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Alok's Posts / Startup

Interpreting the acronym “BERKSHIRE” (of Warren Buffett) for Startups….

I read this fascinating description of Berkshire Hathaway’s culture as explained via the acronymic description of BERKSHIRE in a summary of the book ‘Berkshire Beyond Buffett” as summarised by Blinkist. 

 

Ps – If you are not familiar with Berkshire Hathaway or Warren Buffett, do google the most successful investors of the world and amongst the richest people alive today.

I read the description a couple of times and then asked myself, “Alok, how many values resound with you? Also, do these apply to startups?”

This is my interpretation. All the text is from the summary, except for my interjections:

The author Lawrence A. Cunningham says that the firm Berkshire Hathway is made of core values, which are spelled out by the individual letters in BERKSHIRE: that is, for every letter, there’s a corresponding value.

The “B” stands for one of Berkshire Hathaway’s most essential principles: budget consciousness.

Consider how the company’s stake in GEICO, a car insurer, supports its budget-conscious focus. GEICO practices budget consciousness through serious frugality and extraordinary operating efficiency. The company’s goal to keep costs at an absolute minimum isn’t merely to increase profits, however. GEICO in fact passes along most of its savings to customers as lower premiums. This policy in turn attracts more customers, and results in greater total premium volume for the company.

 

Alok’s view: Yes, budget consciousness is paramount and key, but in the current hustle and bustle of startups and VC, how much can this be practiced? Startups in the e-com, food tech, housing market etc have burnt billions of $$$ in creating cavernous office spaces, advertising the brand, paying outrageous salaries and investing in companies & ventures that have proved to be duds. This is all prompted and supported by the investors of these companies, themselves. The promoters of these failed businesses are celebrated as the greatest entrepreneurs of all time. We all know that all these costs will get added back in the form of costs to consumers eventually, so there will never be a free lunch! They may essentially bankrupt the businesses per se.

So, what would Buffett say to them?

The “E” refers to earnestness.

The value of keeping promises, earnestness is a characteristic which broadly applies to all Berkshire Hathaway subsidiaries, particularly its insurance companies.

The business philosophy of Berkshire Hathaway subsidiary National Indemnity Company (NICO) is based on earnestness at its most effective. Its philosophy stresses that while an insurance policy is merely a promise, NICO aims to offer promises of the highest quality.
How does the company do this? NICO writes policies that other insurers won’t or can’t because such policies involve unusual risks for proportional premiums.



In the months after the 9/11 terrorist attacks in the United States, NICO wrote large-scale terrorism policies including a $1 billion policy for several international airlines and a $500 million policy for an overseas oil platform.

NICO can write such policies and stick to its earnestness principle as it has made Berkshire Hathaway’s core values its own.A good reputation goes a long way, and not just in terms of maintaining a friendship. Even a company’s finances can benefit from a company’s good rep in an industry.

Alok view: Fabulous point and very relevant to Startups and Entrepreneurs. I think the earnestness begins by asking, how much will I suffer, sacrifice and persevere to keep doing what I started. Nowadays, it’s becoming ‘Ultra cool’ to give up in a couple of years (or less), do a PR story about it, get media coverage and even have investors complimenting entrepreneurs for destroying all their capital! I wonder where Earnestness would fit there?

Investing in the value of reputation – the “R” in BERKSHIRE – has paid off for Berkshire Hathaway companies.

Successful furniture retailer and Berkshire Hathaway subsidiary Jordan’s Furniture earns some $950 of revenue per square foot annually, a number that’s nearly six times the industry average. The company’s secret? Jordan’s Furniture has a solid reputation based on its unique customer service. Its approach goes beyond offering a wide selection of furniture at good prices with prompt delivery to orchestrating a special experience that the company calls “shoppertainment.”

At one Jordan’s store, for instance, customers can take a seat in a small theater to watch a flight simulation. At another, customers can stroll along a model of Bourbon Street in New Orleans and even tour a riverboat. These entertaining in-store concepts attract tons of interested customers and in turn generate high sales. Truly Jordan’s investment in the value of reputation has paid off!

