Why Smart Businesses Froze in 2025 and What Will Separate Winners in 2026

0:00Hey, everybody. We may be recording the first episode of Business Lunch for the year. We're not sure because both of our computers, everything got reset. And so we have no tech help. It's just me and Ryan, tech wizards that we are. It's like it's the year 2000. And, you know, the millennium bug actually infected our computer. Like it happened. It broke everything. So Ryan doesn't know what this podcast is going to be about. But I thought that it would be really fun to do a year in review. Okay. And we're in 2026 now. This is our first recorded episode of the year. And we are thinking about this episode not as a highlight reel, not as like predictions, not the hype that you get with those typical reviews.

0:51But 2025 was a year where a lot of things that used to work stopped working. And it happened kind of quietly, I think. And so I wanted to explore that with me and Ryan talking about it. If you weren't paying attention, I feel like it just felt harder and you didn't know why. But I'd like to kind of break down that and really kind of do it more. I wouldn't say that either of us is currently acting as an operator, but I'd kind of, but I think that we're close enough to operators in our businesses and our consulting that we can say from an operator perspective, if you own and operate a business or, you know, or if you're, you know, an operator within one.

1:37We saw some cool stuff and we learned some stuff. We did some things well. We got some things that we could have definitely done better. I don't know if I'm going to admit that we did them wrong. Yeah, we did them wrong. How we're deliberately designing intentionally 2026. So if you're looking for like motivation, this might not be the episode of like, you know, hey, rah, rah, go forward. We're really trying to help you give clarity going into 2026. I'd love to start talking a little bit about, well, number one, how do you feel about that, Ryan? Yeah, I think it's great. And I definitely think it's great to take it from the perspective of just getting real about what actually happened and lessons that we can bring into the new year as opposed to just predictions based on nothing.

2:21Yeah. So, yeah, let's do it. So I think the biggest thing that we noticed in 2025, and it took a while to actually put words to it, is that capital didn't really disappear. Customers didn't really disappear. Deals didn't really disappear. But I'd say what disappeared was confidence without proof. Like everything slowed down, not because people were scared so much, but maybe because they stopped assuming. How does that resonate with you? Yeah, I think everybody just froze was the sensation that I got. Nobody was optimistic, but nobody was scared. It was this true deer in a headlights kind of mentality where everybody just seemed kind of stuck in the middle of the road.

3:12And they were just frozen. Yeah, it felt like maybe all of the things like like what wasn't true in my experience during 24, 23, 22 was that all of the economic indicators that we usually look at and say, oh, this is happening like inflation is up. So people are going to spend less. But it didn't happen that way. Inflation went up and people spent way more. And then inflation kept going up and then interest rates went up and rent and housing costs went up and still everything. Prices went up higher. none of the stuff that normally happens when you are a traditional economic modeler was valid. And I think it just freaked.

3:52I mean, I know it freaked me out. I think it freaked all of us out. And I think maybe that finally caught up a little bit in 25. I'm not sure. Yeah. I mean, I think a mistake that a lot of businesses make and certainly the media makes is equating the stock market with the economy. And they have increasingly become disconnected. So the stock market is not the economy, but we look at them like they're the same. And what we definitely had in 2025 was a stock market that was propped up largely by AI and AI companies. Similarly, if you had a business, small, medium, or large, that was AI or AI adjacent, you were probably doing pretty well last year.

4:43I know we had a client that was in the environmental construction space and they crushed it last year because they were doing a lot of data center work. So it made sense. Similar, if you were doing plumbing and electrical in any kind of commercial capacity, you were doing well. Whereas if you were doing it exclusively in home services, you struggled a bit because people weren't doing as much home renovation. There wasn't a lot of new home construction taking place because people weren't buying as many homes. So it kind of depended on where you were in the economy. And so as is the case, there's never, anytime there's a bull market, everybody, it's kind of like when there's a bull market, everybody's winning, right?

5:31It's kind of like it's at high tide and it winds up lifting all the boats. And when there's a bear market, there's always still a bull somewhere. Like there's always still some place where it's winning. And that was definitely the case this last year. But I think, I mean, to your point, it never felt like, because there were none of the economic indicators that told us like, oh no, it's bad. You should all feel bad. You should all be afraid. Like what we saw in 2008, 2009. And so nobody, there was not this release of, you know, terror. So everybody, everything just stayed locked up. Yeah. Yeah.

