-million-annual-revenue run rate. That’s insane growth in one year.

I was super curious about his journey. During our chat, I learned he has no background in the industry and didn’t know it existed 18 months ago. I was curious how he learned about the problem. It turned out he’d encountered it personally and searched for a solution. He hit a brick wall. Every local company he called couldn’t solve the problem for six months or more. After his searches, he was bombarded with online ads. It was an abnormally high number of online retargeting ads, which caught his attention. Still needing a solution, he tried one of the online companies. It delivered and solved his problem, but the experience was awful.

As a customer, he zeroed in on two things. First, given the number of retargeting ads he was seeing from various companies, there must be an enormous business opportunity. Second, customer demand was so high that people happily put up with terrible customer experiences offered by low-quality companies. He concluded that massive demand and low customer expectations likely meant this market was exploding—ideal for a start-up. Clearly, he was right.

I had lunch with an entrepreneur friend. We talked about what his next company will look like. He isn’t sure what the company will do or the space it will be in, but he’s crystal clear on the kind of people he wants to work with: people he calls “grinders.” They work hard, create no drama, and win. Their goal isn’t to be praised regardless of the quality of their work; it’s to do great work and win by making customers happy.

I thought about this more later in the day and texted him some thoughts about also wanting people who are learners. His replies went deeper than I was thinking. He wants people who have a “diverse track record of success” that “shows they can figure things out.” And then he made a sports analogy that I love. Alluding to a successful recruiting strategy that college football coach Urban Meyer used to win three national championships at two schools, he said he wants to work with multisport athletes.

“Diverse track record of success” stuck with me. To have one, a person has to do several things. First, put in the work to learn new things: learn the rules of a new game, learn new skills required to compete, etc. Second, figure out how to apply what they’ve learned. Learning is nice but not valuable if you can’t apply it. Last, compete at a high level. To my friend’s point, anyone who demonstrates this is someone I want to work with.

I was thinking about yesterday’s post and the Newhouse family’s strategy for reducing their estate tax liability. The fact that they had a tax strategy, and the results, stuck with me and reminded me of a tax conversation I had.

A successful entrepreneur once pointed out that taxes are a successful entrepreneur’s biggest expense, yet most spend less than 1% of their time thinking about them. They don’t have a strategy or defined actions around taxes. Most entrepreneurs spend time scrutinizing and optimizing their biggest business expenses on their profit-and-loss statement but don’t do the same with taxes. He believes this is a big mistake and that founders should spend some percentage of their time, say 5%, on their tax strategy every year. Doing so can have a material impact on business finances and the ability to reinvest in growth opportunities.

Regardless of how you feel about Newhouse's estate tax strategy, the result highlights that an effective tax strategy can indeed have a material impact on a business. To be clear, I don’t believe in tax dodging or doing shady things to avoid paying taxes. That’s just silly and can land you in jail. But I think there’s something to be said about having more of the capital your company generated available to reinvest in growth.