These 6 Quotes from Warren Buffett’s Annual Letters Will Help Your Startup Beat the Bubble

In volatile economic times, investors often look to Warren Buffett for a read on how they should be weathering the storm. And although he famously doesn’t invest in startups, the wisdom compiled over 50 years of his annual letters can help founders and executives make smarter decisions about the future of their businesses when market conditions aren’t working in their favor.

If #VCTwitter is to be believed, the wheels are in motion for a major correction in the private tech market and companies should start gearing up for a vastly changed funding environment.

Image via @StartupDrugz

However, a pull back in the market doesn’t signal the end of days for every company trying to go from growth to scaling to eventual IPO. Sure, some companies, regardless of stage, will fail to meet VC expectations while others, no matter what market cycle we are in, will outperform. This infographic, from a Mattermark + Battery Ventures webinar, displays this perfectly.

In the same way that the Oracle of Omaha has found lucrative investments at every possible point in the business cycle, great companies form and will continue to form in every economic period.

We went back through 50 years of Buffett’s shareholder letters to pull out 6 of the best lessons you can use today to build a business robust enough to flourish whether things are on the way up or the way down for your competition and the rest of the market.

Own your company’s story around the good, bad, and the ugly of your past, present, and future.

“When you do receive a communication from us, it will come from the fellow you are paying to run the business. Your Chairman has a firm belief that owners are entitled to hear directly from the CEO as to what is going on and how he evaluates the business, currently and prospectively.” — 1979 Berkshire Hathaway Annual Letter

When competition increases, telling your company’s story becomes more important. Acquiring customers, raising money, hiring. A compelling story helps give you the edge over the competition in these areas.

Buffett has perfected the art of telling Berkshire Hathaway’s story in a way that makes it more attractive to not only its current stakeholders but also to others who may come into the fold in the future — companies they are looking to acquire, other investors in the market, the media, etc.

So what does a good startup story look like? Here are a couple things to keep in mind:

  • Combine numbers and narrative to provide the right level of context. While readers are interested in how much a given metric may have changed, it is more important to fill them in on why it changed and what they can expect in forthcoming periods.
  • Make specific asks of your investors and stakeholders. Removing as much friction as possible makes it more likely that your investors will be willing to make that intro you need to a key hire, customer or VC.
  • Keep is consistent. For Buffett, that means once per year. For an early stage company undergoing changes at a much faster rate, monthly is often the way to go.

Want to take it a step further? Here are some great templates that you can start using today to craft your own mini-Buffet missives once a month (quick plug: any of these templates can be used inside of Visible)

For your metrics, paint the bullseye first, then shoot the arrow.

“Yardsticks seldom are discarded while yielding favorable readings. But when results deteriorate, most managers favor disposition of the yardstick rather than disposition of the manager. To managers faced with such deterioration, a more flexible measurement system often suggests itself: just shoot the arrow of business performance into a blank canvas and then carefully draw the bullseye around the implanted arrow. We generally believe in pre-set, long-lived and small bullseyes.” — 1982 Berkshire Hathaway Annual Letter

Most emerging SaaS companies are on the search for predictability. How can we get to the point where X amount of money invested in a certain growth channel yields Y new paying customers with an LTV of Z. It is a complex equation that takes a long time to begin understanding and an even longer time to perfect.

Without a well-defined set of metrics and a budget (different than projections or a forecast) to hold yourself to over a period of time, you are constantly restarting the process of understanding what your path to business model predictability looks like.

Tails are not legs (like GMV isn’t Revenue)

Managers thinking about accounting issues should never forget one of Abraham Lincoln’s favorite riddles: “How many legs does a dog have if you call his tail a leg?” The answer: “Four, because calling a tail a leg does not make it a leg.” — 1992 Berkshire Hathaway Annual Letter

As YCombinator’s Sam Altman recently noted, many founders make costly mistakes when representing their financial and growth metrics to investors and other stakeholders. Often, this is done out of ignorance. Sometimes, the misrepresentation is deliberate. Both are inexcusable.

When building out a framework for how to track key performance metrics around your business, one of the first places to start is to set clear definitions for what everything means. Too often, early stage companies play fast and loose with metric definitions in an effort portray their growth in a more flattering light.

An undisciplined approach to defining the key performance indicators in your business represents a lack of respect for, as Marc Andreessen puts it “the fact that you are deploying other people’s capital” and can cause a breakdown in the relationship with your stakeholders.

Before chasing the new and shiny, double down on what is working

“Before looking at new investments, we consider adding to old ones. If a business is attractive enough to buy once, it may well pay to repeat the process.” — 1994 Berkshire Hathaway Annual Letter

On the surface, the cycles for everything in the startup world— funding, product, news —seem to be accelerating rapidly. While a deeper dive makes it clear that a lot of this information is just noise, it doesn’t stop teams and companies from getting distracted.

When a company hits an inevitable rough patch, any new idea seems like a good idea, leading to wasted time and money chasing product or distribution ideas that fall well outside of your core competency and what should be your core focus.

As YCombinator’s Paul Graham puts it, “nothing kills startups like distractions.

Don’t be ‘Cinderella at the ball’

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities æ that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future æ will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.” — 2000 Berkshire Hathaway Annual Letter

Each quarter, we survey top VCs and angels from around the world in an effort to understand where the early stage market is heading. In our Q2 survey, the word on everyone’s mind was ‘discipline’. Specifically, a concern over the lack of discipline many investors saw in the market on both sides of the table.

Some investors expressed concern about a lack of discipline from fellow investors jumping hastily into companies at inflated valuations while many claimed to see increasing burn rates across the industry, partially driven by entrepreneurs thinking that their next round will come as easily as their last.

Hyde Park Angels, one of the top angel groups in the United States and our partner for the survey put together a helpful list of ways your company can navigate the impending (according to some) shakeup in the early stage market. The highlights:

  • Take a fine toothed comb to your financials
  • Understand the logic behind your numbers
  • Be honest with yourself (and your team) about your company’s progress
  • Cultivate strong relationships with your investors
  • Know how to sell your strengths

You can check out the full post here >>

Widen your moat

“Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.” — 2005 Berkshire Hathaway Annual Letter

“Delighting customers” and “winning on product” are two phrases that any startup buzzword purveyor worth their salt is very familiar with. The third part of Buffett’s quote, “eliminating unnecessary costs” is one that is just now coming into vogue with the handwringing over burn rates and bubbles.

Startup cliches aside, the impact of nailing all three of Buffett’s requirements on a daily basis is huge for a fledgling company. One customer conversation can ignite growth into a new market, one feature can help your product leapfrog your biggest competitor, and one spending misstep can lead to a pattern of frivolous cash management.

About Visible

Visible gives you the power to tell the story around your key performance data. Visualize your most important metrics, organize capitalization and keep all of your stakeholders engaged all from a single platform.

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