6:07I think one of the things that we saw, I can think of a couple of examples is the deals that should have been easy. Same number, same business, you know, just radically different buyer behavior. And one that we're kind of in the middle of for selling one of our companies, like we started with light diligence, went into a little bit more and we still don't have an LOI on something that, I mean, has it been like five, six months? Has it been that long? It feels like longer to me, but like, no, it's been, it's been five months, been five and a half months. Yeah. So we closed the year with, you know, we're going to try to get it done.

6:50And we had multiple meetings, you know, flew out, talked, had Zoom calls, you know, had teams, numbers exchanged, and just getting the commitment to buy, we were selling, getting the commitment to buy from people who said they wanted to buy. But just, I feel like that the principals were on board, but the team on their side was kind of slowing it down for various reasons. But just way more detail before even getting an LOI than normal. Does that sound? Yeah, and I really do think it comes down to everybody being so uncertain about where was it going next. Maybe an analogy, like if you've ever tried to, you know, try to keep yourself from crying or maybe something like even just try to keep yourself from sneezing, like that, the most uncomfortable part is that feeling and that sensation right before you cry.

7:48Like when you finally just let yourself cry, it kind of sucks when you're crying. But then when you're done, it's over. And I think we've still been like living in this tension of trying to not cry because we haven't just let ourselves just go like, OK, I guess it is bad. Because, again, the shoe hasn't dropped yet and it still hasn't. And I'm not convinced that it will. That's the thing. Everybody's like waiting for the straw to break the camel's back. It's like the shadow inventory. The shadow inventory that was supposed to depress the real estate market from that 789 period, right? Just it somehow got absorbed, right?

8:29Exactly. This is, I think, 2026 is going to be, I know this isn't a prediction show, but I think 2026 is going to be an interesting year because we find out, you know, we've all been deer in headlights. I think this is the year when we find out, does the car stop and the deer is able to kind of run away? totally safe and unharmed? Or does the deer get plastered by the, you know, semi-truck? It should be fun. And the good of it is, I mean, I can think of multiple deals. We had another deal that we've been working on an LOI for three or four months on a joint venture that's a significant joint venture between two pretty large companies.

9:09And it's just so much prove it, prove it, prove it, not trust me. And I think that like. You're that speed before was hiding maybe bad assumptions and that resulted in some challenging deals that people experienced. And so prove it is replacing. Trust me. And that that's showing up, you know, in in credit lending acquisitions, joint ventures, sales, hiring partnerships kind of everywhere. It just seems like everything is cautious, slow, more more data based than it was before. So that that's something that. Do you think that's going to continue about that way? Do you think because we're shoe droplets that it's just going to be pretty much the same?

9:59Yeah, I do. And I think and I think it's because the opposite has been so true. If you ever do want to predict the future, look at what the past has been and invert it. When you know we're kind of on the other side of a trend. And one thing that we had seen was the offers, for example, that were the biggest were the ones that won. Right. So if you could just make the biggest, boldest claim, then in general you won. And you didn't really even have to back it up. People were likely to believe that they wanted to believe it because everything was up and to the right. Interest rates are 0%, and the government's giving people free money.

10:37So we want to believe all the claims because we have free money just to throw around. Well, that's not the case anymore. And so let's invert it. Now, we don't want to believe that. We're not going to believe that. And so what's the inversion of that? Well, now it's show me. Prove it. And so we're seeing this across the board. And so it isn't impacting deal flow and the time that it's taken to get deals done. It's also dramatically impacting sales and marketing. One of the things I'm trying to remember, I think it was, it wasn't Procter & Gamble, there's another big consumer company, they did this research study, and they were looking into what are the factors that impact consumer trust, right?

11:20Like, how can we get consumers to actually trust our brand again? And is it the number of times that they see our brand message? Is it association with known influencers and celebrities? And the thing that actually moved the needle the most was the founder or the CEO having a consistent presence on social media. Because, again, we're just looking for real humans. Show me. Prove to me that you're a real person. Prove to me that you actually do this. And I do think that that's going to continue even and until everybody breathes a sigh of relief. Yeah, I think that's interesting. One of the things that I would say that was a lesson that kind of repeated all year was that margin percentage lies and profit dollars don't.

