Think Like an Owner Podcast Interview

At Greybull, we love situations where our co-owners managing our investments think like owners — because they are owners. It is a wonderful situation. I recently had an enjoyable conversation with Alex Bridgeman who has a podcast titled “Think Like an Owner” — it is worth checking out that episode and the entire podcast.

Here is a link to the podcast.

Most Companies Not Best Served by Silicon Valley Venture Capital

Most young companies are not well served by capital of the “Silicon Valley venture capital” variety. That has been a common theme of mine over the years, and is a founding hypothesis of my investment fund, Greybull Stewardship. Sometimes this is most obvious to the people who have succeeded with Silicon-Valley-type venture capital—they know firsthand when it is great and when it is not. It is great if you are an obvious billion-dollar idea, where fast scaling will make all the difference. Other than that, it’s like putting rocket fuel into an off-road jeep—it’s just a bad fit. There is nothing wrong with traditional venture capital; it’s just not for everyone.

Birchbox Founder: VC Misaligned With Many Companies

Haley Barna co-founded beauty cosmetics company Birchbox in 2010. She raised tens of millions of Silicon Valley venture capital for Birchbox, grew it to more than a million monthly subscribers, and then became a Silicon Valley venture capitalist herself at First Round Capital. In an interview with Fortune on April 25, 2018, a quote caught my eye.


: Do you ever tell founders they don’t need to raise venture capital?

Barna: All the time. The venture-backed startup path is such a big part of society in this zeitgeist right now that it’s attracting people that it’s not the right fit for. There’s a lot of really good businesses that can be built without venture, and you never want to be misaligned with your investors. I make it very clear that we’re interested in companies that can be $1 billion or more one day. This means I say “no” all the time to founders who are working on businesses that could be really great “couple hundred million dollar” companies.


Just Do It: Shoe Dog Shares Deep Stories of Business

Wonderful business stories

Attending the Berkshire Hathaway annual meeting this past weekend reminded me of Buffett’s book recommendation of “Shoe Dog” by Nike’s Phil Knight a couple of years ago. “Phil is a very wise, intelligent, and competitive fellow who is also a gifted storyteller,” said Buffett. That is an understatement—the book was amazing! Part of what made it so good, I think, is that Knight was willing to reveal the deeper struggles facing any business that people sometimes want to hide for fear of looking less successful. Knight told deeply personal stories of finding financing in the nick of time, managing imperfect relationships with partners and employees, selling things he wasn’t sure he could deliver, making errors in setting up his overseas factories, and striving to be a good husband, son, and father. If the mighty Nike and Knight had these challenges and still managed to build such a hugely successful company … The memoir is a gift of inspiration to the rest of us that we can overcome our own challenges.

Business Is More Than Just Business

Most entrepreneurs and people in business know that the work is about more than just profit. Knight touches on that spirit throughout the book, and does a great job of capturing how a life’s work in business is so much more than numbers and profit. One quote from Knight: “It’s never just business. It never will be. If it ever does become just business, that will mean that business is very bad.”

Another quote: ” . . . for us business was no more about making money than being human is about making blood. Yes, the human body needs blood. It needs to manufacture red and white cells and platelets and redistribute them evenly, smoothly, to all the right places, on time, or else. But that day-to-day business of the human body isn’t our mission as human beings. It’s a basic process that enables our higher aims, and life always strives to transcend the basic processes of living—and at some point in the late 1970s, I did, too. I redefined winning, expanded it beyond my original definition of not losing, of merely staying alive. That was no longer enough to sustain me, or my company. We wanted, as all great businesses do, to create, to contribute, and we dared to say so aloud. When you make something, when you improve something, when you deliver something, when you add some new thing or service to lives of strangers, making them happier, or healthier, or safer, or better, and when you do it all crisply and efficiently, smartly, the way everything should be done but so seldom is—you’re participating more fully in the whole grand human drama. More than simply alive, you’re helping others to live more fully, and if that’s business, all right, call me a businessman.”

Press On

One last quote: “God, how I wish I could relive the whole thing. Short of that, I’d like to share the experience, the ups and downs, so that some young man or woman, somewhere, going through the same trials and ordeals, might be inspired or comforted. Or warned. Some young entrepreneur, maybe, some athlete or painter or novelist, might press on.”


