Month: March 2008

Lessons for startups from WEB’s Letter to Shareholders.

Warren E. Buffet is one of the most celebrated men in the modern history. Better known as WEB, he is a self-made billionaire made most of his money from investments. His flagship holding company, Berkshire Hathaway has stake in more than 70 businesses. WEB believes in taking a controlling stake in companies and chooses a company because of the business value and the kind of people running it. Any mention to WEB is incomplete without talking about Benjamin Graham – WEB’s mentor and Charlie Munger – WEB’s partner at Berkshire Hathaway.

I would look at his few nuggets of wisdom and look at their implications for start-ups from his 2007 letter to shareholders.

People
There could not be a better starting point than Charlie Munger. They are one of the most celebrated teams in the financial world. Everyone knows that we need to select business partners very carefully. All partners should trust the judgments of other partners and should stand behind every decision.

Most of the managers at Berkshire have “… no financial need to work“. This simply means that the people who are working are working because they love working. Rewards for them are not economic in nature but are psychological – of taking their company to a new level, of becoming leaders in what they do and pushing the limits.

WEB further states that “these managers is that they have exactly the job they want for the rest of their working years“. This is probably the most important line for a startup. Have people who like what they are doing rather then employing people.

Business Decisions
A lot of startups assume that once they reach a user base, they can sell out to a bigger player. This approach can take them only so much far. They should take a cue from WEB. He has been advocating the importance of a long-term time horizon for businesses. In my opinion, selling out is ok but only after reaching a point where you think that the other party can contribute more meaningfully to the business and its shareholders.

WEB says, “as with Berkshire, a deal is a deal.” A lot depends on the way your word is taken in the market. Especially when you are starting, a lot of reputation is on stake. As it’s said, reputation once gone is gone forever.

Businesses
WEB says, “A truly great business must have an enduring moat that protects excellent returns on invested capital“. Most of the startups are engaged in reinventing the wheel. I can recall just two Indian innovative products. For a country of a billion, just two innovative ideas? Need of the hour is to look at businesses that are different, can not be copied easily and havhttp://www.blogger.com/img/gl.link.gife a moat round it. The moat could be because of the scale (IRCTC), technology leadership (Zoho), people (??), knowledge of markets (Future Group?), low cost of operations (?) and many other factors. Startups need to identify their moat and build their company around it.

Realistic Assumptions
It’s always recommended to fly high. But the feet should be well grounded for that. Like in the report, WEB says, “Berkshire’s past record can’t be duplicated or even approached. Our base of assets and earnings is now far too large for us to make outsized gains in the future.” It would have been easy for WEB to paint rosy pictures but he chose otherwise. Startups should be realistic when they set their goals and get down to implement them.

To end it on a light note, WEB says, “Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)“. Startups need to identify a business that can grow organically and can operate for a long time.

Although WEB says “Start-ups are not our game”, I could still find these nuggets of wisdom. Anyone wants to share more?