12:17And so basically, you know, one of the most repeated conversations I feel like I had with with deals we were doing and with consulting clients and negotiating and stuff was something like, you know, it was, yeah, we could do that. But then their margin goes down. And and every time the same thing happened, we would just run the math and the profit actually went up. And so it's not, I mean, I guess it's a little bit of you make it up in volume, but not, you know, the hyperbolic, you know, when you're losing money, you can do it. I think that last year finally killed the idea that margin percentage is the goal, that it's really not, that profit dollars are.

13:01And I saw that across a lot of deals. And it was really like something that was getting in the way of making things go. So and and to that end, both we had a financial call this morning, you you and me and one of our other business partners. And I just got off of one before this. And both of those companies had their record record month in December of last year. And I think that that's part of it. But I'd love to kind of get your thoughts on that. And if you guys that are out there listening to this had your record, you know, like had like December was the best month of the year. and that's not traditionally how it is.

13:40Like some businesses like, oh, that's always Black Friday and that. But if you're in a business like ours where that's not the case and actually sometimes it's a tough time of year, I think it'd be interesting to talk about that. Do you have any thoughts on that? I think it's important to point out just for context, this particular business does not historically have great November and December. It's not a retail heavy, consumer heavy month. It's not like it's horrific, but it's certainly not one of its better months. And I have been hearing that. I just did a call with a bunch of our clients and portfolio companies on Monday.

14:15So as we're recording this about 48 hours ago, and I asked them, hey, how is your December? And I first asked, hey, how is your 2025? And it was just across the board, hard, difficult, exhausting, you know, headwinds, like everybody was kind of like tongue wagging. And I was like, well, how was December? And you could just see faces kind of start to light. It's a Zoom call, so I can see a whole lot of faces across the screen and you could just see postures change a little bit. And then when I asked him, what was, tell me about your growth and profitability. just about everybody was either flat somewhere.

14:55I mean, they might have been down a bit, but most were kind of flat ish. And if they were up, they were up kind of 10 to 20 percent. And it was really hard to get there. So they were kind of sort of in this like 20 percent range. So they might have been down 20 percent, up 20 percent, but everybody's flat. Everybody's kind in that range. But even the people that were down were more profitable than they had been in previous years. And I thought that was interesting. And it's because pretty much all the businesses that are still around made a lot of really difficult decisions in 2025 because they were concerned about where things were going.

15:32And they made decisions to make their businesses more scalable, to make their businesses more profitable. And what I was so excited about, and all of them were more optimistic going into this next year, because I said, we get to bring these efficiencies with us going into a year that by and large, people think at least is gonna be better than the year before. Now, will it? Who knows? But at least we're coming in with stronger businesses that are ready to kind of maybe endure something. Yeah, I think the hardness of the year had that as a benefit, that it made you do things that you maybe didn't feel great about, didn't want to do, stop supporting pet projects that you maybe wanted to fund, give up on sunk cost ventures that weren't producing fast enough, let people go that you probably should have let go but didn't want to.

16:29And that had a lot to do with it. Yeah, what's that quote? Hard times create strong men, strong men create good times, good times create weak men, weak men create hard times, and the cycle continues. I do think that's a bit of what we're experiencing right now. I do think that we are on the back of some really, really, really good times that created a lot of really, really, really weak entrepreneurs, a lot of really weak business owners, and a lot of really weak businesses. And I think a lot of them are either getting stronger as a result of this, or they're going away, which is going to be a good thing for the ones that get stronger.

17:09Amen. The other thing I'd like to chat about is, um, is kind of how AI showed up in 25, because if we talk about it, honestly, I feel like early in 25, it didn't really move the needle much for us. And we were doing what everybody else was doing. You know, I feel like we've been ahead of the schedule or ahead of the curve on it since it started. But like we were using tools and saying, you know, what are the tools we should try and what are better prompts? You know, what are the experiments we should run? Which was all interesting, but it wasn't really particularly transformative. And that the breakthrough that happened maybe towards Q3 and definitely into Q4 is when we stopped treating AI like software and started treating it like labor.

