A Crowded Space

Lessons for VCs from the Oracle.

I just finished reading the last 50+ years of Warren Buffett’s annual shareholder letters.  

They are… epic.  One of the best reads of my life.  This, for me, falls into an extremely rare class of “books” which actually change the way you live your life.  For me, it’s changed the way I look at my job as an investor in venture capital.  Seems like a good idea to learn from the best investor in the world. 

So, here are my lessons learned and applications to venture: 

1) Extreme Patience & Extreme Decisiveness - Almost every year Buffett prides himself on laziness bordering on sloth.  He describes his deal flow process as simply “waiting for the phone to ring.”  And frankly, I believe it.  There are years in the company’s history where they hardly made any transactions at all.  He waits for the right business at the right time.  

“Be greedy when others are fearful, be fearful when others are greedy.”  

The flip side of Warren’s extreme patience philosophy is his extreme decisiveness. He takes pride in telling stories about 5B+ investments that he makes based on a single meeting, no audits, and hardly any diligence. When he finds the right business run by the right type of people, he knows it and acts fast.  He also states that he’ll give a “no” in a few minutes, probably just by looking at the balance sheet and income statement.

In VC: operate on the same principle, incredible patience waiting for the right deal and give yes’s and no’s very quickly. Also, don’t believe the hype.  "Be fearful when others are greedy.“ 

2) Team Matters - We talk about this all the time in VC circles, but I found it surprising to see how much Buffett focuses on this aspect, even once a company is a 10B+ publicly traded company.  Some rules are universal.

”Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.“

In VC: Got it. Always remember the first principle –> team first.  If you don’t love the team, nothing else matters. 

3) Great Business @ Fair Price >> Fair Business @ Great Price - Buffett is incredibly self-deprecating and uses each annual letter to point out the mistakes that he’s made.  One of his big regrets is investing and sticking with investments in the textile space back in the 60s’ & 70’s.  He made the investment because it was such a great price, but later lamented that that didn’t really matter, the business still wasn’t going anywhere.  His best investments were companies that could get a high return on capital invested consistently over the years and continue to grow. He was happy to pay fair (higher) prices for those deals. 

“The most important thing to do if you find yourself in a hole is to stop digging.” 

In VC: I see a fair number of deals that have reached some point of stagnation that are seeking a flat or down round. This is bad.  Tread very carefully. 

4) High Concentration of Investments - Berkshire Hathaway is massive.  Assets under management are well over $200B.  And yet, Mr. Buffett has a ridiculously small number of individual investments.  He buys big and he tries to buy 100% of a business.  At one point, he had just 5 individual companies representing 70% of his public stock portfolio. He doesn’t seek co-investors.  When he likes something, he wants more of it.  Pretty clear philosophy. 

In VC: Get as much ownership as you can.  If you like it, commit.  If you feel the need to share the risk, run away… it’s not a good deal anyway. 

5) Be Wanted - Berkshire is a unique company.  It’s a unique home for a company that wants to sell. They are the anti-investment bank or buyout fund.  They have absolutely no interest in chopping up a company or taking a ton of debt and flipping businesses.  Their intended holding period is forever.  This gives them a unique advantage when it comes to deal flow.  There are a number of business owners that went specifically to Buffett because of this unique differentiation.  They wanted a good home for their "baby.”  

In VC: Have an angle.  Why do people want YOU (or ME) as an investor / board member.  If you can’t answer that, you’re probably in trouble. Every good founder I know writes a list of names when they are starting to prepare for fundraising.  Why should your name be on that list? 

6) Defensive Moats - Don’t predict the future, just build moats that give you a ton of value and keep competitors at bay.  Then keep adapting as the future unfolds.  Defensibility is really key in any industry.  Buffett avoids tech companies because a) he doesn’t understand them and b) he has no idea how to predict where they’ll be in 10 years.  He likes saying that he knows exactly where Geico and BNSF (railroad) will be in 10 years. 

In VC: Defensibility is critical.  Invest in companies with real tech or real network effects.  Buffett likes to invest in railroads for a reason.  I haven’t seen many startup railroads. 

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I highly suggest everyone read some of Buffett or Munger.  It should change the way you think about investing. 

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