What is a “machine”?

This web site is called “Machine That Makes Money” because your goal, as an entrepreneur, is to build a Machine That Makes Money.

But what does one of these machines look like? How does one of these machines work? The thing is, we are surrounded by these machines. We are immersed in them, so we see them and interact with them every day. Think about it:

  1. Imagine any company that produces a product that you buy through retailers like Walmart or Amazon. These product companies are machines. They produce food products, clothing products, electronic products, toy products, etc. The company manufactures the product, sells the product at a wholesale price to the retailer, and the retailer sells the product at a retail price. The product company makes a profit off of each item it sells.
  2. The retailers are machines too. They sell things to the public. They are buying products at wholesale prices and selling them at retail prices, making a profit off of each sale. Retailers can be big like Walmart, or small like a convenience store, or tiny like a vending machine.
  3. Imagine any company that provides food and beverages to customers. These companies are fast food restaurants, coffee shops, sit-down restaurants, buffets, fine dining establishments, hot dog carts on the street, and so on. The company cooks the food, serves it to customers, and makes a profit from what it sells.
  4. Imagine any company that produces and distributes content “for free.” These companies include news web sites, radio stations, podcasts, many apps, search engines, YouTube, etc. These machines attract visitors with their content, and then sell ads that the visitors see/hear while consuming the free content.
  5. Imagine any company that provides some service in return for a monthly subscription fee. These companies include gyms, magazines, lots of web sites, cell phone companies, cable companies, power companies, streaming companies (e.g. NextFlix and Hulu) and so on. It costs $X for the company to provide the service per month, and all of the subscribers together pay $Y per month. As long as $Y > $X, the machine makes money.
  6. Imagine any company that transports stuff: Trucking companies, train companies, cargo ships, oil tankers, airlines, taxis, Fedex, etc. These companies are machines that move stuff from point A to point B and charge money to do it.
  7. And so on…

There are millions of companies like these in the U.S. economy. These companies are all around us every day. We could not live our lives without them. They are all Machines That Make Money.

The goal of this web site is to help you to build a machine of your own, no matter what form it takes.

The Parts Inside the Machine

The thing is, even though all of these machines can be wildly different in how they appear to a customer – for example, a factory that makes toys seems very different compared to a news web site or a trucking company – they are remarkably similar at their core. These companies are all machines that share many things in common. If you can understand the commonalities, it makes it much easier for you to conceive of a machine of your own. For example:

  • All of these companies have employees.
  • To pay the employees, every company has some sort of payroll system, benefits system, HR function, and so on. Even the tiniest company with a single proprietor has one employee, and this one employee writes himself/herself a pay check periodically, like every week or every month. At the Fortune 500 scale, the HR department can be gigantic.
  • Every company has at least one bank account and an accounting system that keeps track of the money flowing in and out of the account.
  • Every company has to prepare and file tax returns every year, and therefore probably has an accountant. A tiny company might pay the accountant $400 each year to prepare the taxes, while a Fortune 500 company can have a big accounting department with many employees.
  • Just about every company has some sort of marketing department that tries to attract customers through paid advertising.
  • Similarly, just about every company has a Public Relations (PR) arm that tries to increase the visibility of the company/brand through various news and influencer media.
  • Just about every company today has a web site and social media accounts on Facebook and similar.
  • Every company has a group of employees who “do the thing” that the company is about. At a toy company these employees make the toys. At a retailer, these employees stock the shelves and check people out. At a restaurant, these employees cook and serve the food. At a content web site, these employees create the content, push out the content, maintain the servers, etc.
  • Lots of companies have a sales force to sell the products that the companies make. For example, a large pharmaceutical company can have thousands of sales people.
  • Just about every company signs contracts, and usually has a lawyer on staff or on call to help understand and adjust those contracts. The lawyer can also help with employee disputes, customer disputes, competitor disputes, and so on.
  • Most companies are incorporated in one way or another, and have incorporation papers, operating agreements, shareholders and shareholder meetings. There may be a formal board of directors, board of advisers, etc. A lawyer probably helped in some way, and may attend meetings.
  • Many companies have various permits and licenses to do their thing.
  • Many companies have IP, or Intellectual Property, in the form of patents, copyrights, trademarks, etc. These companies often have relationships with IP attorneys, or have IP attorneys on staff.
  • Most companies have at least one form of insurance.
  • Many companies, once they reach a certain size, have “people in charge“, with these people organized in some sort of hierarchy. The org chart describes the hierarchy. These people tend to be called things like managers, directors, VPs, chiefs, etc. So the Chief Operating Office (COO) makes sure that the machine is functioning properly as a whole, that all of the parts of the machine mesh together correctly, and that the trains run on time. The Chief Financial Officer (CFO) makes sure the machine’s finances are sound, and that the machine does not run out of money. The Chief Technology Officer (CTO) makes sure that all of the machine’s technology is working as it should. The Director of Human Resources is concerned with things like hiring employees, firing employees, employee turn over, pay scales, company culture, etc.
  • And so on…

In a one-person company, the one employee handles all of these different roles as best they can. In a large company, these roles can be spread out across hundreds or thousands of employees in various departments. The point is, at their core, all companies have a LOT of things in common. No matter how large or small, no matter how different they are in terms of how they make money, companies are largely the same. They are all Machines That Make Money, and the machines tend to be very similar internally. The machine does something in the economy in return for money, and the machine tries to cover its expenses and then make a profit in the process with the money it makes. The machine spends $X every month, makes $Y every month, and hopefully Y > X. Or:

$Y – $X = $P

$P, AKA the profit, needs to be positive, not negative. When $P is positive, you have a Machine That Makes Money.

