Entrepreneurship as Investing, and Investing as Entrepreneurship

Recently, I've been in contact with some institutional investors and gradually gained some understanding of the institutional investment procedure. I feel that sometimes the perspectives of investors and entrepreneurs are indeed quite different. When I was starting businesses before, I hadn't raised any funding. When I was investing in the secondary market, I didn't think much about this difference either. On one hand, I’m gradually understanding the differences between the perspectives of institutional investors and entrepreneurs. This is new and unfamiliar to me. On the other hand, I’m recalling my own thinking when I was investing in the secondary market before. It seems to be consistent with entrepreneurship; there’s not much difference. Looking at it now, perhaps the investment and business education I received is relatively niche, but in terms of the time it takes, it’s effective with a high probability. So, I want to record some of my previous thoughts on investing and entrepreneurship. Comparing them might be an interesting thing to do.

I. Investing as Entrepreneurship

I understand Buffett’s saying that buying stocks is buying part of the company. You must have a long-term holding mindset to find good businesses and good partners. This is actually very similar to starting a business. On one hand, you must focus on the business model and choose the right business model (not all models work). You need to spend a lot of time researching the details of this business model. On the other hand, you must choose good “partners.” When investing, you must treat the founder and CEO as your future partners. Ask yourself if you are willing to do things with them for the long term. If the founder’s or CEO’s character or culture makes long-term cooperation uncomfortable for you, then it’s best not to buy on day one. This is the same as starting a business. If you feel that a person is not suitable for the team in the long run, but useful for a short time, bringing such colleagues in often leads to regret. If this unsuitable person is a partner, then it’s not just regret; it’s utter regret.

Besides focusing on good businesses and good teams, investing also needs to consider whether the price is good. This seems to be different from entrepreneurship, but upon closer inspection, it’s actually the same. Buffett has mentioned in many places that Charlie Munger evolved him from an ape to a human. It was Charlie Munger who made Buffett realize that he should buy good companies at a reasonable price, rather than spending time picking up cigar butts (cheap companies with some residual value, but often not very good companies). This is even easier to understand in entrepreneurship. If a business is particularly easy to do and doesn’t require paying a large price, it’s often not a good business that generates a lot of long-term cash flow. Good decisions are often difficult and require paying a painful price. A good company should spend effort to solve/overcome those correct but difficult problems, rather than picking up a lot of sesame seeds everywhere (the mindset of picking up sesame seeds everywhere often means you won’t even pick up sesame seeds. This is completely different from accumulating small victories into a big victory). Another point related to price in investing is to see if the loss in the deal is overall acceptable. Looking at this from an entrepreneurial perspective is more concrete, that is, when investing in a cause, you must see if it will kill you. Staying alive is the primary task of starting a business. At the same time, you often have to evaluate from another perspective, that is, whether you can win and whether you have enough power to invest to win.

II. Entrepreneurship as Investing

As the saying goes, men are afraid of entering the wrong industry, and women are afraid of marrying the wrong man. Like investing, which particularly focuses on business models, the choice of industry and business model in entrepreneurship itself often determines a large part of the outcome. That is to say, you must spend a lot of time researching what the right thing is and then think about how to do things right. Progressing gradually in the right direction is far better than running wildly in the wrong direction. Buffett said that he has seen many ordinary people make a lot of money in the financial industry, and he has also seen quite a few very smart and excellent people struggling in bad industries. On the road of entrepreneurship, many times it's like investing: choice is more important than effort. Moving forward on the right path, even if it’s slower, is like the compound interest in investing—a 20% annual return for 20 consecutive years is very powerful, much more profitable than a 100% increase this year and a 50% drop next year.

Buffett and Bill Gates, in a conversation with MBA students, asked the students a question, the general idea being: if you treat each of your classmates as a company, and you have to invest all your current money in one of “them,” taking a 5% stake, which one would you choose? Often, you won’t choose the smartest or the most capable, but you will often choose the most trustworthy. This analogy is especially appropriate for choosing partners in entrepreneurship. Often what we want are trustworthy long-term partners, not people who seem very capable but you never know if they will stab you in the back.

When Buffett talks about investment targets, he often mentions a concept: moats. If we treat various decisions in the entrepreneurial process as investment decisions, then we have to distinguish which of the things we exchange for time and money are assets and which are costs. Those that are beneficial to deepening the business’s moat over time are often “assets,” and those that are more detrimental to you over time can be seen as costs. There are not many mistakes in the purchase of assets, at most just buying something a bit too expensive. But wasting costs is very abominable and often has negative effects. In the entrepreneurial process, one type of special asset is people united under a certain culture, and one type of cost is the cost of buying labor or skills. The distinction and transformation between these two are very interesting things and also things with a particularly high ROI. If all costs become appreciating assets, then our CFOs and investors would probably laugh in their sleep. But interestingly, many times when investing, the distinction of such major differences is often hasty and the weighting is far from sufficient.