Batterson Principles Very Similar to Buffet Rules

You’re probably wondering now how the venture capital investment principles Len and his team have learned and followed over the years could be similar to “Buffett’s Real Rules.” After all, the Oracle of Omaha buys insurance companies, railroads, soda pop, and chewing gum while Len’s team pursues categories, like the digital tech sector and bio-technology, which Buffett historically has avoided. Let’s go back through Buffett’s rules one at a time and compare.

  1. Buy at low-to-fair prices. Don’t overpay.
    While we stated earlier that in the case of the biggest home runs, like AOL, the initial investment price paid doesn’t matter much, there aren’t many AOLs. The singles and doubles are greater in number, and for them the price paid does matter. . . .
  2. Invest in companies with vigilant leadership.
    We couldn’t agree more with Mr. Buffett on this one. Our team places huge importance on a venture’s management, its ownership commitment, and its operating capabilities. Vision and technology alone are not enough. . . .
  3. Invest in business you understand.
    Again we are on the same page. Len’s teams over the years have always focused on high tech and hard science—in industries including digital products and services, cloud computing and big data, media and telecom, and biomedical and drug discovery—because those are sectors the team understands. . . .
  4. Invest in companies with solid long-term prospects. Buy and hold.
    This is at the core of venture capital. We invest for the long-term. . . .
  5. Don’t shy away from revolutionary investments. Just be sure you understand them.
    This, too, is the very essence of venture capital investment. We aggressively seek revolutionary investments. We subscribe to PayPal and Palantir co-founder Peter Thiel’s strategy of investing only in ideas and companies that appear to have home run potential.Thiel’s philosophy, which we share, is to consider, “What important truth do you see that very few people agree with you on?” . . . If you see it first and others do not yet see it, you can start a company and build a monopoly position before others can get too close to your heels. . . .
  6. Look for companies with top brands and the ability to “control” prices.
    This rule admittedly is a tougher one for us to claim comparability with Warren Buffett on. We don’t invest in leading established brands like Buffett has done . . . But our practices still do hold some similarity with Buffett’s. We seek products and technologies with the sorts of preemptive marketplace insulation that will permit them to capture and hold leadership positions and set the kind of pricing that enables rich margins and lucrative profit potential.
  7. Always be liquid. Have a source of low-cost money ready to invest.
    Like Buffett, we strive to have cash available, or investors ready to entrust additional amounts to us quickly, to pounce on outstanding investment opportunities as quickly as the marketplace demands. Also like the Oracle of Omaha, we don’t borrow to enable such liquidity. . . .
  8. Be very selective. You don’t have to move on every opportunity.
    We couldn’t agree more with Mr. Buffett on this rule. We are inundated with potential deals, and generally act on perhaps one out of a hundred. . . .Our team’s philosophy has always been, if we miss what turns out to be a great deal, c’est la vie. We are not motivated by FOMO—Fear of Missing Out. We are motivated far more by determination to minimize losing deals . . .
  9. Keep doing the above in good times and in bad.
    Again we are in lockstep with Mr. Buffett. We do not let macroeconomic cycles get in our way. Like Buffett, we are in it for the long run, not trying to time the market. . . .
  10. Minimize your mistakes, and learn from the ones you make.
    That’s one more principle where we feel strong concurrence with the Oracle of Omaha. . . . A key to minimizing mistakes in venture capital investment is to avoid FOMO mentality. It’s also essential to learn from the mistakes you do make. Experience is vital in venture capital investment, just as it is in conventional equity investment or in most professional fields.

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Due Diligence Importance to Entrepreneurs

Due Diligence Important . . . Even for Entrepreneurs

Venture capitalists are both hunters and gatherers. They seek out the best and the brightest among entrepreneurs and their ideas. Once they have an initial intuition that they have found a likely winner, they go into data gathering and analysis mode, which in the industry is known as due diligence. All professional VC investment firms perform due diligence to some extent.

Is Due Diligence Really That Important?

How critical is due diligence to the probability of investment success? Since most VC investments fail, might rigorous due diligence be just a waste of time? Are there too many variables and chance events, particularly in a seed- or early-stage investment, for diligence to tilt the chances of success one way or another?

. . . In our minds there is no question that due diligence definitely does matter—a lot. Those VC firms that year after year produce big returns do it at least in part because of superior due diligence. While they may also see better deals earlier and have the reputation to sign them up before others, it is their due diligence skill and discipline that enable them to recognize which ones are indeed better deals.

A Warning to Entrepreneurs: Beware of Limited Due Diligence

As an entrepreneur, you may wonder why we’re stressing the importance of due diligence here with you rather than emphasizing this point in the first half of this book, which was directed more to investors. The answer is because a VC’s commitment to solid due diligence should be important to the entrepreneur, too.

If you come across a firm that does very little due diligence, you should avoid working with them even if you’re an entrepreneur who really needs funding. Try selling others instead. Firms that do little due diligence will have little credibility among their peers, whom they may need as co-investors with them. They may in fact be driven largely by the management fees they charge their investors (regardless of results)—or the fees that some of the equity crowdfunders even charge the entrepreneur—rather than being focused on achieving exceptional gains for their investors and for the entrepreneur by helping to build major companies.

Without solid due diligence, the investor may not understand what the entrepreneur is trying to accomplish, may not be able to evaluate the venture team’s ability to execute, and may not know when and how to help the venture management team when the going gets tough, which it so often does.

