Warren Buffet was once asked by Jeff Bezos a long time friend of his: “you are the second richest man in the world and yet you have the simplest investment thesis. How come others didn’t follow this?” To which Warren Buffets responded: “because no one wants to get rich slowly”
In a nutshell that’s what’s wrong (or rather what’s not quite right) with a lot of the investment community today, from public markets to private equity investors and unfortunately it trickles down into too many companies. You can’t time-box success. You can’t sprint a marathon. And you can’t measure success with speed but only by the magnitude (and significance) of the end result. Building to flip is easy. Building to last is difficult and you cannot take short cuts.
This is my one biggest learning from being an entrepreneur now for 10 years. Every time I put the short term over the long term it backfired. Whether it’s not firing a misfit whom you ‘need’ today (or so you think) lest you create instability, or building stuff that generates immediate but not lasting growth. Maximizing for vanity metrics versus sanity.
The refreshingly good news is that putting the long term first doesn’t take very long to yield results, ironically. In a paradoxical whenever I thought I was sacrificing immediate gain for success later, results started trickling in faster than the converse scenario.
The reason I think is largely down to messaging. When you think long term it sends a very powerful message to your stakeholders: your customers, employees and shareholders (in that order of importance). No one wants to invest in you knowing you may be gone tomorrow. Least of all your customers. Same with your employees, and, some (although not all) shareholders. The Buffets of this world are very scare as we all know, largely because not many invest their own capital so they need to pay back the funds they run. Greenfield investment vehicles who can sit on assets for ever are very few and far between, so in the end some sort of time pressure comes into it.
This is not a criticism or to say it’s wrong. In fact it’s much needed in order to make capital reallocation in the economy from where it’s sits in excess supply (such as savings, endowments, sovereign funds ) to where it’s in short supply (businesses and consumers that need it faster than they can accumulate it). The extended banking system serves first and foremost the purpose of intermediation of capital.
The real problem I believe arises when constraints and norms of the financial markets (which are in essence secondary markets that exist to serve enterprises and consumers) take the driving seat and define decisions and the culture of the people entities they exist serve. Which is why many a company that listed de-listed at some point in order to pursue longer term endeavors, or turnarounds which are almost always long term plans and need to be freed from the scrutiny of public markets. Richard Branson’s Virgin group is one such example as is Dell computer more recently. Try explaining to wall street that you want to conquer the depths of the ocean or develop commercial spaceflight and why that will – in the long term – serve shareholders and society better.
Its no surprise that some of the biggest and boldest projects could not raise any funding like Elon Musk’s SpaceX and Tesla. If it weren’t for his own personal wealth none of these world changing innovations would come to fruition today. The markets penalize you for thinking too big, too bold and too long term. Historically the lion’s share of capital intensive projects like these could only be funded by very wealth and visionary individuals, corporations with strong balance sheets, academic institutions or the military. Not by professional investors. But shouldn’t they? Shouldn’t management of money get smart enough to identify these opportunities, come together and deploy capital for a long term plan if the stakes are so high? With risk-adjusted terms of course.
What I present here are two intertwined issues. One is that the capital markets today have a hole in them. They are very efficient in funding innovations (that usually sit on top of hard science that someone else developed) within a 5-7 year window that will not require exorbitant amounts of capital or uncertainty and have somehow been proven. No one wants to do the heavy lifting. To make it worse, there is a systemic dependency (which thus becomes a risk) which is this implicit understanding that an A round will have someone else lead a B and then someone else lead a C. That’s putting pricing and asset valuation ahead of sustainable value creation. Many healthy businesses suffered from this systemic risk, and of course if you’re Elon Musk and can inject a couple of hundred million to save your business you’ll make it. If not you’re over regardless of the health of your business or the upside to investors if they follow through.
Greenfield investors like Buffet have always maximized for local optima (the company fundamentals) rather than macro metrics – things to do with say a fund’s performance or outside valuation. And the results are proven to be better. Its putting sanity over vanity.
The second issue I present is that – notwithstanding the above – that modus operandi of money management or the intrinsic rules that come with money should not – at all cost – diffuse into the modus operandi of the company. Ever. Because then the leadership teams start making decisions that serve capital first instead of customers and employees. I firmly believe that the best way to serve capital in the end is by putting it last and putting customers and employees first (much like focus on local optima serves the macro better in the end). Which here translates into building things that people love. And the only way to build things that people love is to do it with love.
Hence I always say the number one metric for any company but in particular a startup is love. Above growth, above speed, above valuation, above how much capital you raise, and above shareholder returns. If you build a culture where great people come together to build things that they love, for customers who love them and rave about them and come back for more, you are BOUND to serve your shareholders in the end.
That for me is another way of saying ‘focus on the long term’. Make love your key metric, sacrifice short term gain and be ready to take short term pain to build things that people will eventually love. The rest will just flow from there. Its much better to have 100 people who really love you than a million who sort of like you, because that will eventually build a better business, albeit slower. If people get impatient along the way, just show them the door. Business is not for wimps, or people with acute ADD. It’s for those who have the nerve, stamina and most of all the desire to build something that lasts. However long it takes. And as Winston Churchill said: “If you’re walking through hell [along the way], keep walking”