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Investing Errors Come From Psychology, Not Information — Charlie Munger (2 of 2)

“A latticework of mental models” describes ways that Charlie Munger sees intelligence and wisdom. Mental models describe more than simple IQ, or Intelligence Quotient.

Munger Avoids Investing Errors by Many Mental Models

avoid investing errors

Mental Models in a Lattice

Munger believes a wise person is best served by 80 to 90 mental models from a variety of disciplines including science, engineering, biology, and more.  As we explored in my last blog post about Howard Marks, Charlie Munger pulls a surprising number of these mental models from the field of psychology that are important to investing success.

Munger’s “second level” analysis uses the models of psychology, human emotion, bureaucratic forces, and more. These become more relevant to an analysis of why an investment may be a good opportunity.  These mental models suggest when investments may be mispriced by others in the investment community.

Mental Practice Makes Perfect

Mental models are more than rules of thumb, but good ideas based on objective science and math, and then practiced.  In the book, “Thinking, Fast and Slow” Daniel Kahneman writes: “the accurate intuitions of experts are better explained by the effects of prolonged practice than by (rules of thumb).”

Faced With A Difficult Question, Avoid Answering Another

Similar to the mental discipline developed by Howard Marks and Munger, Kahneman gives us some mental models and pitfalls to avoid when making decisions: “when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.” That sloppy substitution he calls intuitive heuristics and they can be both quick and wrong.  Business needs both fast and slow thinking but knowing the correct question comes first.

In the book “Thinking, Fast and Slow” he also emphasizes the importance of understanding statistics.  Kahneman tries to explain “why is it so difficult for us to think statistically?” We can think in metaphors or stories but there’s a puzzling limitation in our mind when numbers contradict what we believe we know. We have an unfortunate tendency to treat problems in isolation, not in their actual context.”  Statistics can force us to see the context. Statistics can show when what we believe we know to be false.

Munger’s Mental Models Against Investing Errors

Here are some of the psychological mental models that Munger has mentioned:

  • Social Proof.  Most of us are more comfortable in a crowded restaurant. We are more likely to believe the food is good when we have the social proof.  This exists in many other things.  Venture capitalists, for example, are famous for needing social proof for where they are placing their bets, even when that is probably one area where social proof is not very helpful.
  • Confirmation Bias.  We often overweight observations that confirm our existing beliefs.
  • Consistency. We use actions that helped us before.  When we have done something and it worked, we are likely to keep doing that action even when circumstances have changed.
  • Reciprocation Tendency.  This is the tendency to want to pay back someone who has done something for you.
  • Authority.  Most of us are trained to defer to authority.
  • Scarcity. Most people desire objects that are hard to obtain.

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Investing Errors Come From Psychology, Not Information — Howard Marks (1 of 2)

When two giants of investing, Charlie Munger and Howard Marks, emphasize a similar theme, it pays to take note.  It is interesting to me that they, and many other investors, eventually move well beyond the quantitative analysis of business to the “second level” of psychology, emotions, and other very human characteristics of a situation.  “The biggest investing errors come NOT from factors that are informational or analytical. But from those that are psychological,” writes Howard Marks. As chairman and co-founder of Oaktree Capital Management, he manages a Los Angeles-based investment firm with $80 billion under management. His book, The Most Important Thing, Uncommon Sense for the Thoughtful Investor” comes from Columbia Business School publishing.

investing mistakes

Howard Marks

Where Come Opportunities?

“Inefficiencies — mis-pricings, mis-perceptions, mistakes that other people make — provide potential opportunities for superior performance,” writes Marks.  He holds a Bachelor’s Degree in finance from the Wharton School and an MBA in accounting and marketing from the University of Chicago.

“Exploiting (these mistakes), is, in fact, the only road to consistent out-performance. To distinguish yourself from the others, you need to be on the right side of those mistakes” he writes.

Where Come Mistakes?

So, “Where do mistakes occur? asks Marks. “Investing is an action undertaken by human beings, most of whom are at the mercy of their psyches and emotions.  Many people possess the intellect needed to analyze data, but far fewer are able to look more deeply into things and withstand the powerful influence of psychology.”

Again, “Many people will reach similar cognitive conclusions from their analysis, but what they do with those conclusions varies all over the lot because psychology influences them differently.  The biggest investing errors come not from factors that are informational or analytical.”

