Bill Sahlman and Joe Lassiter deserve to be enshrined at Harvard Business School. Choose any entrepreneur or VC across the country and ask if they know one of the two - if he went to HBS odds are that he does and that he sought out advice from one of the two at one point or another. Bill and Joe helped bring the education of entrepreneurial finance to a generation of graduates. For those lucky enough to take their classes, it informed decisions for decades.
Despite the fact that I think about their lessons in entrepreneurial management regularly, one idiom echoes in my head more than any other. Every day, I find myself repeating - "Buy Right, Operate Right, Sell Right."
I remember the first time I heard it. Joe Lassiter was finishing up a class on raising and managing a Search Fund (a financing vehicle that would help young operators find, acquire, and ultimately operate businesses). The case used to teach the class was about the acquisition of an industrial company that made components used in military trucks. Despite the business being operationally complex and traditionally low margin, the entrepreneurs in question managed to buy the company for a fairly low price prior to the 2001. After the US entered Afghanistan and Iraq, volume grew enormously, helping the company make a pretty penny for shareholders.
After chronicling all the challenges in the industry, all of the trials and tribulations of the former operator, I remember Joe Lassiter telling us that we always needed to “Buy right. Operate Right. Sell Right.” And he went on to say that the only thing we could control at the beginning of an entrepreneurial journey was buying right. The two alumni who had started the search fund in question did that. They bought at a low price and rode a tailwind upmarket.
In Silicon Valley, we don’t spend a lot of time talking about industrial businesses. But despite our obsession with rapidly scaling software businesses, those unsexy, lower growth, businesses offer some critical insights. In this case it was that investing in businesses is a actually a fairly rational thing. You can plan for all the synergies in the world. You can forecast out incredible growth. You can model out any number of exit scenarios. But when it comes to investing in businesses, the only thing you can be certain of at the beginning of the journey is your entry price. If you control it well, the benefits are enormous.
Despite the strange economics of software, this dynamic is always in play. Angels can make a pretty penny on an early acquisition if they buy right. Early employees can get screwed on options if they don’t. Buying wrong is what lets investors assemble funds full of big name logos but still yield negative returns for their LPs.
And although you can always grow into a valuation, if you buy right, you don’t necessarily have to.