Welcome to The Business Academy.

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Imagine a machine, that never sleeps. In one end you insert cash, out the other, it creates more cash. This machine never stops, it never sleeps. It's a perpetual motion machine.

Your job as a holding company owner is to create a perpetual motion cash machine.

I like to study how holding companies were founded. The most common trait I've observed is the owner of a holding company needs to acquire or start a high cash-flow generating engine before the compounding can begin. This becomes her perpetual motion machine.

Warren Buffett did this with the Berkshire Hathaway mills. He acquired his way into it.

When Warren Buffett took control of Berkshire Hathaway it was a textile mill generating $4 Million of free cash flow per year ($30 Million in today's dollars). He used this cash flow engine to reinvest in other businesses.

The other way to do it is - start a cash flowing business. Here are some examples:

Tiny (fka Meta Labs)

Founded by Andrew Wilkinson in 2006 in Victoria Canada, Tiny was originally called Meta Labs.

Andrew was an entrepreneur at heart working as a barista when he met two guys who ran a design agency. They worked from the cafe where he served them coffee. Andrew spent the day peppering these two entrepreneur with questions. When he learned they were charging $10k+ per project, the equivalent of 6 months of pay for him, Andrew decided to teach himself web design and start his own firm.

Over time Meta Labs became a premier web design firm for tech companies in Silicon Valley, and today generates over $15 million of free cash flow per year.

After running Meta Labs for 8 years, Andrew realized he didn't like being CEO. Right around this time he read his first book about Warren Buffett and saw his future. He hired a CEO for MetaLabs and formed Tiny to acquire businesses and become the Warren Buffett of technology.

Andrew's agency business gave him the cash he needed to jump-start his holding company. Since then the business has gone public with a market cap of $314 Million.

37signals

The idea for 37signals began when Jason Fried, a web designer, started collaborating with Carlos Segura, a graphic designer, and Ernest Kim, an information architect. They named their company after the 37 radio telescope signals identified by astronomers as potential messages from extraterrestrial intelligence.

Initially, 37signals provided web design consulting services. Their early clients included major companies like Qwest, Hewlett-Packard, and KitchenAid. However, they found that managing client projects was a pain, and challenging due to the lack of effective project management tools. This realization led them to create their own solutions which include products like Basecamp (project management tool), Campfire (online chat), and Highrise (CRM tool).

Today the business is very profitable with over $30+ million of revenue per year.

BendingSpoons

Luca and his co-founders started a business called Evertale in 2011 which failed after two years. He realized that starting a company and finding product market fit was incredibly hard (this sounds familiar).

So they started a mobile development agency called Bending Spoons. Then they used the money from their agency to purchase few small mobile apps. Since they were mobile app builders, they could roll up their sleeves and be very hands-on after they bought a company. They would often rebuild the technology, and manage the growth of each app.

In the last few years they have raised $200 million in financing, valuing them at over $2Bn. They have used some of their capital to buy former American darling technology companies that have hit hard times including; Evernote (prev valued at $1.7Bn), Meetup (prev valued at $300mm) and Hopin (prev valued at $7Bn).

All of these businesses followed the core playbook of successful holding companies

Step 1 - build a perpetual motion cash engine

Step 2 - allocate capital wisely

Step 3 - give your investments time to compound

Have you seen other examples of holding companies I should study? I'd love to hear about them

have a great week,

Sieva

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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