Marks Quotes Munger on Investing Errors

Then Marks quotes the one who sits at the Berkshire Hathaway table with Warren Buffett, Charlie Munger who quotes Memosthenes: “Nothing is easier than self-deceit. For what each man wishes, that also he believes to be true.”

Charlie Munger, the Vice Chairman at Berkshire Hathaway, and a huge, still unrecognized force behind the success of Berkshire Hathaway, has often written and spoken about similar things.  The importance of “psychology” in investing to Munger is explored in next week’s post.

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Bootstrap Companies Succeed Without Big Venture Capital

Five out of six of the fastest growing companies in the US grow with capital from sources other than traditional venture capital.  How about the banks? Talked to an entrepreneurial banker lately? Didn’t think so. Bootstrap companies are creative in finding capital, often out of simple necessity.  This often creates stronger companies because an abundance of capital did not allow them to delay addressing their flaws.

Capital Imbalance in Need-vs-Supply Creates Contrast to Larger, Publicly-Traded Companies

The chart here shows research done at Pepperdine University on the capital shortage for smaller companies.  My fund, Greybull Stewardship, works to fill this need for capital that is not being met by traditional venture capital and private equity funds.

Bootstrap Offers More Opportunities

This dynamic among smaller companies stands in stark contract to the dynamic for larger and publicly-traded companies.  Since 1997, the quantity of publicly traded companies has fallen by half, to 3,200.  While the quantity of dollars under hedge-fund management has increased by 2,500%.  It is no wonder that hedge funds have under performed lately. So much capital chases so many fewer publicly traded companies.  If an investor seeks an edge, she can more likely find it in the smaller valuations. An edge in the larger valuations now becomes harder to find.

Traditional Private Equity and VCs Can’t Exit So They Don’t Enter

Bootstrapped company owners have the traditional problems of growing companies — expansion opportunities, family wealth diversification. But they don’t have the traditional sources of investment capital. And, those traditional sources also may not be aligned mutually with objectives for growth rates, exit timelines, governance, and more.  At Greybull Stewardship, our goal continues to be the perfect capital partner for bootstrapped companies. And then we place as few restrictions on the company as possible from the fund.  We grow as it makes sense. We do not force a sale on an artificial timeline.  Greybull does this because we started out as company founders, not investment bankers. We believe that providing this freedom to pursue the best strategy for the company leads to the best long-term financial returns for ourselves and our investors.

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Roger Murphy’s Significant Life & Murphy Business Brokerage

Murphy business brokers

Roger Murphy

Living a significant life that has a significant positive impact on others is a great accomplishment.  I believe that the investments of Greybull Stewardship are a force for good in the world and have a significant positive impact.  That is certainly true for business brokerage generally, Roger Murphy, and Murphy Business.

Roger Murphy, the founder of the leading business brokerage firm, Murphy Business, had that type of significant impact before he passed earlier this winter.  Greybull Stewardship invested alongside Roger in Murphy Business starting in 2014 and increased our ownership in subsequent years.  We were honored to know him. And to be business partners with him for a few years.

Contributing and making places for others

One of the leaders of the Murphy organization in the Mountain West for a number of years was Ezra Grantham.  Last year, Ezra wrote a wonderful note to Roger about the significant impact that Roger and his organization had on many people.

Hi Roger, I thought I would touch base and give you some reflections I have:

They did a survey of a group of senior citizens in the last part of their lives to determine what their worst fears were? They expected fear of a lack of enough money to finish out, or fear of poor health would be at the top. To their surprise the number one fear was ” a lack of significance.”  Either that they had not done anything significant in their lives , or were no longer significant to anyone else. When they were gone nothing would be left behind and they would be soon forgotten.

Recruit and mentor others

With you and Murphy Business I see the opposite. You have not only lived ( and are living) a significant life, but you are contributing and making it possible for so many others to do so as well. In my own case in the 8-9 years I was fully active with Murphy I earned a nice sum in commissions and then sold out for a nice multiple. All made possible by you and the system you set up. More importantly than that was being able to recruit and help mentor some other good folks who will have their own story to tell. For all of us it’s more then earning a living . It’s the pride we have in having the tools and backing to do a good job for our clients and the pride we have in being able to feel like we have been successful ( significant in some way).

So my hat is once again off to you  my friend. You have been significant in my life and I thank you once again for all you have done for me. Have a great convention and KEEP UP THE GOOD WORK! 🙂 Ezra

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Founder-Led Companies Return Three Times S&P 500 Average

A study in 2016 from Bain & Company shows that over the past 15 years “founder-led companies deliver shareholder returns that are three times higher than those of other S&P 500 companies.”

