How To Make 40x Your Investment
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2017-11-27 11:21 by Karl Denninger
in Small Business , 328 references Ignore this thread
How To Make 40x Your Investment
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Bet against my view on "Make America Great Again".

And have about a million and a half to put on the table in support of your belief.

For what?

HomeDaemon-MCP.

So let's say you spent the $1.5m and acquire everything.

Here's a hypothetical way of looking at the opportunity.

There are roughly 80 million single-family, detached homes in the US. (I'll ignore condos, mobile homes and townhouses, although some of the first and last are potential customers as well.)

We'll also assume you can appeal to just 0.1% of those single-family homes.  That's a tiny penetration.

But it would amount to 80,000 installations.

The hardware cost to install is under $100 for a minimal install (that's the power that comes from running on a $35 hardware base!) and under $500 for a typical install including sensors and control points (e.g. switches, etc.)

We'll assume you sell the base hardware and software alone for a one-time price of $350, and 50% of your installs go that way (homeowner does the rest on his or her own.)  That's $10m in gross profit.

The real money is in the annuity stream and installed systems.  We'll assume those have a minimum install of $1,500 billed out, of which $500 is your fixed cost.  That fixed cost includes $100 for the controller and $400 for a mix of motion sensors and controlled points.  Install time is 3 hours @ $60 each for skilled labor, or $180.  That's $820 across 40,000 installs, or $32.8 million.  We're now to $42.8 million in gross profit.

Now assume you use the certificate system built into the software and slightly extend it (yes, I can do that on a contract basis, or you can if you have a competent programmer on staff, since the framework is already in the code) to add an annuity-style revenue stream for maintenance, updates and offer an option to the customer for same.  We'll assume you charge $20/month for this and half your 40,000 install-it-for-me customers go for it.

That's another $4.8 million a year in revenue and the effort to issue the certs is about 1 minute each per year.  You can automate that, of course, but there will be expense in doing so.  Of course the actual time spent servicing said customer is variable (and you'd have to take a guess on that), but over 3 years that gets you to $57.2 million.

We haven't yet included what you can make off the "higher end" installations (the million dollar+ homes and condos) where the owner wants not 10 control points but 30, and is willing to pay for it.  He gets convenience, security (e.g. access to his IP cameras and triggering points from them), no cloud required so Google, Amazon and others do not have access to the inside of his home, everand you get to sell that -- it's private, it's his or hers, and it's accessible and controllable from anywhere in the world via said secure infrastructure that has no access for anyone other than him -- including you!

Let's assume that of the 40,000 "you install" locations 10% of them are truly high-end homes (remember, we started with 0.1% penetration into the market and now we're at 10% of 50% of those) are not $1,500 installations, they're $3,000+ installations and your gross margin on those is 50% -- which is easily achievable.  That's another $6 million in gross profit; we are now at $63.2 million.

Is this a reasonable projection over three years time?  It's in the game.  No, it's not "riskless" by any means, but on an adjusted risk:reward basis it looks pretty damn good.  In fact, it's not all that far off what I accomplished with MCSNet in terms of return-on-invested capital.  The real return is always on sweat equity as that gives you much more control for the risk you take, but you have to have something that affords you enough operating margin to make it worth it.

Of course there's SG&A to be accounted for.  How good of a businessperson are you?  Cost control is a big part of the game in any business but any line of work is a hell of a lot easier to succeed at when you start with a nice fat margin on the goods and services you sell up front.

This is a 40%+ gross margin business, in short, as I analyze it, and in areas where you have existing people I bet you can sell to vastly more than 0.1% of the households.  Certainly in many metro areas far more than 0.1% are in the $300,000+ price category where a system like this is a tiny percentage of the home's price yet the value delivered in convenience, energy saving and security dramatically outweigh the tiny uptick in cost generated by including or adding it.

So if you're "MAGA" or just believe my view on monopolists, the rule of law and such is horribly pessimistic and wrong, and in addition have the cash to put on the table to back your position with a big fat check then come do so.  Show me that my pessimism is unwarranted the best way anyone ever can -- by making a bunch of money that I am intentionally leaving on the table, handing to me just one fortieth of what I could have had.  We'll drink a beer together when you prove my view on the business environment in the US to be unreasonably pessimistic and you'll laugh as you motor away from the pier on your new yacht.

