Blend Compounders and Cash Cows — You Can't Live on Appreciation
Deliberately hold both businesses that compound and never pay you, and businesses that pay you monthly and never get huge.
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 7
- Confidence
- 85%
Girdley's structural answer to portfolio design is to hold both categories deliberately, summarised in one line: you can't live on appreciation. Compounders — his software roll-up Dura, aiming to be the next Constellation Software — absorb his money, effort and time and return no cash flow by design. Cash-flow LLCs like the coding bootcamp pay him every month, have low capital expenditure, and are capped: no billion-dollar exit twenty years out. The framework's real utility is the mental model he prescribes for evaluating any opportunity, stated as three questions: what does it take to start, how long until a payday, and how big can the payday get. He contrasts venture — put up none of your own money, raise $3M to $300M, expect nothing until an exit at seven to ten years on average — with his e-commerce business, which took $600K of his own money in year one and could pay quarterly profits by year two, with healthy distributions funding a good lifestyle by year three or four. Small businesses in his portfolio run 15-20% EBITDA margins, and after debt service the reinvest-or-distribute decision comes down to whether he has a better use for the money, which he mostly doesn't. He also flags the structural motive: opportunities have been hard to find for five years, so he built a structure flexible enough to take whatever walks through the door.
Origin
Pressed by Sam on what '$100M in revenue' actually means for what he takes home, Girdley laid out the deliberate mix of compounding and cash-flowing assets that makes the number ambiguous by design.
Core principles
- 01You can't live on appreciation — something has to pay you now.
- 02Compounders are a decision to forgo cash, not a failure to generate it.
- 03Cash-flow businesses buy freedom and cap your upside; accept both.
- 04Evaluate every opportunity on cost to start, time to payday, and size of payday.
- 05Reinvest unless you have a genuinely better use for the money.
- 06Structural flexibility matters when good opportunities are scarce.
How to run it
- 1
Name the two categories explicitly
Separate compounders (Dura, aiming at the Constellation Software model, deliberately returning nothing) from cash-flowing LLCs (the coding bootcamp, paying monthly).
- 2
Apply the three-question mental model
For any opportunity: what does it take to start, how long until a payday, and how big can that payday be? Girdley runs this before anything else.
- 3
Benchmark against venture
Venture: none of your own money, $3M-$300M raised, nothing until an exit at seven to ten years. Use it as the contrast case, not the default.
- 4
Benchmark against self-funded
His e-commerce business: $600K of his own money in year one, quarterly profits available by year two, healthy distributions funding a good lifestyle by year three or four.
- 5
Run the margin calculus
Assume 15-20% EBITDA for small businesses in the portfolio, subtract debt service, then decide on the remainder.
- 6
Default to reinvestment
Girdley mostly reinvests because he doesn't have better places to put the money than new assets and acquisitions — but the question is asked each time.
- 7
Ensure the blend actually funds your life
The whole point of holding cash cows alongside compounders is that appreciation doesn't pay bills.
In the wild
Girdley and his partner — the former head of support at Rackspace, now CEO — put up their own money for the first acquisition, ran out after a couple of million, and then raised outside capital. The explicit ambition is to be the next Constellation Software.
→ A business that takes his money, effort and time and returns no cash flow, by design — 'I'm just a long-term player.'
His second business, all services with low capital expenditure, at low eight figures of revenue and 15-20% EBITDA margins. Coming from fireworks, Girdley was astonished that students pay before the classes are taught.
→ His favourite holding — pays monthly, changes people's lives, and made every subsequent business feel easy by comparison.
Multiple tens of millions in revenue across two selling windows a year, but all cash goes out from January 2nd, demand must be forecast 6-12 months ahead across 200 Texas locations, and break-even doesn't arrive until 7-8pm on the 4th of July because consumers buy at the last minute.
→ Girdley calls it the hardest business in the world to run — and the reason every other business felt straightforward.
Common mistakes
Holding only compounders
Girdley's one-line warning. A portfolio entirely of long-horizon compounders leaves you asset-rich and unable to fund your life.
Expecting cash-flow businesses to produce venture outcomes
He is explicit that the upside on cash-flowy LLCs isn't as good and you can't have a billion-dollar exit in that stuff twenty years from now. The trade is deliberate.
Skipping the three questions
Entering a business without knowing its capital requirement, time to payday and realistic ceiling means discovering the profile only after you're committed.
Is it for you?
Best for
Operators building a portfolio of businesses who need both a lifestyle today and a large outcome later.
Not ideal for
Single-business founders, where the trade-off is a sequencing decision inside one company rather than a portfolio mix.
From the transcript
“you can't live on appreciation”
“the upside isn't as good like you can't have a billion-dollar exit in that stuff 20 years from now but you could start cash flowing…”
“what does it take to start how long do you have to wait to get a payday how big are those pay you know are…”
From the episode
Michael Girdley: Why Fireworks Are A Cash Cow and How to Operate a Holdco Worth $100 Million
Michael Girdley