I was talking with an entrepreneur recently about a familiar dilemma:
“Should I hire XYZ agency for a $30k piece of funnel building work?”
The questions were:
- Is that good value?
- Does the investment make sense?
- Should I go ahead?
This email is how I think through these kind of large decisions. It might help you make similar assessments.
I tend to look at an investment like this through three different lenses:
- financial
- competence
- opportunity cost
By looking at all these angles in the round, you can get a better idea of whether you should go ahead.
Let’s start with the financials.
1. Financials
So the cost is $30k.
Is that a lot? Not very much?
Of course the answer is “it depends”.
But we don’t want to try to judge the agency with the proposal just yet.
Step 1 is to try to assess the likely ROI for the business:
“What is the likely return on investment of a project like this?”
In other words, assuming the project is successful (we’ll get to the ‘if’ part later), what’s the likely financial outcome?
Example…
Let’s say the aim of the $30k project is to build some email marketing automations, to help you make product sales on autopilot.
Currently: You’re making $3k/mo with these products.
Goal: The agency is confident they can make $10k/mo.
Now, a bad question is: “Is this going to work?”
A much better question is:
What’s the range of possible outcomes?
So, let’s think it through…
Best case? They hit the goal, your revenue jumps by $7k/mo, and you make back the investment in 4 months.
Average case? They only reach $6.5k/mo, so you make back your money in 9 months.
Worst case? It fails miserably, and you flush $30k down the toilet.
OK, now we’ve quantified it,
Now, what’s the likelihood of these different outcomes?
In reverse order…
Worst case - In order to make you $0, they’d have to be totally incompetent. Unlikely, assuming we vet them properly.
Average case - More likely. It’s useful to be conservative in projections.
Best case - We really have no idea how likely it is, so let’s be safe and assume they won’t have as much success as they think.
So…
We can probably say that the average case is our ”most likely worst case”.
To get specific:
The likely worst case scenario for this project is that we make our money back in 9 months.
Now we’re getting somewhere.
Is that a good return period for you — spend 30k today, make it back in 9 months?
On the one hand, 9 months is kinda slow for a fast growing business.
On the other hand, you keep the assets, so the ROI will continue for years after the 9 month payback period.
The decision is up to you.
But at least we’re quantifying things now, rather than operating on fear.
Now that we’ve quantified the finances, it seems like we’re ready to make a decision now…
Right?
Whoa there… You’re not even close!
There are two more steps you need to take, to properly assess this decision.
Let’s see now…
2. Competence
Now that we’ve thought through the likely financial outcomes of our little project, and we have a good idea of the likely worst-case scenario…
Who’s gonna do the work?
Important:
The answer is NOT: The guy who’s trying to sell me it.
(Not necessarily, anyway)
With entrepreneurs I mentor, this question often comes up in a predictable way:
- Entrepreneur gets DM’ed on Twitter: “Hey bro, we can do this thing for you!”
- Entrepreneurs messages me: “I’m thinking of doing it!”
- Me: “Wait, what?”
It often happens out of the blue, when we’re already working on a totally different plan.
But business owners are like this…
Once we get an idea in our head, we immediately get FOMO about not doing it… even though 5 minutes ago we weren’t even thinking about it.
Anyway…
Let’s just say the piece of work on the table does actually make sense for your business right now.
Like adding pineapple to pizza — always the correct decision.
Well, we follow these steps to find the right person:
1. What needs to be true about them?
Step back for a second — imagine you were starting the hunt from scratch.
What criteria would you set for the perfect person to help you with this work?
- Does this work as a specialism (not just jumping on a new trend)
- Has 10+ examples of identical work done that I can see in the wild
- Can refer me to at least 2 past customers to talk to about their experience
This is the kind of stuff I look for in service providers.
Out of everything, it’s the last point that’s crucial.
Before hiring for a big job, I ALWAYS go and talk to a couple of people who’ve worked with them in the past.
It’s exactly like hiring.
9/10 times, it doesn’t turn up anything bad.
But that one time that it does… you’ll be glad you did it.
2. What do they need to be great at?
Agencies (especially those who peddle their wares on social media) often flip-flop from one service to the next…
Jumping on new “hot” marketing trends because they’re easy to sell to curious business owners. (AI, anyone?)
But you always want to work with people who are legit specialists and have been doing the same thing for 5+ years.
So what do they need to be able to do really well?
In our funnel example, perhaps:
- Page building capability
- Tracking
- Outstanding copy
You get the idea.
It’s not important what you choose. What’s important is that you think it through in advance.
That way, when you meet the sub-par vendors, you’ll have hard criteria on which to spot the BS.
And this brings us neatly to the most important part of all…
3. Rule of three
This is an unbreakable “golden rule”, which I command you to follow at all times!
Always…
Always…
Always…
No matter what kind of work you’re doing…
And especially if the proposal came from someone who also wants to sell you on the service…
Speak to three people before making a decision.
It’s called the “Rule of 3”.
It’s kinda obvious why this rule exists.
The principle is that you:
Widen your available choices at the start of the decision making process.
Whatever it turns up, doing this just guarantees that you have eyes on more options…
And stops you making the predictable error of just going with the first guy who hit you up on Twitter.
So, speak to three people.
- Phone a friend
- Ask for recommendations
- DM someone you respect and ask for a referral
- Do a Google search (seriously)
You’ll be glad you did.
But nowhere near as glad as you’ll be after you read section three.
This is my favourite part of the decision making process.
Highly nuanced.
But crazy powerful when you understand it.
3. Opportunity cost
Quick story…
I know a creator business doing 7-figures in annual revenue, but that wasn’t enough for the founder.