Of course the above is all "back-of-the-envelope" speculation but that's how a decent functional business plan starts being developed.  It's how MCSNet was developed originally, but before it was actually executed on I fleshed it out and actually wrote a full five-year business plan with pro-forma financials.

The difference between doing something like this and the Ponzi scheme nonsense peddled by many on Wall Street such as belief in 30% growth figures into the indefinite future when you already have half the nation on your service (cough-amazon-netflix-facesucker-cough-cough!) this sort of back-of-the-envelope pencil-out assumes 0.1% penetration into potential buyers.

What happens if you can get 2% penetration?  You make well north of a billion, and then you really laugh at me.

So if you're both "accredited" (you almost-certainly are if you have the capital) and this makes you salivate look right, click and email me.  We'll talk.

When I started MCSNet my view on business changed. I don't consider a 10% gross margin to be attractive at all.  IMHO if you can't get into the 30s it's not worth it on a risk-adjusted basis, and the target is 40%.  IMHO this, while certainly not "buy it and sit" like speculating in something like Bitfraud, fits that category -- but since success is of course directly related to both your analysis (rather than mine) and how you execute (rather than how I execute) this is all hypothetical, but if that 0.1% penetration can be turned into 0.5%, well...... you do the math.

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User Info How To Make 40x Your Investment in forum [Market-Ticker]
Themortgagedude
Posts: 10424
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saint louis
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So if I think you're a dumbass but have $1.5 million around to give you - you're all in on taking my money.

Oh I kill myself with my cynical way of looking at things. Hope you had a great holiday.

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Tickerguy
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A True American Patriot!
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Well if you think I'm a dumbass and that the small business environment exists such that you can take something you can't do yourself and buy it, then market and sell it and not get killed by the fraudsters out there you can both prove me wrong and (maybe) get Forbes 400-style rich at the same time. Now that would require some serious penetration, but it's nowhere near a ponzi-style reach to think it could happen.

Were I to view the environment as something akin to the 1990s I'd have gone after this already; it was by no means a "fair fight" then either, by the way....

It's somewhat akin to buying stock -- the person who sells it to you thinks its worth less than the price you pay, or he wouldn't sell it. You think it's worth more, or you wouldn't buy it.

Same deal, except there are damn few times your difference of opinion can be multiplied by 40 or more. Sure, it happens, but not very often, and in the case of a stock your personal input has nothing to do with the outcome (unless you're getting options as an employee.)

When it comes to running a business your personal input has EVERYTHING to do with the outcome.

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Winding it down.

Tripseven
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$1.5mil? But but...you'll lose your $15/mo Silver plan...for the year. smiley





Tickerguy
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A True American Patriot!
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For one year, yes I will..... I'll be forced to pay back the APTC, or I might drop it and pay the fine instead.... (probably the latter) smiley

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Gauntlet33
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I could only invest in this idea as a passive shareholder (say 10% ownership interest for $150k) so if anyone out there wants to start a corporation and get 10 shareholders to start this business, please let me know.
Tickerguy
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Quote:
I could only invest in this idea as a passive shareholder (say 10% ownership interest for $150k) so if anyone out there wants to start a corporation and get 10 shareholders to start this business, please let me know.

Unfortunately due to how the law is structured at present it's illegal to put a structure like that together unless everyone involved is an "accredited investor" (the rules aren't all that complex - you already have to have a lot of money, so if you lose it all it's ok.)

Basically you can be an active partner in an unregistered enterprise but it's not legal to solicit or put together a means to sell unregistered securities (which is what they would be) unless everyone involved is an accredited investor. The reason for this is quite-sound (there's a hell of a lot of snake out peddlers out there who would just plain rob you if they were able, and it would be damn near impossible to police it.)