Alok view: No disputes here. But in my opinion, the concept of reputation applies both INSIDE and OUTSIDE of a Company. While you can be all great and squeaky clean outside, does the same hold true for startups and their reputation inside – AMONGST their employees and partners? Almost every day I am pinged by someone senior who left a high paying job to join a well known startup for ESOPS as the extra kicker. Months and years have passed and the ESOPS are nowhere to be found! What kind of reputation would that qualify for, in the worlds of Buffett?!

The “K” in BERKSHIRE, kinship, has also proved valuable for Berkshire subsidiaries. In striving to solidify kinship bonds, Berkshire Hathaway aims to create wealth that lasts generations, in the same way that a tight-knit family values identity and legacy.

Berkshire Hathaway does business for the long-term. This makes family businesses particularly attractive for it, as they are often characterized by powerful bonds such as fairness, mutual respect and trust. And in business, this pays off.

In 1995, Berkshire Hathaway was able to acquire family business RC Willey Home Furnishings for $25 million less than a rival bid. RC Willey knew that Berkshire Hathaway appreciated the strengths of family businesses and saw value in its financial position and policy of permanent relationships. Thus the benefits of its corporate culture allowed Berkshire Hathaway to seal a deal while also saving money!

Alok view: Wow! This is remarkable and it’s a bit hard for a Marwari to accept US$ 25 million less for his sale of business. Having said so, startups have a long way to go to build a long tail of reputation and ‘kinsmanship’ as Berkshire Hathaway. In the world of VCs, it’s the  other way around. Some of the more successful VCs are ‘famous’ for being ruthless; pitting founders against each other and changing CEOs at the drop of a hat by ousting the chap/s who could not perform for a quarter or two. VCs ‘FLIP’ companies just to show ROI on their older funds so as to raise money for their new funds. That’s hardly the spirit of ‘kinsmanship’ I would say 🙂

As an entrepreneur in the field of acquisitions, Warren Buffett showed how a small business could transform into a huge corporation.
It’s no surprise that this entrepreneurial spirit still fuels Berkshire Hathaway’s company culture.

Berkshire managers must be self-starters, the “S” in BERKSHIRE.

Self-starters are entrepreneurs who have a vision and can run a business on their own.

In fact, among Berkshire’s entrepreneurs are several recipients of the Horatio Alger Award, an honor for individuals who have achieved success often in the face of adversity. One award winner was Albert Lee Ueltschi, founder of FlightSafety International. At just 16 years old, Ueltschi opened a hamburger stand called “Little Hawk” and used the profits to fund his flying lessons. His passion for flying then inspired him to teach others how to fly.

Ueltschi eventually created the world’s premier commercial pilot training school, using flight simulators to teach routine patterns and emergency drills. Since 1996, FlightSafety has been part of Berkshire Hathaway.

Alok’s view and comment: In the self starter point, NO ONE AND NOTHING can beat entrepreneurs in startups. We all have amazing stories to tell and could keep Mr. Buffett entertained and enamoured for a lifetime if he lent us an ear!

To encourage a self-starter mentality in employees, Berkshire Hathaway practices a hands off (the “H” in BERKSHIRE) management approach.

Most businesses are often organized bureaucratically, mired in committees and meetings, with multiple layers of reporting to make sure every message and decision is controlled.

In contrast, Berkshire Hathaway’s management approach values decentralization and autonomy. Every subsidiary stands on its own, and only the most mission-critical decisions are made at headquarters. Interestingly, Berkshire Hathaway subsidiaries employ more than 300,000 people, while Berkshire’s headquarters claims only two dozen employees.

Alok’s view: This is what I found on the home page of the Berkshire Hathaway site 🙂 Click on the image to expand and chuckle 🙂

Some Berkshire subsidiaries also practice the 90/10 rule, in which junior managers make 90 percent of the decisions while senior managers collaborate on the rest – in particular for issues which involve unusual risk, require special skills or go beyond the expertise of junior managers.

This hands-off style is exactly what makes Berkshire Hathaway attractive to self-starters. Executives appreciate that they can continue running their businesses independently yet feel secure in a partnership with Berkshire Hathaway at the same time.

Alok’s comment: This is an ‘ideal’ approach but it assumes (correctly) that the management of the companies Berkshire owns and buys has the maturity to manage itself. In the world of startups, I believe there should be a HEALTHY blend of Investor Intervention and guidance since entrepreneurs know no better. Check out my very own ‘11 lessons I learnt from 10 VCs as testimony to the “meddling” that VCs can provide! 

