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.
- 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. . . .
- 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. . . .
- 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. . . .
- 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. . . .
- 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. . . .
- 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.
- 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. . . .
- 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 . . .
- 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. . . .
- 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