Therefore, we at Greybull Stewardship focus on those founder-led, or founder-involved, companies. We study how they are conceived and managed. And we study how best to support founder-led companies with capital and with support for their growth and long-term prosperity. We have written here about how founders need better financing options.


Movie poster for The Founder featuring Michael Keaton

Founder-Led Companies Crucial for the Economy

Bain’s Chris Zook and James Allen write: ‘‘The Founder,” a new film starring Michael Keaton, tells the story of McDonald’s Corporation founder Ray Kroc as he turns a few small restaurants into a ubiquitous international chain. It’s a tale of founder-driven corporate growth. Something that has become too rare today. This breed of entrepreneurial spirit makes for a good story. But it’s also crucial for the economy.”

Continuing, Zook and Allen write: “We analyzed examples of sustained success at 7,500 companies in 43 countries, visiting many in person, to determine what made them stand out. Great founders imbue their companies with three measurable traits that make up what we dubbed ‘the founder’s mentality.’”

“First, insurgency: The founding team declares war on its industry on behalf of under-served customers. Mr. Keaton’s Kroc announces in the film that the McDonald brothers’ fast-service approach is akin to revolution.”

“Second, an obsession with how customers are treated—an attention to detail that borders on compulsive. In his autobiography, Kroc discusses not only burger patties, but even how high they could be stacked and the amount of wax on the paper slips between them.”

“Third, these companies are steeped in an owner’s mind-set. Too often in business, the founder’s vision becomes distorted. Managers seek short-term profits by cutting corners, alienating customers and employees. Companies that maintain the founder’s mentality constantly reassess internal spending. But their goal is to root out bureaucratic barriers to free up underused cash. Kroc was able to create an army of mini-founders by perfecting the franchise model.”

Founder Mentality Creates 50% of the Stock Market’s Value

Moreover, Zook and Allen emphasize: Those companies that continue the founder’s mentality “create more than 50% of the net value in the stock market in any given year.”

In summary: “Too few companies have a driven founder at the helm. An owner’s mind-set governed by a sense of insurgency and a front-line obsession are what’s needed to turn America’s anemic recovery into a turbocharged one.”

Similarly Zook and Allen published research in July 2016 saying “that of all newly registered businesses in the U.S., only about one in 500 will reach a size of at least $100 million in revenue. A mere one in 17,000 will attain $500 million in revenue and sustain a decade of profitable growth. Despite their rarity, these successful firms are a bedrock of the U.S. economy.”

Zook and Allen, partners at Bain & Company, wrote “The Founder’s Mentality,” and published these comments in 2016 at Harvard Business Review Press.

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Investment Asset Class Taking Shape: Smaller, Fast-Growing, Backed by Not-Traditional-VCs

Harvard Business School now catches up to a business trend my investment fund, Greybull Stewardship, has been focusing on for years — the increasing frequency of great businesses that have gotten to nice levels of profitability ($1-3 million) by bootstrapping (i.e., no traditional institutional venture capital).  In the Wall Street Journal just before Labor Day weekend, Harvard Business School Dean Nitin Nohria wrote an Op-Ed titled “Appreciating the Big Role of Small Business.”  “The most visible manifestation of Harvard’s increased focus is a class called Financial Management of Smaller Firms . . . MBA students learn in the course how to seek out, purchase and run small companies,” Nohria writes.

“The class has become so popular that we now offer three sections a year, with a wait-list clamoring to get in.”

Best Investment Class in Private Equity

To me, this asset class of smaller, fast-growing, not-traditionally-vc-backed companies is the most attractive investment in private equity or venture capital.  In this category are strong, fast-growing businesses that avoid the start-up risk of an ‘all-or-nothing roll-of-the-dice venture capital’ while achieving attractive returns.  The businesses are also less expensive than traditional, larger private equity acquisitions because of the inefficiencies of finding them.  This is a recipe for attractive investment returns, particularly on a risk-adjusted basis.  As a result, Greybull Stewardship is in the top quartile of venture capital returns according to Pitchbook — giving greater than 20% net IRR’s since inception.

