Andrew Chen Archives

The Snowball by Alice Schroeder

I <3 Warren Buffett
One of the recent books I read during my blogging vacation was The Snowball, a comprehensive biography of Warren Buffett. I’ve always enjoyed reading the shareholder letters, and have read other books about him, but at nearly 1,000 pages, this book is particularly detailed and goes into a lot of unique stories.

In many ways, Buffett’s world is diametrically opposed to the startup world. He specializes in boring industries, doesn’t worry much about products, and has extremely long timeframes. Yet I took a lot out of reading about his experiences, and thought I’d share some thoughts about the startup world:

1. Enduring businesses take a long time to build
2. Who cares what other people think? Boring businesses can win big 
3. Access to money can be a huge competitive advantage
4. Success begets success

Let’s talk through a couple of these ideas:

1. Enduring businesses take a long time to build
I live in the heart of Silicon Valley, in Palo Alto, and there is an inescapable pull of “get rich quick” in the culture here. Every time there is a new trend, I quickly get calls and emails from people telling me about a new “gold rush” forming, and how I don’t want to miss out. In many ways, getting visibility on these trends is why I’m here, yet at the same time, it demonstrates a real breakdown in the business culture of Silicon Valley to be focused on quick flips.

Right now, the current “gold rush” trend is probably around mobile and social gaming, particularly the amount of revenue that small developer teams are generating on Mob Wars clones. Or iPhone apps. And before that, there was a huge gold rush around Facebook apps, and before that, Web 2.0 anything. The real pinnacle of this is an exit like YouTube, which generated over a billion dollars before it became profitable, and in less than 2 years.

Yet at the same time that this froth exists, there’s an undeniable fact that enduring, profitable, standalone businesses have still taken 5-8 years to build. Yes, it’s very cheap to get started and run some experiments, but to scale into a huge business, it takes real time and capital. Take a look at Facebook, for example, which clearly still has many years on it before it cracks the code on its business model and scales into something huge. Even Google took from 1996/7 to 2004 to get big – can you really do it faster?

I think the Warren Buffett view of the world is in a decade-or-more type timeframes, not in months. It’d probably be worthwhile for everyone to think about their startups and their eventual businesses that way, rather than just trying to get rich as soon as possible.

2. Who cares what other people think? Boring businesses can win big 
The other striking thing about the Buffett model of investing is that he puts money into a ton of companies which ultimately sell pretty boring things – bricks, chocolates, jewelry, etc. These are evergreen industries that will be around 5 years from now or 50 years from now.

From my personal observation, the startup world doesn’t think like this, and the focus is on the hot new thing. There’s always a lot of excitement about technologies or products, regardless of whether or not they address mainstream consumer needs, and thus a lot of market risk gets injected into every company. From the last couple years, trends like podcasting or RSS or P2P/BitTorrent got white hot, but ultimately didn’t go anywhere. Right now these hot trends might be new platforms (like mobile, SNs, etc.) or data portability, or status messages, or lots of other candidates. Maybe these will all go somewhere, but maybe they won’t.

And woe to the startup which is not working on a sexy problem, but instead working on something boring ;-)

I think there’s a lot of great opportunities in consumer internet that are now considered boring or forgotten. For example, doing things like domaining, ad arbitrage, forum sites, SEO sites, etc. Or similarly, there are now a number of proven consumer interactions, like video sites and toolbar companies, which are not likely to ever get funded now. All of these boring sectors, given the right twist or the right team, might actually lead to big successes, since a significant portion of the model has been proven out, but not as many smart people are working on them. Certainly you won’t have Techcrunch and the geek press banging on your door, but for some, that’s part of the appeal.

Instead of asking “what are the hot areas right now??” instead, the question to ask might be, “what are the overlooked areas right now?” 

3. Access to money can be a huge competitive advantage
One of big competitive advantages of Warren Buffett’s investment model is that he discovered that he could take money out of his cash-rich businesses, particularly in the insurance world, and then use that to invest in more cash-rich companies. This allows him to have a lot more flexibility in reacting to the market, and only jump in when he thinks companies are cheap. (Interestingly enough, the first chapter of the book starts out with everyone writing him off in the late 90s for not investing in tech companies, saying that he’s lost his touch, etc.)

For startups, my interpretation is pretty simple – ultimately, startups get money via two methods:

• Customers give them money
• Or, investors/bankers/VCs give them money

And these two methods are constantly in flux, depending on whether it’s more fashionable to sell stories to investors or whether the focus is more on revenue. And especially right now, the latter holds true. Having access to this capital is huge, for obvious reasons – there’s been a ton of discussion about why it’s a great time to start a company, because it’s easier to hire, office space is cheaper, etc. so I won’t go and repeat all of this.

The important part, I think, is to gear your company into to maximize for bringing cash into the door – you need to make sure that you’re either in a super hot space where investors are willing to throw money at you, and ideally also you’re making a ton of money. Oftentimes it seems like companies end up going either in one direction or the other – either they are going big, growing traffic, and raising money at crazy valuations, or they are boring and make money slowly but surely ;-) Not sure why it seems so mutually exclusive, but either way, have a strategy ;-)

4. Success begets success
Last thought on something that occurred to me while reading The Snowball – in the early years, you could really see that Warren Buffett succeeded just by pure skill alone. He invested in undervalued companies, and made money on them over time. But as his fame grew, it also became clear that there was a secondary impact from him investing – not only did his capital help, but the brand of Warren Buffett investing was enough to drive up the value of his shares. Pretty nice.

In the Silicon Valley startup world, I think it’s unavoidable that many of the successes here also hinge on luck as much as skill. But there’s also some secondary effects of having the right people involved, whether it’s founders or investors or other – you end up seeing that the social proof of having successful people involved has a self-perpetuating angle to it. Success begets success.

No wonder that the best venture capital firms experience serial persistence – the best ones stay at the top, year after year, even though this is typically not the pattern in other investment categories. As an entrepreneur, this tells me that it’s important to get the best people involved with your company, at all levels of the business, from investors to employees – and the more you are kicking ass, the easier it gets.

Your thoughts?
If you guys have thoughts on the above and/or on Warren Buffet or the book, please leave me a comment! Thanks. 

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