17:55And I know that in our digital marketer business, we had been doing that. And then we productized that into agents to do things for people. And so I'd love to talk a little bit about that. Like, you know, maybe if you can think of, was there a moment when you, like when you reframed, uh, AI as an employee that had a job versus, you know, isn't this a cool thing that I can kind of like basically use like Google only better without the ads. And then maybe, you know, did sequencing or ownership or anything like that impact that? Yeah, that was the breakthrough for me. I mean, I've been, you've really been the person driving the AI initiative at our companies, and I've been the laggard, admittedly.

18:41And it's not that I wasn't excited about AI. It just, for me, it just seemed kind of like another tool, right? And I knew that it was powerful, and I was using it, and I was learning it. It's not like I was anti-AI. I just, it seemed like a force multiplier, but a multiplier like 2X, 3X, not necessarily 10X, 20X. And it wasn't until I remember there was a project that I really wanted to get done. Like it was a passion project. I was enthusiastic about it. I felt like it was going to be a game changer. I remember trying to take it to the team and being told that we just don't have the capacity to do it.

19:18Right. We just, we just can't do it. We don't, we don't have the bandwidth. We don't have the manpower to do it. And so I remember going to AI and pulling up projects in ChadGPT and seeing that it had these two boxes at the time. The UI has changed since then, but at the time it had these two boxes side by side. And one of them was instructions and one of them was files. And I thought, okay, well, what if I just take the job description of the person, Matt, who I want to do the thing that doesn't have the time to do what I want to do. I'm going to take his job description. I'm going to put it in the instructions and I'm going to take a bunch of the training materials that we'd use to train Matt, a bunch of the data and stuff that I would give him so that he could build the thing.

20:02And I'm going to put all those files in the files. Now the files are in the computer and I'm going to get this mini AI Matt to do the thing that I actually want to get done. and that was when the breakthrough happened, I know for me, is because I stopped, like you said, stopped thinking about AI as a tool and started thinking about it as an extension of the team, as an actual team member. Yeah, I was able to, in about a half day, working with this new AI team member to crank out all of the assets needed for that campaign and that completely changed everything, that mindset shift. Yeah, I think that's pretty cool.

20:43I, I, um, the, the two big things for me there were, um, at the, cause, cause I'd been using it similarly, I mean, but, but much more consultatively, I'd say like, I, I consider it its own person separate from me. that's basically like a peer to bounce things off of. And I've used it like that for a while, but definitely getting into lovable for building things. Like I had played around with stuff, but like in November, when we did our Get Scalable Live event and I was looking at all our Google sheets in the operating system, I was like, this needs to be software. And we're like, yeah, we've tried that.

21:28You know, it's just so hard and expensive. and hadn't worked in the past and all. And I was just like, well, screw it. I'm gonna make it that with Lovable and basically built and then verified the amount of work that building the app that is becoming the scalable AI app with my own team of software developers, which was Claude, ChatGPT, and Lovable, all working together, by the way, Um, was able to accomplish what it said. I, it took me, I think about four weeks working, you know, at least 10 hours a day. Yeah. You didn't sleep. Yeah. I mean, I was like obsessed with it. Um, but basically coming up with something that it said would have taken a small software development team about four months, you know, with five or six people on the team.

22:21And I was able to do it myself and get it the way that we wanted it, not the way that the developers interpreted what we told them after multiple, you know, false starts and bad runs and building things we didn't need or want. And the power of that was truly transformation. I mean, that's that I think for our business going into 2026 and all the other businesses that we work with, the ability to do that and have that, that language barrier that exists and the time barrier that exists between developers and the people who have the vision of what they want developed, that's a major, major game changer.

23:04And then the second part of AI for me, which is really just over the last, maybe it happened over 25, but I realized what had happened in right at the end, like in again, around the end of November, early December. And that was that I don't really prompt anymore as much as I call on protocols that I've built. And so I like for my content creation, I have a protocol I call North Star 3.0. And so it's obviously gone through several iterations. And so now if I just say, here's a bunch of thoughts and ideas we've been brainstorming, me and the AI, and now I want to make a LinkedIn article in an X thread.

