One of the best things about keeping a ton of physical books around the house is the opportunity it creates to connect ideas that are top of mind with concepts you read about years ago with nothing more than a quick glance.
This happened yesterday when I walked past a shelf in my apartment and saw The Warren Buffet Way (a generally watered down recounting of Buffet’s core investment philosophy) after spending the day thinking a lot about retention and the importance of building a product or service that increases value to customer with each incremental interaction — what Bill Gurley called “increasing customer utility” in a great 2003 post — instead of one that gets the fundamentals wrong and gets forced into a never ending cycle of paying more money to acquire marginally worse customer.
Blue Apron’s downfall provides a look at what happens when a company doesn’t figure out how it is going to retain users and is forced onto the vicious treadmill of vanity growth.
The line of thinking I was on throughout the day made me come back to one Buffet idea that I do remember picking up initially from the previously mentioned book — the Institutional Imperative.In Berkshire Hathaway’s 1990 letter to shareholders, Warren Buffett defined the institutional imperative as “the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.” This discussion was a follow-up to the 1989 letter, which detailed traps within a firm and include:
(1) As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.
This way of operating — something that many companies in the “CAC is the new rent” economy of the last 5 years fell victim to in verticals like DTC products, consumer subscription, and even enterprise SaaS — has largely given way (out of pure necessity in many cases) to a focus on leveraging retention as the path to growth.
As traditional paths to defensibility become harder to develop and maintain, the only moat that sustains is a company’s ability to consistently deliver an experience that leaves the consumer feeling like they are getting a better deal every time they walk away from an interaction.
It can become easy to lose track of this “value to customer” north star and fall victim to the institutional imperative imposed by the venture capital culture that says the only way to build a massive business is to optimize for 12 month cycles of momentum that help you get to the next fundraise (to hire the next person, open that next geography, or roll out that new product line).
Companies like Calm and Webflow have started to show us that the best companies aren’t opting out of the venture capital track, as many predicted, but are instead taking back control over when and how to use capital as a tool instead of as a signaling mechanism.
Resisting the institutional imperative must happen proactively and must be embedded in the company culture from day 0.
It requires (to repeat myself), a focus on long term customer value from the outset (some examples here and here), a “default alive” approach to revenue and burn, and perhaps most importantly, a personal temperament capable of giving you blinders to the inevitable high-profile fundraises by competitors (and the press fawning that comes with that).
An over-focus on competition what others are doing leads to a lust for activity.
The scarce resource in for today’s emerging startups is the ability to build a “run your own race” culture. Those who do will be able to resist the venture market’s institutional imperative and will stand alone at the finish line.