Bessemer Venture Partners is a well-known venture capital firm—also one of the nation’s oldest in VC business. As the name implies, it invests in young startups, mostly technology related businesses. Over the years, it had invested in some promising businesses that grew to be highly successful public companies. Like, Shopify, LinkedIn, and Twilio.
I don’t do any venture investing in my portfolio. But what got my attention was that Bessemer recently published its internal memos on its web site. Memos that were written many years ago when they were first investing in these startups. They make for some interesting readings. You can read those memos here.
Bessemer had the following key insight on what made those investments so successful for them:
One pattern that consistently emerges is that Bessemer’s best investment decisions centered on people. In retrospect, the early products themselves are barely recognizable today. Rather, passionate, analytical and relentless founders zigged and zagged their way to that elusive “product-market fit”. [source]
Their key to success was the people running those startups. This has been my observation too—even in non-venture public capital markets where I tend to operate. Founder operators often continue to make huge difference even after their businesses have gone public. So much so that I look for public companies that are run by founders who also have big stakes in the businesses.
In my investing, I pay close attention to the people running the business. But still, foremost in my mind is the quality of business itself. Quality of management—though important— comes right after. Along these lines, Warren Buffett in his 1989 shareholder letter had this quote:
Good jockeys will do well on good horses, but not on broken-down nags. [source]
Chuck Akre of Akre Capital Management is a successful professional investor. His investing style is inspired by Warren Buffett’s long term, business first approach. He calls his investing approach a three-legged stool:
This metaphoric three legged stool describes what we look for in an investment: (1) extraordinary business, (2) talented management and (3) great reinvestment opportunities and histories. [source]
I follow the same principles, more or less. I wrote about how I assess quality of a business in another post: what is a high-quality business?
Regarding reinvesting, I am somewhat agnostic. I fully agree with Akre that a business with reinventing opportunities is great for investors like me who prefer to hold on to our positions for years, if not decades. On the other hand, I am not one who passes up a business with no reinvesting opportunities but great fundamentals and excellent managers. Instead of reinvesting, the business might be paying dividends or repurchasing shares with excess cash. I am happy with that too. See this table for my investments in businesses that are dividend payers or share repurchasers.
I own many good dividend payers and happy to see them thrive and steadily increase distributions. I wrote about my dividend payers here and here.
Why do I need to know the managers? Because I am just a passive investor. I learn a good deal about a business from its public financials, quarterly reports, and management commentaries. But still, I don’t know what’s being discussed in the board room, or in the corner office. Businesses don’t disclose all their business and strategy details to public. Even if I have a say in a corporate decision, my vote won’t count for much because I am a small shareholder. So what I do to overcome this inherent limitation? I only invest with managers that I could trust.
How do I tell if a manager is good? I look for long tenure with successful history (of growing the business and allocating capital) and big ownership stakes.
Two years ago, I profiled founder-run businesses that I own and admire. I continue to own them and have added to my positions.
Since then, I have found a few more businesses like these, and have taken small positions in them. The table below is an appendix to this much larger table I shared in 2018.
For a full list of all my founder-owner invested businesses, see this link
Bruce Flatt of Brookfield Asset Management (BAM): Brookfield is not a new name since I have written about this company and his long-time CEO several times on these pages. See here. In a strict sense, Flatt is not the founder of this business. Brookfield has been around in some form for over 100 years or so. However, in last twenty years since he took over the business, he’s completely transformed it—effectively converting it into a new business model. In that sense, he’s the founder of this new Brookfield.
Michael Dell of Dell Technologies (DELL): He is a familiar name in the hi-tech industry for last 30 years. Dell has gone through several transformations under him. He’s never left the company, and still has a huge stake in it. I admire Michael Dell’s business acumen but also recognize that the business model is inferior to many others I own due to Dell being in the low margin PC hardware business. I took a small position recently.
Thomas Golisano of Paychex (PAYX) is not nearly as well known as Michael Dell is, but his impact on this payroll processing business has been huge. He ran the business since its founding until 2004. Today he’s 78 and continues to chair the board of directors. I took a smallish position in Paychex back in 2010 that has blossomed since. I added to my position again in March this year when the market panic drove down its share price.
To round out my thoughts on founder run businesses, here’s a list of some that are on my radar, but I have not (yet) invested in.
I admire all of them for what they have done for their shareholders. Why am I not invested in them already? For one, I identified some of them a bit too late while the market had already done so. As a result, their valuations today are just too high for my comfort. Others, I am still learning about their business models, competitive advantages, and the industries they operate in. For those, it’s too early for me to consider investing in them.
All things considered, some of these names might go in my portfolio next time stock market dives and offers me a compelling price.
These are all seasoned and highly accomplished CEOs. [Though it’s not quite the same thing as investing in young startup owners like Bessemer does, but I don’t have access to them like a VC does.] As you can see from the previous tables, most of them have been at the helm for twenty years or more. Investing in their businesses is certainly not the same as betting on a young gun who’d just started his company. On the other hand, it is also far safer. I can invest more capital in such businesses without risking permanent loss. Granted my upside potential is probably not as high as if I were investing in a young Mark Zuckerberg when Facebook was still private. But we investors also tend to underestimate growth runways ahead of excellent public businesses. Consider the case of Wal-Mart (WMT) from early 1990s. Or Amazon (AMZN) from mid 2000s. Both became 10x baggers in about a decade, and that was well after they went public.
Good companies continue to do well even after becoming public. Seeing founder operators at the wheel gives me further confidence about their future growth. But other market participants also recognize them, so their shares often sell at premium. I just need to be patient and wait for an opportunity to arise. Today might not be the best time to invest in them. Someday, it will be. Like it was in March this year.
Nicholas Kellagher says
Thanks MC – excellent post and links
Thanks for being a regular reader, Nicholas!