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Maynard
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on the move
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Damn I have been interested in this since you first started coming out with it and continue to download the updates. I would be more interested in Gauntlets idea. That sucks about the structure ....I will just continue making custom welded items on my own.
Themortgagedude
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saint louis
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Some states do not require accredited investors but most are as KD claims here. And it depends on the amount of money you are raising and I think the amount of money that is being invested per the individual. I did a lot of research on this a long time ago when I had a bplan I was thinking about. Generally speaking anything in the range he is talking requires accredited investors.

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Themortgagedude
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saint louis
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There are also exceptions to the accredited investor guidelines for employees of the company and ESOP plans.

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I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Tsherry
Posts: 961
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Spokane WA
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How long would this be in the wild before the Chinese clone it?

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Omne mendacium est.
Tickerguy
Posts: 150720
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Well, that's one of the risks.

BTW they try to steal the source code regularly and no, they don't get in. Stealing the object code has its problems in that the certificate management could be patched out, but if you did that then there'd be no security at all (bad!)

If they steal the SOURCE, on the other hand, yeah, you'd be ****ed.

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Ckaminski
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Mass-Hole!
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And one of the risks is the Chinese going to open source projects as well. HomeAssistant, etc.
Tickerguy
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Well yes, but the primary reason I wrote this is that the open source packages pretty-much all suck in one form or another, and most suck in more than one.

So do most of the competitors, IMHO.

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Ckaminski
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Mass-Hole!
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Not disagreeing there. An open source solution looks like you need to put a bunch of different packages together, and resource requirements grow quite a bit when you do. It's just another competitive risk to be aware of.
Tickerguy
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It's more than that... what you get is less, maybe a lot less, both in resource and responsiveness.

There have been open source "answers" since the days of X-10. A hell of a lot of people have asked for me to post my source. That's NEVER going to happen; the entire reason I wrote the FIRST iteration of this code (which was nowhere near as efficient as the current software) was that the open source packages all blew big chunks in some form or fashion, and for that matter so did the other competing commercial offerings!

There are always "open source" alternatives to darn near everything. The issue is that open source is almost-never a complete package and usually the cost of making it one in personal terms is greater than buying something that's fully-baked.

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Gauntlet33
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Hey Karl, here's an idea that shouldn't be too difficult to implement...

Get 10-15 partners (from this blog or elsewhere), form a partnership and pay a salary to someone, hopefully you since you know the logistics of the source code and have successfully run a business before to run it as the CEO/COO and then hire a few salespeople in key richer areas (Beverly Hills, Miami, NY, etc.). Then you would have $1.5 million in your pocket from the sale and still receive a nice salary each year, and the investors/partners hopefully make a killing too if the business does well as you project. Maybe you even keep 10% of the company so you have sufficient incentive and say sell the company for $1.35 M. It's a win-win for everybody as I see it. Please let us know your thoughts.

Also, I'm still curious about the "other" business idea that I believe you mentioned in your May 29, 2017 blog.
Tickerguy
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See above; this was already floated, more-or-less.

https://market-ticker.org/akcs-www?singl....

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Gauntlet33
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Karl: "See above; this was already floated, more-or-less.
https://market-ticker.org/akcs-www?singl....

Gauntlet: Oh, I thought that if the investors were "partners", rather than "shareholders" that the business entity partnership would be legal as their wouldn't be any sale of securities issue...
Tickerguy
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The distinction is passive .vs. active. There's nothing stopping you from setting up a Sub-S, LLC or Partnership with unaccredited people PROVIDED all are actively involved in managing/operating the business.

There are exceptions and instances where it's legal but again I'm not interested in running a company in the current environment or I'd just do it up front.

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Goforbroke
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Time to feed the chickens.
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What about MLPs? Investors in them are passive, but they aren't accredited.

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Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our Light, and not our Darkness, that most frightens us. -- Marianne Williamson
Tickerguy
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MLPs are typically listed entities and thus file SEC-mandated quarterly and annual reports (e.g. Kinder-Morgan, etc)

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Goforbroke
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Time to feed the chickens.
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Got it. Thanks.

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Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our Light, and not our Darkness, that most frightens us. -- Marianne Williamson
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