We need backers who watch and wait
First published in the Financial Times on 18th February 2014.
Lots of young founders expect lightning progress and startling pay-offs within a short timeframe
Anyone who knows me is aware that I’m an impatient fellow. But the odd thing is that I’ve chosen a career where patience is essential.
I buy part of a company, nurture it and wait. At heart, capitalism is essentially the deferral of rewards. Instead of working and receiving a monthly salary, investors in private companies risk their funds and hope for a capital gain, perhaps half a decade hence. Usually such companies are expanding and need to reinvest their earnings. They cannot even pay an income to the owners in the meantime.
This attitude becomes addictive. I focus more than ever on medium to long-term growth in companies I own, which means I want businesses that endure, rather than transient victories. I find the idea of flipping a business for a quick turn unappealing. Identifying an attractive business and negotiating a transaction is so hard that I am increasingly reluctant to let the good ones go. That is partly because I have sold out far too early from some of my winners. So nowadays I risk making the opposite mistake – keeping them too long.
Almost 30 years ago I worked as a stockbroker and dealt in quoted shares, where short-term price movements and news flow can make huge differences. Such impetuous stuff is anathema to me now. I believe all genuine commercial undertakings require years to develop. This has almost always been the case. The very first industry – agriculture – requires staying power through the seasons. For example, I have just received a proposal about investing in a new mango and lychee farm in Italy. The business will not generate positive cash returns for at least four years. Meanwhile the trees do not reach true maturity for 60 years. That sort of concern really takes perseverance.
Lots of young founders, offspring of the digital age, expect lightning progress and startling pay-offs within a short timeframe. Most will be disappointed. I fear quite a few imagine successes such as Google or Facebook are regular events. I suspect those two stories are once in a generation aberrations. The right circumstances arise occasionally for such shooting stars, but they do not last.
The robber barons made unprecedented fortunes in the US in the late 19th century thanks to an incredibly fortuitous combination of land, natural resources, cheap labour, rising demand and minimal regulation.
Similarly, the early movers online have been able to grab commanding positions in the digital universe, and enjoy the luscious margins of dominance. The hordes following in their wake will not fare nearly so well. Many will never make a profit, and I’ll wager none will experience the same astonishing trajectory of expansion. Technology can transform industries, but the market leaders will usually require management with stamina and long-term vision.
Unfortunately, capital markets are not arranged to encourage patient capital. Most institutional investors insist on liquidity, in order to allow them to bail out at short notice. In Britain at least, tax rates are identical for long or short-term gains. But real innovation and research usually take time to come to fruition.
The momentum trading that dominates most financial markets overwhelms the reality of industrial development. Genuine breakthroughs – even very successful ones – can take many years before they pay back. Typically, important inventions – from the Xerox photocopier to the Dyson vacuum cleaner – needed refining over many years before they started generating significant sales and profits. New medicines frequently take at least a decade to come to market, because they undergo rigorous clinical trials to ensure their safety and efficacy. Technical progress, the engine of all productivity and material advances, can be painfully slow, uncertain and expensive.
I admire those entrepreneurs who have the indefatigable energy to stick with a radical project through thick and thin. They must possess both a sense of urgency and superhuman persistence.
Many such schemes fall by the wayside. I have seen hundreds of such business plans, almost all unrealised, now neglected in some forgotten filing cabinet. But among all that hope and sweat there are occasional gems that change the world and make fortunes.