They wanted to scale to $10m+.
They realised that the only way to do that was with paid ads.
However, every time they’d tried ads in the past it hadn’t worked.
The problem was that the business couldn’t stay in its current form — they had too many expenses, team was too big, and they weren’t focused.
There was a clear choice:
- Either they make the choice to scale, invest $100,000s in a world-class team and make a serious effort
- Or they slim down the team and prepare the business for profit mode
So, should the creator make the investment or not?
Ego says “yes”. Wisdom possibly says “no”.
But it’s a highly individual call.
Unusually for me, this is where the story ends.
It doesn’t actually matter what happens next.vBecause the point is a different one:
Sometimes, your investment decision is about more than the project in question — it’s about the future of the entire business.
With this particular dilemma, the creator needs to get this decision off their chest in order to be able to make peace with the future of the business and move on.
“If this isn’t going to be a $10m business, I may as well find out ASAP and move on.”
In other words:
The decision on the table is about so much more than the project itself.
This catapults us headfirst, and at great speed, into the nice, juicy realm of: opportunity cost.
1. What’s the focus in the business?
(Time or money)
Entrepreneurs tend to always look at investments through a financial lens…
“Am I going to get an ROI on this?”
But as you can see from the above example, it’s not always about the money.
It can be about sooo much more than that.
For example, in my mentorship work, I begin by creating a long-term strategy for the business — looking at everything the business needs to scale and building a plan around it.
There are typically 3-5 big buckets.
At that point, the entrepreneur I’m working with is facing a choice:
Do I want to complete this work in 12 months or 5 years?
The same set of tasks can take 5 times longer if you try to do everything yourself, or 5 times faster if you’re prepared to put money into it.
But there’s more…
Out of 5 big buckets, you can’t expect everything to work.
I normally approach this work with the expectation that perhaps 3 of the 5 ideas will work.
And that’s all you need to transform the business.
The question is…
Which 3 ideas are going to work?
And just like that, the focus becomes something altogether different: Speed.
Speed to learning.
So, when you’re weighing up a decision, the first big question to answer is just that:
What’s our wider focus?
Is it about saving money, or is it about speed to learning?
That can help put a whole new spin on the decision.
2. Reversibility
I almost never see people talking about this, but it’s a key element of risk analysis.
With any big project, there’s a risk associated.
The risk isn’t just “what if the project fails and we lose our money?”
The risk isn’t also “how much will it cost to put things back to the way they were?”
Ever think of that?
In email 1 of this series we used the example of a $30k funnel building project.
Now, the easy question is “what happens if it fails?”.
But if it were my business, a much more important question would be “what would it cost us to put things back the way they were… if it fails?”
If the work involves:
- changing your website
- new automations in your email
- rewriting landing pages
…then there’s potentially a whole dog’s dinner to put right at the end if it isn’t managed properly.
Funnels are one thing.
Hiring is something else altogether.
Something I see entrepreneurs flirt with all the time:
Should I hire a CMO?
Well…
Leaving aside the question of the impact they’re likely to be able to have on the business, consider the reversibility factor…
In a scenario where they don’t work out, you’ve got to deal with:
- Probationary periods
- Benefits
- Severance pay
- Disruption to the team
- Delay in finding a replacement
That $250k salary can easily snowball into a $500k cost and a whole bunch more opportunity cost…
Because it isn’t easily reversible.
(One of the many reasons I advise against hiring a CMO in a creator business.)
3. Learning to make decisions
Lastly, my favourite.
It concerns your own development.
Often, if I’m working with an entrepreneur who’s deliberating on a big decision, I’ll guide them towards doing it simply to earn the experience.
Take hiring.
Making your first full-time hire is a watershed moment.
Many entrepreneurs procrastinate on this for years, largely out of fear.
But, guess what?
Once you learn to hire, your world will never be the same again.
And so, even if we’re 50/50 on a hiring decision, there’s tremendous value in just doing it because it speeds up your own development.
4-5 years ago, when I was first dipping my toes in the water of angel investing and M&A, a mentor of mine suggested I list StoryLearning for sale.
“But I don’t want to sell!” I protested.
His reply:
Just going through the process of selling a business is worth $1 million in terms of education.
Interesting.
So, when you think about your decision on the table…
Leave aside the likely outcome for a moment…
- How much will you learn from just doing it?
- What will that mean for your development?
- How much will your confidence grow?
I’ll admit, it’s tough to see this from your current vantage point.
But to the extent that you like investing into your education — this is a big one.
OK.
Phew.
This was kinda mammoth.
Not sure I knew how big this was gonna be when I sat down to start writing it, but I hope it’s been helpful.
Summary
Let me summarise the key points we’ve covered in this little series on how to assess business investment decisions:
Financials:
- Determine the range of possible outcomes (best case, average case, worst case)
- Estimate the likelihood of each outcome
- Focus on the “most likely worst case scenario” and decide if the payback period is acceptable
Competency:
- Define the criteria and capabilities needed from a service provider
- Always get proposals from three providers before making a decision (the “Rule of 3”)
- Properly vet providers by talking to past clients before hiring
Opportunity Cost:
- Consider the wider focus of the business (time vs money) and how the investment aligns with that
- Assess the “reversibility” of the project — how much would it cost to revert things if it fails?
- Use the investment decision as a chance to level up your own skills and confidence as an entrepreneur
Ultimately, there’s a lot more to weigh up than just the pure financials when making a big investment call.
You need to look at it from all angles - money, people, and opportunity cost.
Only then can you make a well-rounded decision that’s right for your business.
Wishing you zen-like clarity.
Namaste,
Olly