Supported by Greenhaven Road Capital, finding value off the beaten path.
Brent Beshore was on the Invest Like the Best podcast with Patrick O’Shaughnessy and it was great. There was a lot of advice for business operators. Here are five things:
- Build a moat, not as easy as it sounds.
- Experiment, then do more of what works and less of what doesn’t.
- But don’t expect it to be easy.
- Find incentives then align incentives.
- The bias to act.
1/ Build a moat. Brent and Patrick agree that people probably don’t design moats as much as they stumble into them. Tren Griffin reminds us that some build a moat (Bill Gates) and that some find a moat (Warren Buffett). In general, the moat menu looks like this:
- Network effects (Facebook, WeChat).
- Supply-side economies of scale (Coca-Cola, Tesla batteries, Amazon).
- Brand (Harry’s Razors, Amazon).
- Intellectual property.
- Government regulation.
Beshore adds one – or creates a hybrid -; geographic isolation. Beshore looks for companies with a niche and “not much natural competition.”
Organizations and organisms do better when they have a niche. Seth Klarman said his niche is catalyst moments. Chris Sacca explained that Uber survived because the niche was deemed too small. Yvon Chouinard found the niche of rugged, stylish, functional apparel.
Beshore says that not every company he looks at is worth an investment. In fact, most are not. “Last year I looked at 2500 business and after a while, you get pretty good with the reflexes around what are the things you are trying to ping…it’s painting a story in my head.” Arnold Schwarzenegger said much the same:
“It is always the more you practice something the more confidence you get and the better you are going to perform when you go to those auditions. So, reps, reps, reps and keep practicing…we have a saying in German…the more you practice something the more you master something.”
Mistakes happen when you don’t have the reps, when you think there is a moat and there isn’t. Beshore says that he sees investors buy businesses only to get in trouble. “They haven’t seen enough pitches to even understand what they’re trying to look at,” Beshore explains.
Lesson: Moats are hard to construct from scratch but it’s an idea to keep in the back of your mind. You can learn what they look like through repetition.
2/ Experiment. “The biggest secret,” Beshore says, “is there is no secret.” Experiment and then, “do more of what works and less of what doesn’t.”
When Beshore said this it reminded me of what Ben Horowitz wrote about doing hard things. Horowitz explained that there are no silver bullet solutions, only lead ones. Solving problems takes work (time * effort) and panaceas don’t exist. I sort-of knew this but Horowitz crystalized it for me.
Then, Beshore crystalized something else, there’s a lot people don’t know. Sure, doctors are mostly right. Accountants do good work. Bloggers, well, let’s not get into bloggers. Steve Jobs explained it this way:
“Everything around you that you call life was made up by people that were no smarter than you. You can change it. You can influence it. You can build your own things that other people can use.”
I couldn’t unlearn this idea. OF COURSE, WE SHOULD EXPERIMENT! Andy Katz-Mayfield doesn’t know what he’s doing with Harry’s. The Instagram founders created a check-in app. How quaint is that looking back? Jim Koch, Yvon Chouinard, and Phil Knight didn’t know what they were doing. They experimented and did more of what worked, and less of what didn’t.
Hopefully, that inspires you. Now, let’s get real.
3/ Knife fights in the mud. Beshore compares running a company to getting out of bed, knife fighting through the day, and then getting back in bed. It’s hard. Beshore loves his job, loves the struggle, but notes “some days you have to trudge through the mud.”
I sense a glory around start-ups, entrepreneurship, gigs, freelancers and so on. They’re not just jobs, but cool jobs. They’re dream jobs. Mostly.
Jon Acuff and Austin Kleon are quick to point out that they too trudge through the mud. Just because you don’t have a boss doesn’t mean you don’t have to do things you don’t like. Elizabeth Gilbert said this:
“I have this theory that everything that’s interesting is mostly boring. Life is filled with all these interesting things and we chase the high and the buzz of the excitement of the thing, but 90% of the thing is boring….The trouble people get into, is that they go into creative careers because they want an interesting life and then they’re amazed to find out at how much tedium and boring is in there, but if you can stick through the boring part, there is stupendous reward.”
The key is to find a job where you – not your parents – like the balance between excitement and boredom. A job with enough knife fights and enough peace. Beshore said, “There are a lot of ways to make money in this world but you ultimately get one life.”
4/ Aligned incentives. Money is a commodity (another lightbulb moment) says, Beshore. If the dollar doesn’t differentiate, what does? For founders who take investment dollars the answer better be the people. To put it another way, your incentives better line up.
Andy Weissman is a venture capitalist who cautioned entrepreneurs:
“If you take money from a venture capitalist, the way the economics of the VC world work, are an investor like me needs to make 10 or 100 x on our money, which means we need these companies to be really large businesses for us to return money to our investors. If they’re not, those returns make less sense to us. The time to take venture money is when you think your incentives are completely aligned with that. You have to believe it’s a big business. You are comfortable taking big risks, including existential risks around managing that business.”
When Phil Knight was short on cash – which was always in the early Nike history – he had to borrow from a shoebox supplier to pay payroll. The supplier lent the money because if Nike went out business, who would he make shoes for?
When workers went on strike against Milton Hershey the local dairy farmers came to his aid. If there was no milk chocolate being made, who would buy their milk?
When Coca-Cola expanded overseas they aligned the incentives. “As one Coke executive pointed out, ‘in Germany it is a German business; in France, it is a French business; in Italy, it is an Italian business.’ Local industries to produce glass, carton, crown and bottling equipment started in each new country.”
It helps when everyone in the same boat rows the same direction. If you take on an investor like Beshore or Weissman, make sure they want to row the same way as you.
5/ Bias to action. “There is a constant pull to do deals,” Beshore says, “it is seductive, to say the least.” It’s “progress anxiety.”
We call this the “don’t just do something, sit there” condition thanks to how Barry Ritholtz talks about it on his podcast. This bias to action is powerful because we want to show that X leads to Y. However, there are times when no action is better.
Beshore looked at 2,500 companies and invested in two. That’s fighting the bias. Phil Jackson fought the action bias when working out difficulties with players or in the games he coached. Cal Newport suggests we take this approach to social media. Nassim Taleb points out, “It is much easier to sell ‘look what I did for you’ than ‘look what I avoided for you.’”
Brian Grazer writes, “Bob Iger, the CEO of Disney, is a close friend who once gave me a piece of advice that has stuck with me. In the right circumstances, he said, ‘Doing nothing can be a very powerful action unto itself.'”
To run a company means to make the right decision. The bias toward action is a crosswind off the bow. Incentives and people are those on the oars. Moats are the direction you want to go, only like the island in Lost, the destination moves. All this isn’t easy because of the weather, waves, and lack of orange juice.
Thanks for reading. If you made it this far you’ll probably like some longer, hidden stuff I write. That’s shared on this email list: http://eepurl.com/bgRZOX.
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