Over some 50 years, Berkshire Hathaway has acquired dozens of companies, and the value of each has increased over time.
How has the firm managed to do this? Because the company’s subsidiaries do a lot of acquiring, and are successful at it, too.

They have investor savvy, the “I” in BERKSHIRE.

This means that subsidiaries keep an eye out for companies with an organizational culture that fits their own – which enables them to attract a target company without even having to make the highest bid.
Moreover, many Berkshire subsidiaries replicate the firm’s approach to acquisitions by attracting companies that also stress core values, such as trust and partnership.

Chemical company and Berkshire subsidiary Lubrizol has made a number of smaller acquisitions, many of which have gained it not only talented scientists and business managers who fit well with its ethical, research-driven culture but also increased research and development capabilities.

You may have noticed that subsidiaries are also of a particular nature. We’ve seen so far that Berkshire Hathaway companies engage in business in the fields of energy, transport, chemicals, insurance or furniture, as just a few examples.

Alok’s view: A few successful new world companies have begun showing the same skill! Google’s acquisition of YouTube, AdMob, Facebook of Instagram and WhatsApp all point to this awesome quality pre-defined by Buffett!

In sum, the firm’s acquisition criteria states a preference for businesses that are easy to understand; that is, businesses that are at their essence, rudimentary – the “R” in BERKSHIRE.

The logic is that such businesses have been around for a long time and are thus well-understood; what’s more, such businesses are expected to be around for many years to come, which jibes with the firm’s preference for permanence and long-term value.

Such rudimentary businesses usually pose less risk than do new or seemingly exotic industries. At Berkshire Hathaway, it is more important to keep things simple and not lose money, rather than to make money by taking big risks.

Alok’s view: Aren’t the greatest startups the easiest to understand and use? Did we need education to use Google or Facebook or WhatsApp? Genius lies in those entrepreneurs who have made life (and hence their Startups) so easy to use and build. Just look at the iPhone. The greatest proof is how a 2-3 year old uses an iPad once its given to her. From such simplicity comes the ease of understanding of business valuations. You don’t need to be Einstein to figure that if Amazon is powering up 1 out 2 of all Internet sites today (AWS), it will be a very valuable company in the making!

The BIGGER point is that Startups in the digital space need to pivot and change constantly and this is a start difference from being a Furniture maker all your life. The guys who pretended to be ‘digital furniture makers’ – Yahoo, Nokia and Twitter (in the making) can’t remain valuable (or rudimentary) for all we care!

It’s the question on everyone’s mind: what happens to Berkshire when Warren Buffett passes away? Many people fear that losing Buffett could mean the end of Berkshire Hathaway.

But keeping in mind the company’s core value of eternality – the “E” in BERKSHIRE – Buffett has developed his company’s culture and practices in a way that will see Berkshire Hathaway endure long after he is gone.

Since 1993, Buffett has written a number of articles about what Berkshire should be without him, and he’s also formalized with the board a succession plan, which prescribes splitting Buffett’s job into two separate roles: management and investment.

Berkshire Hathaway has since recruited investment managers Todd Combs and Ted Weschler, two men who possess the necessary skills to handle the investment line of Buffett’s job and have even surpassed Buffett’s investment performance in recent years!

Buffett has ensured that his company has solid candidates for future managers waiting in the wings as well. The most important trait for a successor as manager and chief executive officer is a commitment to Berkshire Hathaway culture. Thus, as the succession plan outlines, the best candidates are insiders, or those employees who now manage Berkshire subsidiaries.

Yet there’s no question that Buffett’s successors, whoever they may be, will certainly face challenges.

Alok’s views: This is where I have the biggest difference of opinion. Nothing lasts forever. I am reading Benjamin Graham’s epic ‘The Intelligent Investor’ (much loved by Warren Buffett) in which Graham empirically proves that the stars of the DJIA (Dow Jones Industrial Average) change every 20-30 years.  

In digital startups, who can plan for eternity? It is a question probably Warren Buffett can best answer for us!

 

Really?!

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If you have enjoyed this blog, please comment. Also leave behind your own comments on the interpretation of the acronym BERKSHIRE and I will be happy to add it it against my view / replace if I receive quality feedback!

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