Much has been written of selecting an investment manager. What about managers selecting investors?
Some of my favorite authorship on this subject is from Warren Buffett in his 1960’s partnership letters. In these annual letters he repeats the concern about compounded costs incurred by employers of large institutions who overlay their own reputational risk upon the individual’s portfolio construction. The end result is nearly always under performance. A low cost index is likely to out perform. (Perhaps that’s not the goal?)
Normally, a full time manager like myself would tout wing flapping skills to rise above the general market tide in order to attract or retain investment partners. In this letter I would like to pivot in a different direction. Today I want to discuss my selection criteria of partners. Who do I want as my business partners?
If large institutions prefer the long term ignorant, cloaked in “preservation,” then I am scanning the environment for a business ownership ethos.
While the above may sound simple it grows complex as I discern the health of the overall organization. Little Engine Ventures is an amalgamation of small businesses with centralized capital allocation. We are one part investment access to the small business sector and one part manager of a singular, complex private enterprise. Stirred together these two aspects make it hard to compare us to large institutions with more popularity and large teams. Furthermore, I am unwilling (and unable) to accept investment from just anyone. They must align with our criteria. So what are those key criteria?
1. High trust level. (reduces cost and increases speed)
2. Personal experience as a business owner. (Understand price and value detach… and that’s the beginning of the profit equation.)
3. Open to periods of illiquidity
4. Inclined toward wealth and preservation
That’s pretty much it.
I use additional aspects to maintain balance within the organization. These include size of investment, percentage of ownership, portion utilizing scheduled draws, location, age, and even relationships with other partners. I must also throttle new funds against deal flow. Frankly, these discriminations are probably too numerous to list in full (some of which I’m not sure I could articulate.) My overall mission in selection is to protect the partners from each other. This service reduces potentially fatal situations from developing. Thus it helps the longest term holders preserve their equity.
Ultimately, our investors are owners who choose to expose their equity to risk in exchange for a return. We intentionally trade cash for illiquid small business equity. We expect to extract a profit over a period of several years. That sounds simple but we do evaluate more than the green hue of their cash before partnering. Frankly, it’s not just the investor that accepts the proverbial strings… it’s also me and all the other partners woven together.
I want diversity with a shared ethos. How do you select your business partners?