“Our favorite holding period is forever.” Warren Buffett
Most people don’t realize the impact of that statement by Warren Buffett on a specific type of founder or CEO looking to exit his business.
Let alone how that translates into proprietary deal flow for Mr. Buffet.
Let’s unpack this and you’ll see what I mean.
Warren Buffet buys companies.
To do that he needs to build deal flow of potential acquisition targets just like everyone else.
Most financial professionals realize that, while Buffet has preached his buy & hold mantra for decades, he also trades stocks quite frequently.
Less charitable observers mark this as sign of hypocrisy.
More astute professionals see the elegant application of fundamental principles of building out a pipeline of qualified deals.
His buy & hold mantra is a prospecting message
targeting a high-value segment of founders and entrepreneurs.
I learned this lesson while on a small group retreat in Pasadena, California while talking to Barnett Helzberg.
Barnett Helzberg sold his company to Mr. Buffett.
However, that outcome was not pre-ordained.
The sale was being prepped by one of the behemoths of investment banking. The goal to sell as high as possible.
The Helzberg family was looking to finally cash out on having built a wonderful business.
The prospect of sale, however, created a deep emotional problem.
Helzberg knew the best-case scenario would still involve large layoffs. Duplicate departments always get cut.
The worst-case? The company gets carved up and auctioned off. Leaving loyal employees devastated and jobless.
The Helzberg’s built a company they believed in.
The last thing they wanted was to destroy their company.
Barnett told me he was walking in New York City while wrestling with how to both exit the company and protect it after the sale.
The solution turned out to be crossing the street directly in front of him.
He rushed up to Buffett and blurted out something along the lines of “I want you to buy my company.”
After sending over his financials, Buffett made him an offer.
One “substantially lower” than what they investment bankers were expecting to sell the company for.
It was less money.
But the Helzberg’s said yes.
Why? Because they knew Warren Buffett does not sell great businesses. His favorite holding period is forever.
He doesn’t replace management.
He doesn’t carve the company up and sell off its assets.
He buys the cashflow.
Always at a discount.
Buffett’s message is a beacon of hope
to any entrepreneur who wants both
an exit and to preserve the company they’ve built.
Is it a surprise when Warren Buffett courts the media he is often sure to mention it whenever discussing buying a company?
Of course not.
He understands the media is his bullhorn to broadcast his message to prospects.
He offers entrepreneurs a solution to an otherwise impossible problem.
His message: you can cash out without selling out.
Entrepreneurs, like Barnett Helzberg, are willing to sell at a discount in order to stay true to their values.
Your messaging affects the quality of your deal flow.
Think of what you say you want in terms of deals as a form of pre-vetting deal flow.
If Mr. Buffett simply stated his preference of buying assets at a steep discount that would only negatively affect his deal flow.
How?
It would introduce the idea it was impossible to get a “good price” by selling to Buffett.
He would become the buyer of last resort for forced sellers.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he says.
His message here negates even the inference he would demand a low-ball sale.
A fair price for wonderful companies is a positive, practical message.
Proclaiming your investment thesis attracts
both like-minded investors and like-minded deal makers.
If you have a strong investment thesis then you want it known far and wide.
It will attract like-minded people.
If you’re raising capital it will attract investors who agree with your thesis.
Any investor who meets with you after knowing your thesis is pre-qualified compared to an investor who has no idea how you invest.
You’ll take fewer meetings that are wastes of time.
If you’re a VC then founders whose companies fit neatly into your thesis will be more likely to seek you out.
They will also feel like you “get them” better than VCs whose thesis is irrelevant to the founder’s vision for their company.
One of the reasons personal referrals tend to result in higher quality deals is because your referrer understands what you’re looking for better than most.
They send you deals more attuned to your investment thesis or your business. They know what you want and who you can help.
Peter Thiel’s Founders Fund Manifesto may be
the perfect expression of a VC investment thesis
The Founder’s Fund Manifesto is a pitch perfect investment thesis.
Its content designed to generate both capital and proprietary deal flow.
You can (and should) read it here. https://foundersfund.com/the-future/.
Notice how Thiel addresses issues specific to investor returns while calling out specific types of technology worthy of investment.
Or go read the FAQ at Indie.vc.
Both have a well thought out, clearly articulated investment strategy.
Those strategies grow directly out of deeply held beliefs about the opportunities in the market.
How well defined is your investment thesis?
What kind of deals are you specifically looking for?
How much your network knows that?
Part of your deal strategy should be to craft deal messaging around what you want in ways your network can easily grasp and remember.
Then push your deal-messaging out broadly and often to your network.