For more than a decade, I like many, loved to talk about, listen to and read everything I could about Warren Buffett (WEB). Constantly looking for patterns to replicate and learn from, I would brainstorm with my now partner, on how we could create the same ethos, longevity, and culture of Berkshire Hathaway. Our aspirations guided not by wealth, but by happiness.
After many years of talk, we’re now on our way. We are building the Berkshire Hathaway of Software.
Software? Why not just copy WEB? After years of study, I have yet to discover a system to copy WEB successfully. In fact, over time, I have realized that some of his favorite patterns are becoming less applicable today. Take for example investing in brands. One of the great lessons from WEB is to pay up for durable brands that can maintain their margin and not be commoditized. He’d often challenge his audience to find a business that has maintained its margins for 25 years, almost always the answer was a brand (or a regulated moat).
But ask yourself, is a brand today worth as much as yesterday?
We as consumers and small businesses are far more comfortable exploring beyond the big brands that we grew up on. Have you bought something that showed up in your Instagram feed recently…trust me if you haven’t, your kids have. Have you subscribed to a product online like pet food that shows up at your door monthly instead of getting in your car to drive to PetSmart and buying the brand you grew up using?
Brands used to signal something about who we were and our aspirations but now our social profiles (Instagram, FB, Twitter etc) brand who we are and want to be. We validate the quality of products not by the logo but by the 1,000s of reviews on Amazon.
I’m not arguing that Berkshire is at risk or that Mr. Buffett is no longer great, but rather suggesting that the next Berkshire will not be built the same way that Buffett and Munger did it.
“When Berkshire came up, we had an easier world than you people are facing this point forward, and I don’t think you’re going to get the kind of results we got by just doing what we did. That’s not to say what we did and the attitudes that we had are obsolete or won’t be useful, it’s just that their prospects are worse. There’s a rule of fishing that’s a very good rule. The first rule of fishing is “fish where the fish are”, and the second rule of fishing is “don’t forget rule number one.” And in life it’s the same thing” — Munger, 2018
So, tell me, why the Berkshire Hathaway of just Software? Because with all the disruption in today’s world, the changing nature of moats (networks vs high fixed costs, social proof vs brands, etc.), we have found software to be the ONLY business model we think a 30-year-old Warren Buffett would invest in. When you dig beneath the surface, these businesses have everything on Buffett’s wish list.
Wait…but WEB hates technology? Buffett doesn’t like technology because it changes fast, making it hard to predict. That’s not the software we’re talking about. The software we focus on, is the type of mission-critical service that acts as the backbone of a business; where there is no benefit to switching and the product delivers far more value than it costs.
It is not the buzzword stuff (Crypto! Artificial Intelligence! Autonomous cars!), but rather a core part of your day to day business life.
Take for example the software used to run a dental practice. It is often integrated into the dentists’ scheduling program, payroll program, billing software and 10 other systems. Once installed the chance of that product being removed is very low (~2% to be exact) because changing products does not offer the dentist any incremental benefit and the switching costs are extremely high. The beauty here is that so long as the software continues to get better, customers won’t leave, allowing the founder to have 98% of last year’s revenue come in on day 1 next year …before he/she has spent a dollar on sales and marketing.
But that’s just the beginning …If you do a great job delivering value to customers, you can even raise prices a little bit each year — WEB often says the definition of a great business is one that can raise price. So in summary, we are talking about a business that can keep its customers for decades, maintain high margins, can potentially raise prices AND find places to reinvest >>> That’s a Berkshire Business.
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” — Buffett, 2011
Prove to me that software is the best business? Data?
We’ve posted HERE why we think software is the perfect Berkshire business.
If other people have figured this out, what’s left to do?
After studying investors in the software space, we realized that almost everyone is focused on larger companies, within sexier parts of software and they uniformly have very short time horizons. Most investors make decisions that maximize value in the short run, not for the decades that follow. They are not bad people, it is just how the incentives are structured. Private equity is scouring the earth to find the next business to buy, add debt to, cut cost and flip. We call this renting, and it’s not in our DNA. That strategy looks to extract value from the business…we want to add value.
So what is the action plan?
We’re going to find smaller niche software businesses, that have developed a product that customers depend on and work with the founders to help them grow and eventually transition. We spend a lot of time understanding the history of every company’s journey so that we can show great respect to the legacy and people who helped get the business to where it is today. In our book, success in business is survival and we never lose sight of that fact.
Our edge is finding these types of businesses and founders, where the product and team are just a part of DNA of the founder. We then commit capital, never look to sell, and spend countless hours working with the management team to help them tackle their hardest issues (sales growth, hiring, efficiency etc).
We believe that our patience (no time horizons), focus on reinvesting for the future (not maximizing short-term results) and ultra-focus on software (no distractions), provide a world of differentiation from the alternatives.
So why you?
We’ve lived it. I started a financial software business when I was 26 years old. We built an amazing team, scaled to serve some of the largest financial institutions in the world (even governments!) and became the dominant player in our small corner of the world. I know very deeply the challenge of landing your early customers, the loyalty to early employees, the struggle to keep everyone happy and the importance of building & maintaining a great culture.
My company also took private equity money. I saw the advantage of big pockets and experience, but also the challenges around short term focus and constantly chasing an exit. I felt the pain of making changes that my gut knew were wrong and learned what it was like to say goodbye to an entity I gave my blood, sweat and tears to.
That is why we created Tera Holdings; to be stewards for the next generation, not renters of a business to make a return. Our belief is that the keys to this success will lie in the scar tissue created from years of operating — not in the 160th row of an excel spreadsheet.
How will you help?
After having spent a year getting on 60 plane rides and meeting 100+ software founders, I have come to realize that Tera adds value in a few major ways to software founders:
- A Strong Home — We have immense respect for the heritage and legacy of every business. We understand the personal dynamics, unique cultures and emotions that go into a transition. Our goal is to be the home that creates a smooth transition and sets a path for multi-decade growth.
- Sales! Every company I have met in my life wants more sales. In fact, what we’ve found to be most valuable in our conversations is our sales playbooks. We have spent so much time operating and investing in software, that we know the levers to scale a sales force, build best in class lead generation, fine-tune commission structures and most importantly: bring a culture of process + data to sales. Sales is NOT easy, and we pride ourselves in helping founders grow their businesses with tried and true playbooks.
- Simplicity — We are easy to work with. Our goal is to be simple and straightforward. The term sheets come in English, not in legalese. We move quickly. We share our analysis as we learn about the business, this is valuable for founders even if they decide not to work with us.
- Respect — We have been privileged to learn from some incredible minds/mentors over our careers. This was a function of luck not skill. We believe that respect is earned via experience, not bank accounts.
At our core, we believe our intense focus (software), long-term commitment (permanent home) and operating focus (scar tissue) are true differentiators in a world flooded with people chasing a quick buck.