 

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Venture Capital: A Hedge Against Inflation and Lengthy Bear Markets

My original reason for thinking about including more aggressive growth vehicles in my overall asset allocation was a concern with potential future inflation. While inflation has been extremely tame in recent years, I remember well the hyperinflation of the late 1970s and early 1980s. Back then, prices were rising nearly 10% a year, mortgage rates reached 15% and higher, and if you didn’t get double-digit raises every year, you were falling seriously behind.

Maybe that won’t happen again in our lifetimes, but the near-zero interest rates over the past several years and never-ending government deficits scare me, as they could trigger a big inflation run-up. The experts are already warning that policies expected from the Trump administration, including substantial tax reductions and substantial infrastructure expenditures, are likely to keep government deficits high and drive at least some increase in the recent benign inflation rate.

That’s good reason to include at least some aggressive growth elements even in overall conservative financial plans for anyone who can afford the risk that more aggressive growth investments always entail.

And inflation is not the only worry. I also still remember vividly the sting of the broad collapse in both stock and bond prices in 2008–09.

. . .  Our 2008–09 market scare got me digging through historical data and uncovering some long stretches when the stock market—the place we’ve been taught to look to for reliable growth—either went down sharply or simply went nowhere positive for extended periods.

You may be surprised. I was.

I looked at stock market levels at the start of 2000, the New Millennium, and then again at the start of 2017. Despite all we hear about extended bull markets, the S&P 500 index over that 17-year period grew at just 2.7% per year.

. . .  Then I remembered the economy’s difficulties back when I was still in school in the early 1970s. Fortunately I wasn’t in a position yet to worry about investing and building wealth, so the market’s travails didn’t mean much to me then. The historical data, though, sent a shiver down my spine. The S&P 500 index began a long-term drop at the start of 1973, and that index finally recovered back to its January 1973 level in 1983, and then dropped below that benchmark again later in 1983 and into 1984.

In a presentation Warren Buffett gave at a major investors’ conference in 1999, at the height of the dot-com frenzy, his memory and historical digging proved even sharper than mine. As Alice

Schroeder described so eloquently in her book, The Snowball: Warren Buffett and the Business of Life (published in 2008 by Bantam Books), Buffett reminded that audience, a savvy group made up of many of the country’s most successful movers and shakers, about market risks. . . .

As recounted by Ms. Schroeder, Mr. Buffett’s comments did highlight the timing risks of stock market investing. He explained, “In the short run, the market is a voting machine. In the long run, it’s a weighing machine. Weight counts eventually. But votes count in the short term. Unfortunately, they have no literacy tests in terms of voting qualifications, as you’ve all learned.” He then displayed on the conference room screen a simple PowerPoint slide.

 

Dow Jones Industrial Average

December 31, 1964 874.12

December 31, 1981 875.00

He went on, “During these seventeen years, the size of the economy grew fivefold. The sales of the Fortune Five Hundred companies grew more than fivefold. Yet, during these seventeen years, the stock market went exactly nowhere.”

 

Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Venture Capital Investing: Taking the Road Less Traveled

“Two roads diverged in a wood, and I —
I took the one less traveled by,
and that has made all the difference.”
– Robert Frost, “The Road Not Taken”

To be successful in any high-risk investing like venture capital, the investor must always take the road “less traveled by.” It’s necessary to hear the sounds of a different drummer and to act in accord with those different sounds as soon as the notes are clear.
Taking the well-worn path leads to mediocre returns at best, because if everyone is doing it, no one holds the unique advantage needed for big wins. Exceptional returns require exceptional insight, and exceptional insight is the province of seeing what is still unseen by others.

(more…)

A Strategy of Progress

For nearly seventy-five years, venture capital has been a force of change relying on capital and chance to bulldoze and reshape the American business landscape. The business had a small beginning with a few wealthy and notable American families investing their spare cash in what in the day were considered high risk investments-frozen orange juice and fly-by-night new airlines. (more…)

Venture Capital Investing and the “Miracle on the Hudson”

For those intrepid investors who invest in seed, start-up, or early stage venture capital, their high wire investing act has similarities to Captain Chesley Sullenberger’s and Co-Pilot Jeffey Skiles’ controlled ditching on the Hudson River  on January 15,2009 saving 155 lives in one of the most heroic feats of aircraft piloting in history, the famous “Miracle on the Hudson.” (more…)

Title III JOBS Act (Crowdfunding) NOT a Cause for Celebration

Title III JOBS Act- not much to celebrate

Caveat Emptor! Caveat Venditor, too!

If you’re opening a champagne bottle to celebrate Title III of the JOBS Act, which opened up venture capital investing to everyone, including those who are not accredited investors, don’t let that champagne cork hit you in the eye or get lodged in your throat. Our advice to investors: caveat emptor, let the buyer beware. Our advice to entrepreneurs with really high-potential ventures: caveat venditor, let the seller beware..

If you’re an accredited investor (more…)

We’re Funding a Magic Bullet to Cure Cancer

Lets Kill Cancer

In his Pulitzer-Prize winning book,  The Emperor of All Maladies: A Biography of Cancer, Dr. Siddhartha Mukherjee paints a picture of cancer not as one disease that could be reversed with a single, magic bullet, but of a multi-headed hydra: different diseases that take different forms. His book elegantly details research and treatments since the early Egyptians, and it becomes clear that scientists have had more success fighting some types of cancers than others.

Because cancers are derived from our own misguided cells, they can be as individual as we are. A large number of companies are now studying ways to fight cancer at the genetic level. One of the more promising is (more…)