Now let’s look at several example machines, starting with one that is as simple as possible…

Example 1

This is the simplest example possible of a machine that makes money. Note that it is a bad example, but millions of people have tried something like this because the machine is so simple, and it costs nearly nothing to crank this machine up.

Let’s say you are a teenager who needs some quick cash. Or you are an adult living paycheck-to-paycheck, your car’s transmission just blew out, and you need to create $500 out of thin air. It is the middle of summer, you live in a big city with a lot of traffic congestion at rush hour, so you come up with the idea to sell ice-cold bottled water to commuters stuck at a particularly bad traffic light where hundreds of cars get backed up. I’m not saying this is a great idea, because it would be illegal in a lot of places (violating one of the core concepts in Chapter 1 – your idea must be legal), but you are desperate. You need to make some cash right now. So you decide to create a machine that sells bottled water on the street. What are the components of your machine?

  1. You
  2. A big cooler
  3. A case or two of bottled water purchased at Costco or wherever
  4. A big bag of ice
  5. A congested road with a traffic light that stops traffic periodically.
  6. A sign that says, “Ice-Cold Water – $1” (this video argues that better words can yield more sales)

That’s it. A case of bottled water at Costco right now contains 40 half-liter bottles costing 7.5 cents each. A big bag of ice costs $3 and will chill all 40 bottles if you let the bottles sit in the ice for two hours beforehand. You already own the cooler. The sign is probably free, created with a piece of cardboard and a magic marker. You have some expenses driving to Costco to buy the water, and getting to the congested intersection, which we are going to mostly brush those aside for the moment.

So in round numbers, let’s say that you are spending 30 cents (the bottle of water + the ice + transportation) for each bottle of water you sell. You are making $1 per bottle. You can sell an average 20 bottles per hour for 2 hours each day. So you are grossing $40 per day, and netting $28 per day. In 18 days you can pay off your transmission.

Is this a machine that makes money? Absolutely. Is it a great machine? Absolutely not. Why not?

  • It is illegal in most places, and eventually a cop is going to come along and shut you down.
  • You are ignoring a lot of stuff that a “real business” cannot ignore, like taxes, permits, insurance, etc.
  • $14 an hour is not a great hourly wage. Certainly better than nothing, and better than minimum wage in a lot of places, but not great.
  • It is not really scalable in its present form.
  • Blah blah blah

But it is a machine, it is super simple, so it is a good example to start with. It’s the same idea as a kid starting a lemonade stand, and runs into the same problems.

Example 2

What is the simplest possible legitimate machine you can build? This might be a gumball machine that you install in a restaurant lobby, a mall, etc. The advantage is that this is a fairly hands-off endeavor. Maybe once a week you are going to spend half an hour refilling your machine with fresh gumballs. Maybe it takes you 30 minutes a week. What are the components of this machine that makes money?

  1. You
  2. The gumball machine
  3. Gumballs that go into the gumball machine
  4. Some kind of agreement/contract with the owner of the restaurant or the mall giving you permission to install the machine, and probably specifying some cut of the profits

Where do you get the gumball machine? I typed “commercial gumball machine” into Google and this is the first thing that came up:

Which looks pretty cool until you see the price tag – holy cow – it is $2,495! You would have to sell thousands of gumballs just to recoup the cost of the machine. This high cost might cause you to look for used machines, or much cheaper and simpler machines.

The gumballs you can buy by the box on the Internet or at BJ’s. They cost 5 cents each or whatever.

Then you have the cost of driving to the location every week. And the cut of the profits that you have to give to the landlord.

When it is all said and done, and you account for all of these costs, you might make 5 cents off of each gumball you sell? If you sell a hundred a week, you make $5, maybe? And you have had to spend 30 minutes or an hour of your own time to make this $5. Is this even worth your trouble?

Have you ever wondered why a soda from a vending machine costs $1.50? This is why. The vending machine costs as much as a small car. It needs electricity to keep the soda cold. Someone has to come refill the machine once a week, and he/she needs to be paid. The cans of soda cost something. There are insurance costs (what if someone lights your expensive vending machine on fire as a prank?). You have to give the owner of the building a cut. And so on. When you add it all up, it costs a lot to sell a can of soda with a vending machine.

Example 3

If you read the creation story for Ben and Jerry’s ice cream, they started their first ice cream shop in an old gas station in Burlington, Vermont. They spent $12,000 in 1978 dollars ($45,000 in 2018 dollars) to launch. What did their original machine look like?

