When investing, the simpler the business you’re investing in is, the better.

It’s important to be able to easily understand how a business runs, how to read its financial statements, and how is it really making its money. When you trying to analyze the financial performance of say a conglomerate, it’s very difficult to see what’s going on. You do not really know what the main business drivers are. The more complicated something is, the easier it is to mess up.

A company’s accountants may do some fancy financial engineering, trying to devise all sorts of ways to make a balance sheet or p&l look better than it really is. When this happens, the investors suffer, because what beings appearing on the statements are strange one off items, exceptions and or weird cashflow calculations and methods. This was the example of Enron and so other many companies, financial statements can be engineered to look but, but really in the future they’re soon about to explode, and show some massive losses. A straight forward, simple to read and understand financial is worth it’s weight in gold.

Simplicity when making deals is also worth a lot. The more complicated a deal is is, the easier it is to fuck up. When we sold our first company back in the day, we got 1.5m in cash, a 2–3% equity in the acquirer and a 2–3% gross earn out from the sales our company did. We received our cash and never received the latter, why is too much for the purpose of this share. Although we lost the other 2 parts, we were happy to get our cash up front, because originally we were potentially going to sell our company on a payment plan, over time. We were strongly told by our advisors to get cash up front, as everything else may not happen and we were bad we did. We bought to make the deal simpler, you buy the company, and give us cash. That was a smarter and simpler choice, had we got paid over time, we would have likely never been paid. Everything else is way to complicated, contingent on way to many future events happening, and everything working as planned.

In my industry, the internet marketing space, a lot of companies make how they generate money, very complicated. We generally revenue from a variety of companies, selling a variety of different products and services, spending money to acquire customers all over the place. With all of these moving parts, it becomes even more difficult to track what’s going on, how profitable you really are per marketing channel or product sold, and causes a lot of issues. The moment we later tried to simplify our business, create one excellent product, sell it ourselves, optimize 1 or 2 marketing channels and basically control everything including the processing, our business simplified and we were able to scale.

It is hard to make things simple. When you do, it’s well worth the effort. When investing, the simpler the better, and the more complicated, it’s risker, and the worst it generally is. Especially when you consider, they’re are generally always simpler, more straight-forward options to accomplish what your objective is.