Given the time and resources needed to update research facilities and recruit scientists with the right expertise, the growth of knowledge in internal laboratories can be painfully slow. A better view of threats. A venture fund can serve as an intelligence-gathering initiative, helping a company protect itself from emerging competitive threats.
During the s, for example, when integrated-circuit makers were searching for alternatives to silicon the basis of the dominant chip technology , the silicon-chip specialist Analog Devices created a venture program to invest in competing technologies. Its goal was to gather strategic information at relatively low cost. But the reason for the lackluster performance was significant: Making chips out of anything other than silicon turned out to be stubbornly difficult and expensive. But the corporate venturing program had provided insurance: If the alternatives had been viable, Analog would have been covered.
Easier disengagement. As is well-known, many companies find it difficult to abandon the not-quite-good-enough innovations that sometimes come out of internal labs. Even if a corporation is unwilling to terminate an unpromising initiative, the presence of co-investors may force the decision. A bigger bang. By combining its own capital with that of other VCs, a corporate venture can magnify the impact of its investments.
This is particularly beneficial when technological uncertainty is high. In this way, Apple rapidly built a critical mass of applications for its new phone while spending very little. Given the success of the iFund, it is not surprising that similar efforts have been launched by, among others, Research in Motion to encourage the development of third-party applications for the BlackBerry and Facebook which teamed with Kleiner, Amazon, Zynga, and other tech luminaries to establish the sFund, devoted to promoting companies that work with social media sites.
Increased demand. A Rising Tide Large companies have been wary of creating corporate VC funds; the median life span of these funds has been about one year. Source: National Venture Capital Association Intel Capital also played a role in seeding companies developing wireless internet products around the Higher returns. For independent VCs, making money for the limited partners is the primary if not the sole object.
Still, profits are always nice to have. Companies bring a lot of value to the start-ups they fund, in the form of reputation, skills, and, of course, resources—from research scientists to sophisticated laboratories to armies of salespeople. Private and public equity investors often anticipate that a corporation-backed start-up will ultimately be bought by the company that invested in it—and at an attractive valuation, reflecting the strategic benefits the start-up can offer its new owner.
During their first three years as public companies, the researchers found, firms backed by corporate venture funds show better stock price performance, on average, than those backed by traditional venture groups. Billions of dollars have gone down the drain as corporations have struggled to deploy their venture capital groups effectively.
Most of the problems are rooted in incompatibilities between two mind-sets: that of the risk-loving, sometimes ruthless venture capitalist, and that of the process-bound corporate executive. And the parent company can miss out on valuable knowledge. Buffett earned his first dollars apx. Buffett was never interested in material consumption.
He said that there was nothing material in the world that he would want very much. Owing to a low level of personal spending, his savings have remained very high during his entire life and he has invested nearly all his earnings. It is well known that the success of Berkshire is a joint achievement of Buffett and his intellectual partner Charlie Munger.
Buffett possessed a sizable capital at the start of his investment career6. This fact can be partially explained by luck of his ancestry. He also caught a lucky chance quite a few times in his investment career. Firstly, he established his business in a very favorable year. The shares had been already going up for some time after the stagnation of the —s caused by the Great Depression, but the first large scale market contraction was far away in Graham taught Buffett the wisdom of the profession.
Graham also recognised Buffett as the brightest student of his theory7 and, when retiring, he left all his clients to Buffett. Another important event was the acquaintance with Charlie Munger in Munger is six years older than Buffett and at a time of their meeting he probably had a broader investment experience than Buffett.
For instance, Munger had an unsuccessful exposure to technology stocks in the s. He avoided losses, owing to a rapid change of technology, only by miracle. Let us look at the purchase of the major furniture retailer, Furniture Mart, in Omaha Nebraska in An excellent company with a significant future growth potential was acquired for approximately six times annual earnings which was a very low price for such an asset.
We have to do justice to the genius of Warren Buffett. He had been following this business for a long time and chose a very good moment to make an offer. He used the friction between the elderly owner of the business, Mrs. Rose Blumkin, and her sons, who were also involved in the management of the company. Buffett promised Rosa that after the sale she would manage the shop as usual and he would not intervene. Upon her agreement to sell the business, he closed the deal in a matter of minutes.
He skipped due diligence and returned to her office with a check, not giving her time to reconsider the terms. Later Rosa asserted that the shop which was bought for 60 million was worth at least million. Outstanding Abilities Buffett was highly committed since a very early age. He became interested in the stock market at the age of 6 or 7 and in he jokingly commented that he always regretted that he had not started earlier.
At the age of eight the young genius was reading investment books from the library of his father. Two years later he borrowed all investment texts that he could find from the local library. And now at the age of 78 it is not any lower. He is talented both in sciences and humanities. Buffett is good at math, is a Pulitzer price winner, a good bridge player and a fantastic psychologist. His abilities in math and interpersonal skills helped him achieve his success in investing.