23:55then I just say, okay, based on our discussion, create a LinkedIn article in Xthread using the NS3 protocol, or sometimes I have to say the NS3 compliant protocol. And it will actually give me what would have taken me two or three hours to create before, because it's already hard-coded in it. And there's nowhere that you can see it, by the way. You have to ask it to share with you the protocol that you've built. but it's it is if you start naming the things that you do over and over it will absolutely change how fast you can do things and so now i'm like is that all within one chat say again is that all within just like one chat it's any chat now so like so that's what's cool about it so like if you create the protocol and say make this a protocol i'm going to refer to this as the NS3 protocol going forward and it's like locked.

24:51Uh, and now it's in the code somewhere so that whenever, whatever chat I'm in, it doesn't matter. I can say, give me an NS3 protocol with, through a TL, TL lens to EAL lens, uh, and, um, on, uh, pulse 4.2, uh, content it's taken all of the things Like it's kind of like projects only bigger around everything with no walls, but very compliant. And then what you have to do is keep holding it to the protocol. So when it comes back with something like I've got one that's a 21 point thing and it comes back with kind of crap, even though I've told it what I want, it didn't follow the protocol. And then I'm saying, did you follow the NS3 protocol?

25:41And it's like, oh, I didn't. OK, now I will. And it does. And so instead of arguing with it for an hour to get it back to what I need, it just refers to the rules. I mean, protocols are basically rules that I've given it and named. So like that, that's been a giant thing for me. And so I think going forward into 2026, the people who are building their versions of AI, like your user on your chat GPT or your Gemini or whatever, where you've got your protocols that have become part of that creates an ever widening moat for the people that are just prompting and using it. You know, even if you're an advanced user and you're not using protocols, you're having to repeat yourself so much to get back to what you want.

26:26And you're not going to remember all of the things that you did to make this thing better. You know, I guess you could like evolve a prompt forever on a note or something and then copy it in, but you'd still have to argue it. This is like inside the brain that you're using and it's only in yours. It's not like in your friends. So it becomes, can I try to, can I try to explain back what I think I heard you say? Yes. Um, cause this is cool and I've never heard anybody do this and I want, I want to, I want to try to do this. So I'm, I'm, I'm inside of Chad GPT and I'm guessing the same thing would work inside of Claude and Gemini.

27:02And if it doesn't now, then it will. It does week. It does. Okay, cool. So I'm in there and I'm, I'm, I'm in a chat to, to try to get some type of output and I'm going back and forth with it. And I, and I finally get a result. That's awesome. Once I've done this, I can now define this particular conversation chunk. I can give it a name that is whatever, you know, hitty, you know, bibbidi slop protocol. Yeah. Right. And it will forever be named that. And so instead of having to come up with a specific prompt, which I totally understand what you're saying, because a prompt is inherently somewhat limited.

27:43Yeah. Right. And it now has this entire chunk of context. Yes. Yeah. That can then be re-referenced and applied anywhere else. And so it's almost like you're reverse naming something that happened as opposed to having to do it ahead of time. it's basically just naming the process that you went through instead of having to go through that process. Because if you had it as a prompt, you'd still have to go through the process. Like one prompt isn't going to fix it. So it's, it's so powerful though. And I just kind of stumbled on it because I had been doing that and naming things and I didn't really even think about it.

28:17And then I was like, why didn't you do that? And it's like, I'm sorry, I failed to follow the protocol. And I was like, ah, protocol, you know? Okay. Well, I want this protocol to be every single time and I have called it this. So, you know, what, what's the problem? So then, you know, I started calling it out when it doesn't follow it. And then I, I deep dove on using protocols through a thread, having a conversation back and forth with the AI about it. And that's basically what it said was, it said, it's like, this is the future. This is the way to use me the best is to have these protocols.

28:51And I am not built to comply with the things that you're saying in the prompt. But if you've given it to me as a protocol, what you can do is you can save yourself a ton of time because that's the set of rules that I know that I have to follow. Like I know this can't be because I'll be like, you've given me bumper sticker wisdom. This is completely useless to me. I need you to go back to the detail that we did before. And I would always have these arguments with it about that. And it's like, I'm not good at that. It says, you know, that's an inherent weakness in how AI is. I'm not good at doing that without a protocol to follow.