value and opportunity

Those two books might be somehow unusual for a blog dedicated to Value investing, but I do believe that especially for value investors it is very important to understand what is happening elsewhere and those two books provide plenty to learn and apply even (or especially) for value investors.

“Venture Deals  – Be smarter than you lawyer and Venture Capitalist”

“Venture Deals” is a rather technical but nevertheless very interesting book and in my opinion a “Must” for anyone directly involved in start-up funding, either as an investor or founder.

The authors are two very succesful “early stage” venture capitalists who run the Venture Capital firm “Foundry Group” (among others they finenced FitBit).

In the book itself, they take the reader in a very good way through a typical Venture capital “Term sheet”, explaining all the concepts in an easy to understand way and giving a lot of practical advise on top of the pure technicalities. After reading this book, I actually had the feeling that I already had some advantage against many people who called themselves “specialists” in that field. Venture Capital has some specialties, but once you understand the “jargon”, it is actually quite easy.

Although as one of the important take aways, I was surprised how complicated a capital structure of a succesful start-up can be after several rounds of funding with different liquidation preference rights, convertible debt elements etc. That’s why it is not that easy to actually determine the overall value of the equity of a startup company and that sometimes big differences exist when different investors value their stakes (Kinnevik vs. Rocket Internet).

Another thing that stuck with me was that the authors briefly explain their investment philosophy.  As early stage investors, they don’t care about business plans (they are wrong anyway) but on two aspects: Who runs the startup and what problem to they try to solve ? I think especially for Value investors (and myself), who are very numbers driven, those aspects need to play a big role in the investment process and I plan to put more emphasis on this in the future.

Overall, you should read this book if you are interested how Venture Capital works and if you have any potential direct exposure to the start-up world (or if you want to be able to call “bullshit” on many pseudo start-up experts).

“The lean startup” Eric Ries

Where “Venture Deals” explains how to finance a start-up, “The lean start-up” is the bible for how to run and manage a start-up or any other innovative activity.

The author has been a succesful entrepreneur himself and has developed this methodology during creating his own company.

The cornerstone of the “lean start-up” is that products and ideas should be brought to the market as quickly as possible and feedback if something is succesful or not needs to be scientifically collected and reacted upon.

So instead of sitting in a room for 2 years, creating a product for 2 years and then finding out that nobody needs it, any start-up should create a Minimum Viable Product (MVP) as quickly as possible and try that out with real clients as quickly as possible. In one of the examples, the MVP for a potential online service was actually an “offline version” with the founders performing the service in person with paper and pen.

If it doesn’t work as expected, it is then necessary to “pivot” at some point and try something different instead of remaining “On track” and hitting the brick wall.

He combines his philosophy with a couple of aspects from “lean manufacturing”, like to work in “small batches”, i.e. for instance in software development not to release one big upgrade per year with many changes but to continuously implement changes.

Working in “small batches” also allows to better measure the impact of improvements and innovations. Of you change many things at once, it is not always clear which feature had which effect.

Measuring success scientifically is very important in the “lean start-up” philosophy. To be able to do so, you must have a theory what works and why and then you have to be able to measure your actions against this.

The book contains a lot of other useful tools and techniques which can be applied both, in a start-up or to accelerate innovation in a larger organisation.

Some additional observations:

I think the author hits a lot of very critical issues and bringing ideas to the market early is important. On the other hand, there are also examples of what I would call the “anti MVP”. Steve Jobs is a good example. He would never ever had come to the market with an MVP, his products always had to be perfect from day one. In many cases this enabled him to get a head start and it took a long time until competitors were able to catch up. But even Steve Jobs had his failures (Next) and it looks that without Steve Jobs, Apple really does have issues with innovation as the Apple Car project clearly shows.

Elon Musk at least to me looks also like a guy who read this book and has taken up a lot of the techniques. Clearly his Autopilot “MVP” was somehow flawed, but Musk uses a lot of the ideas in my opinion, both at Tesla and SpaceX. The same goes for Amazon. Many people still make fun of some ideas that Amazon tries and don’t work well, but this is exactly how innovation should look like according to the author. You try out new things, measure them and if they don’t work you “pivot” and move on to the next idea.

Overall I do think that “The lean startup” is an important book, at least for me it really changed my perspective on how innovation should be managed.

For  any value investor I think the most important message is that GAAP accounting numbers are not very good in measuring innovative companies. Vanity metrics like “eyeballs” neither but there are metrics which can show you if innovation is getting traction and they might not be reflected in the numbers “we” as value investors normally look at.

Overall, those two books provided a lot of new insights for me which I can apply both at my “day job” and for my value investing activities. I do think that reading these kind of books is maybe also more useful in the long run than reading the 15th book about Warren Buffett …..