Last updated on July 5, 2017
In Quora, somebody asked why Warren Buffet prefers not to invest in startups [1]. One of the answers that resonated with me was this one:
“In an interview several years back, Warren Buffet said that he does not like to invest in companies whose success is based on the smartness of its people.
His reasoning was that all companies hire from the same pool of talent, so smart people by themselves do not provide long-term competitive advantage or “moat” (because a competitor can hire the same or similar talent). He thought of a company’s processes (not just operating processes, but also processes for new product creation, developing new business models etc) as the place where its value resides.”
So, I got to think of this question:
Which is more important for business success, people or business model?
At critical extremes, the answer splits like this:
People are critical, so talented people can make any business model work.
versus
Business model is critical, so even non-talented people can make a good business model work.
The question is quintessential for startup entrepreneurship — should we be
chasing the best people or the best combination of business model parameters?
In other words, can we find business models combinations that even an idiot could use to succeed? Or, is it like most lean startup advocates argue, that any business model parameters are just guesses and the success rests only on the team’s ability to execute them?
There are examples of smart people turning around business that would have otherwise failed. There are equally examples of poorly managed companies that still thrive because they have a killer business model at place.
However, facing the market dynamics often involves shaping the business model parameters that therefore cannot be seen static but dynamic in nature. But who are the ones shaping them? It’s the people — ultimately everything in companies can be abstracted to human actions. But, without the right “recipe” of business model components at place, the actions of even the smartest people can become futile. As such, we may not be able to examine the team and business model separately – business model and people are not isolated but interacting factors.
The truth, therefore, lies somewhere in between and in the mix of both. Oftentimes in dichotomous questions like this end up in a structurally similar conclusion that was made here. Almost every time, an extreme argument can be shot down. The fallacy of believing in extremes can therefore save you time, but lead astray.
As for Warren Buffet, the explanation given in the Quora post sounds plausible — for an investor, it may be an efficient strategy to focus on business model parameters and macro-competitive factors (and finding opportunities against logical basis) instead of betting on startups with risky ideas and people.
[1] Here’s the Quora discussion: https://www.quora.com/Why-doesnt-Warren-Buffett-invest-in-startups