"With few exceptions, when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact." - Warren Buffet
In the VC community, there is an age-old debate - are people or markets more important in determining success? Our firm is a big believer in people. But even great people will struggle in a bad industry. Don Valentine once observed,
“I've always been mystified by the critically important disc drive industry, without which the PC is a useless device. You have to be brilliant in electronics, you have to be brilliant in magnetics and you have to be brilliant in mechanics to get all that memory capacity in a very little place and do it for next to nothing. That market has never been rewarded financially for its brilliance."
Warren Buffet learned a similar lesson in textiles. He wrote to his shareholders, “a textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business.” After concluding that financial results will be more of a function of "what business boat you get into than it is of how effectively you row," he exited the business as Berkshire Hathaway diversified.
There is no doubt that Warren Buffet is an amazingly disciplined, patient, and brilliant deal picker. The investing world is full of deal pickers. However, there are not enough company builders and this is where venture capitalists are supposed to step in. The VC's job is to help entrepreneurs build companies, and those companies create products, create jobs, create wealth, and even create new industries.
To build great companies, there is nothing more important than people. It is by far the most important factor when we consider new opportunities. The founders and early employees set the values and culture of companies, whether they intend to or not. We've learned that if we partner with great people - those who think big, but act small, keep the burn-rate low, and keep trying - we can figure out the business. (Even textiles couldn't keep Buffet from inevitable success). Working with great entrepreneurs is also what makes our jobs so interesting and fun.
However, even great people are likely to fail if they find themselves in bad situations. VCs often invest in entrepreneurs without much business experience. Entrepreneurs come to VCs for advice as well as capital. That's part of our job spec. For this reason, we should feel a tremendous sense of responsibility. The DNA of great, enduring companies are formed in the earliest years and our actions and influence can have huge multiplier effects.
Unfortunately, even brilliant entrepreneurs are likely to fail in a bad system. We believe that the venture capital industry is setting up far too many people to fail. Even when companies don't fail, the blueprint for success seems more focused on great deals rather than great companies. Our next post will discuss the game of venture lotto.