Physical Business Constraints

Sam Rattner shares insights about evaluating business opportunities, particularly in physical businesses, and why being a great operator isn't always enough to create massive value. His perspective comes from investigating various businesses like vending machines and riverboat operations.

Key Points:

• Business Model Constraints:

  • Even perfect execution can't overcome fundamental business limitations
  • Value creation needs to be 5x better, not just marginally improved
  • Location-dependent businesses are particularly challenging to scale

• Vending Machine Case Study:

  • Found a profitable operation in Lewiston, Idaho making $1-2M annually
  • High margins due to local market dynamics and lack of alternatives
  • Key limitation: Success tied to specific location characteristics
  • Couldn't replicate the same dynamics in other locations

• Evaluation Framework:

  • Look for businesses that can scale beyond single locations
  • Seek opportunities where fundamental changes can create massive value
  • Example: Removing Coke/Pepsi contracts could dramatically improve margins
  • But: Geographic constraints often limit total potential

• Operating Philosophy:

  • "You can be the best operator in the world but the business is the business"
  • Don't pursue opportunities just because you can operate them better
  • Look for structural changes that can transform the business model
  • Avoid businesses where success is tied to specific geographic dynamics

• Investment Criteria:

  • Must see path to $1B+ valuation within 5 years
  • Avoid businesses requiring physical presence in specific locations
  • Focus on scalable opportunities that can grow beyond regional constraints
  • Willing to walk away from profitable but limited opportunities