  1. Them
  2. A loan
  3. The building (either purchased with a mortgage or leased)
  4. The sign (gotta have a sign, right? And signs can be surprisingly expensive)
  5. The furniture (tables, chairs, trash cans, etc.)
  6. The ice cream churns to make the ice cream
  7. A freezer/display case
  8. Maybe a freezer in back too, along with a refrigerator for raw ingredients
  9. A cash register
  10. Phone and a phone line
  11. Electricity connection
  12. Insurance
  13. Advertising budget
  14. Raw ingredients (milk, cream, sugar, chocolate chips, etc.)
  15. Recipes
  16. Supplies (napkins, cups, cones, bowls, containers for the ice cream, toilet paper/soap/paper towels for the restrooms, etc.)
  17. Cleaning supplies
  18. Health certificate (can’t have a restaurant without a health certificate)
  19. Business license
  20. Some kind of accounting system
  21. Accountant for tax preparation
  22. Incorporation papers
  23. Bank account
  24. Checks

This is a really simple machine, relatively speaking – a single small town ice cream store started by two random guys in the 1970s – but there are a fair number of moving parts in this machine even so.

Ben and Jerry started this business, and they soon discovered a problem: People in a cold place like Vermont don’t spend much time in ice cream shops in the winter. This got them into the business of selling pints of ice cream, which originally they schlepped around in their cars to take to convenience stores and gas stations in the area. Their pints business grew, and they added this to their machine. A few years later they opened their first franchise, adding franchising to their machine. And so on… This is classic IPESSI at work. They came up with an idea (ice cream shop), they prototyped it (first shop opens), the store made money so they stayed in business (evaluation)… and then they improved/scaled their machine incrementally. See the MMTM table of contents for details.

Example 4

Think of many of the websites we see today:

  • Twitter – A very simple idea to start with, then went public, and has a market cap of ~$16 billion today
  • Trello – Another very simple idea to start with, and recently sold for $425 million to Atlassian
  • HowStuffWorks – Super-simple idea, eventually sold to Discovery for $250 million
  • Whatsapp – Incredibly simple, wildly resonant, sold for $16 billion

What’s cool about these examples, and thousands of other similar stories, is that a web site is an incredibly easy machine to start, and it may only take one or two people to get the MVP online to see what the response is. What does a machine for a web site idea look like? Initially the components are:

  1. You
  2. Your domain name
  3. A web hosting company (Hostgator, Godaddy, etc.) with CPanel support
  4. A laptop
  5. The software you develop or the content that you create
  6. An analytics account from Google or similar
  7. A Stripe account (if people are paying you money with a credit card) or an Adsense account (if you make money through advertising) or a Shopify account (if you are doing ecommerce or selling products) or similar
  8. Incorporation papers (not necessarily required early on, but it is a good idea to incorporate or form an LLC)
  9. Bank account
  10. Some kind of accounting system
  11. Accountant for tax preparation
  12. A PEO account like Trinet to handle payroll/benefits/HR for employees
  13. Maybe an advertising budget, maybe not in the early days

Technically you could start a website idea for $100 or so if you already have a laptop, you don’t incorporate initially, you do everything yourself, you don’t pay yourself, and you rely on PR/resonance rather than advertising, etc. It can be one of the simplest machines to get going, yet the upside potential of a website that resonates and takes off is incredible.

Example 5 

This page talks about Dor, a small investor-funded startup company with ~15 employees right now. What does a machine like this look like?

  1. Founder
  2. Employees
  3. A PEO account like Trinet to handle payroll/benefits/HR for employees
  4. Office space for employees
  5. Utilities for office space (power, water, etc.)
  6. Furniture for office space
  7. Office equipment for employees
  8. Domain name
  9. A web hosting company (Hostgator, Godaddy, etc.) with CPanel support
  10. Hardware design developed for the product
  11. Any patents associated with the hardware
  12. Patent attorney to deal with the patents
  13. The software you develop and the content that you create
  14. An analytics account from Google or similar
  15. A Stripe account for people who are paying you money with a credit card or similar
  16. Incorporation papers (not necessarily required early on, but it is a good idea to incorporate or form an LLC)
  17. Bank account
  18. Some kind of accounting system
  19. Accountant for tax preparation
  20. Lawyer on retainer to handle contracts, legal quandries, etc.
  21. Contract with contract manufacturer
  22. Phone lines and phone system
  23. Contract/relationship with angel investors
  24. Growing relationships with other angels, VCs, advisers, mentors, etc.
  25. Advertising relationships accounts
  26. Trade show relationships and contracts
  27. Social media accounts
  28. Marketing and PR subcontractors and/or firms
  29. And so on….

It does not start this way… at the beginning it may look a lot more like Example 4. But by the time the company gets to 15 or 20 employees there can be a lot of moving parts. The 100-employee level is another world, never mind the 1,000-employee or 5,000-employee level. The thing is, you can grow into it piece by piece, and you can also hire experienced people who have done it all before.

These are all Machines That Make Money. Small or large, simple or complex, there are a lot of similarities between them.

The goal of this web site is to help you build a machine of your own. Let’s take a look at why a lot of entrepreneurs tend to create a machine based on stock…