My hypothesis in Greybull Stewardship is that the quantity of these business has grown larger than people expect, and grows faster now.  They grow because it costs less to start-up attractive businesses (overseas programmers, Amazon Web Services), plus more information and education are available easily to these entrepreneurs, and it is easier for these firms to access and distribute to larger markets immediately.  All of these efforts were much more expensive years ago, and often necessitated traditional venture capital investment for the companies to reach scale.  That is no longer true.

Advantage of Greybull Stewardship for Investors and Investee Companies

For investors, there are three ways to take advantage of this attractive investment class: a) buy a business yourself, b) back a search fund (see below for links about search funds), or c) invest through an investment vehicle like Greybull Stewardship.  Buying a business yourself has obvious downsides and headaches.  Most importantly, one would not be well diversified which is critical in this asset class.  I also think that Greybull Stewardship is much better set-up to invest in the most attractive of the companies in this asset class — much better set-up than the most obvious other option, search funds.

This is because search funds have three major flaws that all increase their risk: a) by definition they change the management team (risky in and of itself) and therefore only attract sellers who fundamentally are bailing out of their business for some reason, b) their goal is often to “fundamentally alter their [the companies’] trajectories” according to Nohria, which is often difficult and risky, and c) they must also time everything just perfectly to sell themselves again in a few, short years (per the search fund agreement with investors), which also increases risk.

For potential investee companies, Greybull is a much better choice for the best of the companies with a management team who wants to stay at the company, who has a lot of equity and who wants to keep a significant amount, and who doesn’t want to be forced to exit the company in the future on a time frame that may or may not be best for the business or for minority owners.

As the investment world continues to expand, I think this trend is healthy for investors identifying newer categories and sub-categories of venture capital and private equity.  It is a natural evolution.

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Culture Eats Strategy for Lunch

The massage school where I am a co-owner, the National Holistic Institute, recently had our annual all staff gathering in Northern California.  wowIt is a big investment, but also a critical culture investment to get everyone on the same page.  In a school, the interactions every day among students, staff, and the public number in the thousands or tens of thousands.

There is no way to train or provide an employee handbook to handle all of those critical interactions.  The only way to do it is to get on the same page with culture and values — what we like to call the unwritten understanding of how we do things.

This year, we had an observer, Drew Sanders, an expert on business management and building high-performing teams.  Drew has joined us here at Greybull Stewardship to assist the management teams at our companies when called upon.  In his email newsletter, here is how he described the meeting.

Is Your Culture a WOW! Or a Whatever? by Drew Sanders

One of the benefits of helping companies work on turning groups of people into teams is that you get to visit a wide variety of settings and environments. A recent trip to a professional college had us buzzing and prompted the above title. This team of 125 teachers, administrators, and service staff were on fire from the very beginning of the two-day long all-hands meeting all the way until the end.  Every member of the team was making a sacrifice to be present, and the business itself was closed the entire time. Thinking of the total cost to the enterprise would make most owners blink, yet like clockwork for years these days are reserved to fill up the tanks of the people that make the company tick.  If your current culture is more of a Whatever these days than a Wow, see if implementing a few of these tips we gleaned will help.

An initial idea to consider is having a common way to signal the end of a situation or event. Most companies will have gatherings, and even with the best clock management they can run long. With attention spans waning you increase the chances of having the end of your meeting being a dud, which sends your people scattering and potentially lacking vigor. Consider having something everyone does together to officially signal moving on to the next task. Think of a football team clapping their hands as they break the huddle. Your group should have its own authentic act, but as corny as it sounds it brings your people together.

Another tip is to allow your long standing employees to talk about their experiences at the company. You will be shocked at how seriously they will take this, and it signals to everyone that commitment to the company is honored and appreciated. You needn’t have a perfect culture to accomplish this, and the people you are honoring will have had challenges along the way. Regardless, this ceremony binds your people to each other and your enterprise.

Finally, give your new employees a chance to answer a few key questions in front of the group, and make sure they are made to feel very welcome. One of the questions can be serious enough to let the entire group know that not just anyone qualifies to be on this team, and we are all looking to make a contribution. We really liked the question; what do you intend to contribute to our purpose, mission, and objectives? As newcomers stand in front of a group of warm fellow teammates and are given a resounding ovation after they share their answer, you are well on your way to having a culture of Wow vs Whatever.  Here is a short video about how Zappos built a culture of Wow in Las Vegas where the call center employees are motivated to keep customers on the phone longer….

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