5X Better Mindset

Sam Rattner's approach to evaluating business opportunities focuses on finding ways to make them 5X better rather than pursuing marginal improvements. Here's his framework for analysis.

Core Philosophy

• Don't look for 10% improvements - seek opportunities that can be 5X better
• If you can't make something 5X better, it's not worth pursuing
• Look for fundamental inefficiencies that can be completely reimagined
• Focus on the biggest line items/costs that could be eliminated or drastically reduced

Example: Vending Machine Analysis

• Initial discovery: Found a vending machine business with 3X better margins than competitors

• Root cause analysis:

  • Most operators locked into contracts with Coke/Pepsi
  • Forced to buy branded products at high wholesale prices
  • Limited by required use of manufacturer's machines

• 5X improvement opportunity identified:

  • Wait for brand contracts to expire
  • Replace with generic products at 1/10th the cost
  • Keep retail prices similar
  • Dramatically increase margins by eliminating major cost center

Key Analysis Steps

• Start with basic "back of napkin" math (5 min assessment)
• Deep dive into contracts and obligations
• Talk to industry experts and former employees
• Look for the biggest cost centers that could be eliminated
• Validate assumptions with customers/users
• Calculate potential upside if major inefficiencies removed

Decision Framework

• Can identify clear path to 5X improvement = Worth pursuing
• Only see path to marginal improvements = Pass
• Need to be willing to completely reimagine how things are done
• Focus on fundamental business model changes vs operational improvements

Red Flags

• If improvements require just being "a better operator"
• When gains come only from minor optimizations
• If core economics can't be dramatically altered
• When major cost centers are fixed/unchangeable

The key is looking for opportunities where you can eliminate or drastically reduce the biggest costs rather than trying to optimize around existing constraints.