The math is needed to value the acquisition targets and the interpersonal skills help negotiate with the owners. Buffett also has considerable work capacity. Besides, Buffett has phenomenal memory. The Legal Structuring of the Business Warren Buffett chose not to structure his business as a classic fund managed by a management company.
And this is one of the key factors of his success. The two-level structure of a fund with a management company used at the time of the Buffett Partnership was liquidated in In Buffett took control over a small public company Berkshire Hathaway and that company became his investment holding vehicle for all his acquisitions and portfolio investments.
It turned out that a controlled public company has a number of significant advantages over a mutual fund as an investment vehicle. The unit-holders of a publicly held mutual fund can seriously influence the result of the fund manager by taking money out of the fund when stock prices are falling and investing into the fund when the market is at its peak level.
A fund is forced to sell assets in order to raise liquidity in the periods of low prices and to buy shares to invest new capital at the market highs. If Berkshire shares fall Buffett does not need to sell any assets of the company, if they increase in price he does not need to buy.
Unfortunately Buffett never commented on whether the change of the investment vehicle was a thought-out strategy or a fortunate coincidence. Originally not a highly connected investor, Buffett owes a considerable deal of his success to his acquaintance with Kathrin Graham, the owner of The Washington Post, where Buffett is a shareholder. Buffet started investing in Mrs.
While making investment decisions Buffett has had a rare chance to supplement his own analysis by information received through his circle of contacts, which also includes the resourceful shareholders of Berkshire Hathaway. She encourages investors in a particular stock to visit a shop where the goods produced by the company are sold and discuss with the shop assistant how those products are perceived by consumers and how they sell.
This advice certainly makes sense, but through his social circle, Buffett has other and more serious sources of information. It is also a powerful intellectual resource. Buffett has created a unique niche of the white night and a friendly buyer. Upon acquiring a business Buffett does not dismiss its former owner if the latter is prepared to manage the company further — «… nothing ever happens to our managers. We offer them immortality», — says Buffett[10, p. As Buffett buys only quality companies and, if a company is good enough to be acquired by Buffett, it already has excellent management.
To make a former owner comfortable in a new capacity of a manager accountable to someone else Buffett adheres to the laisser-faire policy toward the management of Berkshire subsidiaries. Buffett helps his managers only if his help is wanted but he does not interfere in the decision-making process, if his involvement is not solicited.
But he is not a financial investor either as he does not resell the businesses after a few years. Buffett removes the threat of any restructuring even in the remote future. These entrepreneurs are reluctant to sell their companies to investment funds also because these funds have a relatively short term investment horizons of 3 to 5 years. Buffett sends a very clear signal that he is a friendly buyer.
For example, he does not conduct due diligence. Buffett deals only with decent people and preferably those who want to sell their businesses to Buffett and not just to an any buyer. Such sellers have no intention to maximise the price by any means. We like to do business with someone who loves his company, not just the money that a sale will bring him though we certainly understand why he likes that as well.
When this emotional attachment exists, it signals that important qualities will likely be found within the business: honest accounting, pride of product, respect for customers, and a loyal group of associates having a strong sense of direction. The reverse is apt to be true, also. There are no documented cases when after purchase problems were found.
Buffett is a great motivator. Option schemes are not used because of the motivation distortion: an option holder does not bear a downside risk and receives either nothing or an upside, while a shareholder has the downside risk also. It is prestigious to sell business to Warren Buffett.
Such a deal means that one is allowed into a private club where only selected few get membership. Most CEOs inherit a culture with a short time frame in which to put their thumbprints on their organizations. In addition, these businesses are usually so large that they become resistant to change, even if the CEOs have better management methods[18, p.
The non-bureaucratic decision making process and skipping of due diligence in Berkshire are also important. Buffett is an investor dissimilar to any other. Buffett managed to transform his early success partly achieved through fortunate circumstances into a long-termsustainable competitive advantage over other investors. This transformation was a purposeful act for which he deserves full credit. Buffett established his competitive advantage as an investor by the s when his name became well-known.
Since then the number of investment funds in the USA has grown strongly and competition for good businesses intensified, but Buffett was ready for that competition as he had already created a unique market niche for himself. Buffett is very cautious about the use of debt in principle, in financing mergers and acquisitions and in investing in the stock market.
He has warned investors about the excessive use of leverage many times. The company rarely borrows from banks or issues bonds. Insurance premiums are the source of the long-term financing as the time between premiums collections or the raising of debt, and the payouts, the repayment of debt, may reach many years. Buffett published data on the cost of capital of his insurance business during 31 years —
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