Chapter 80 - The First Venture Capitalist: Georges Doriot on Leadership, Capital, & Business Organization
Today’s Chapter is based on the book “The First Venture Capitalist: Georges Doriot on Leadership, Capital, & Business Organization” by Udayan Gupta.
Previously on Georges Doriot:
Here’s what I have learned:
Cultivate Imagination
“Creativity is thinking up new things. Innovation is doing new things.”
— Theodore Levitt
As we have learned previously, Georges Doriot is well-known for being called the “father of venture capitalism”. As a renowed professor at the Harvard Business School, he shared with his students timeless wisdom on the art of business management that remains profoundly insightful even today.
One of the key tenets in Doriot’s philosophy of business management is the belief in the power of imagination and progressive thinking. He once said that “the growth of a company, a country, or indeed a community depends on the vision and enterprise of its people.” As a matter of fact, Doriot explains that true innovation and progress not from mere adherence to established norms, but from the ability of business managers to challenge the status quo and envision new possibilities.
In terms of products development, he encouraged his students and business managers to look beyond the surface-level characteristics of products and services, and instead, delve into their fundamental functions and requirements. This deep understanding, coupled with a willingness to experiment and improve, was the cornerstone of Doriot's approach to business management.
"First, you must train yourselves to be imaginative. You must look beyond to see objects which you can improve. To do this, you have to realize the needs for which the object is made. In other words, you have to determine the functional requirements of the object—learn to think about how it was made, why it was made, who is going to use it, and how it is going to be used. Then on the basis of these functional requirements try to see how you could make the object better in a different form and different material. Be critical of what you see but do not stop at criticism. Attempt to improve."
— Georges Doriot
This reminds me of the concept of “common people doing uncommon things” that we have learned from Henry J. Heinz. Heinz once said, “to do a common thing uncommonly well, creates success.” And, as such, as the founder of the H.J. Heinz Company, he was always looking for ways to improve on the company’s manufacturing process and on the quality of its products.
In my opinion, one reason for Heinz’s success as an entrepreneur was his ability to recognize facts as the truth even when they are exceedingly uncomfortable. In fact, whether it was an office boy or a partner, he always had the time to listen and to discuss about new ideas on how to improve his business. And more importantly, Heinz had great satisfaction in training his employees to achieve uncommon things “in passing on a new idea, or in promoting a new method, that would make for the greater comfort of men as well as for efficiency.”
“Find your man, train your man, inspire your man, and you will keep your man.”
— Henry J. Heinz
Finally, Doriot was a staunch advocate for long-term thinking in business. He was critical of the short-term focus that often dominates corporate decision-making, particularly the emphasis on quarterly reporting and stock market performance. Instead, he encouraged businesses to make decisions based on long-term growth and stability, because it is only by doing so that you can cultivate imagination and innovation among the company.
As Doriot once said, "Therefore, having to make a choice between pleasing people with temporary interest vs. pleasing people with a long-term interest is an easy decision from my standpoint. I suggest that our companies be judged on the basis of at least a year's work. In our line of work, it is better to be industrially oriented than stock-market oriented."
This is especially true considering the importance of strategic planning and foresight in business management. As a matter of fact, especially in today’s rapidly changing business environment, companies that think long-term are usually better positioned to navigate uncertainties and create sustainable value.
"If you need money you never thought you would need, you are a washout. You must first build up a relationship with the banker so that he trusts you and then you must have laid the groundwork for borrowing on the basis of wise forecasts."
— Georges Doriot
As we have previously learned from Jeff Bezos, it is primordial for business managers to have a long-term vision. As he once said, “Long term thinking is both a requirement and an outcome of true ownership. Owners are different from tenants. I know of a couple who rented out their house, and the family who moved in nailed their Christmas tree to the hardwood floors instead of using a tree stand. Expedient, I suppose, and admittedly these were particularly bad tenants, but no owner would be so short-sighted.”
Bezos also mentions that it is primordial to be long-term focus in order to cultivate innovation among a company. He explains that the fact that Amazon had long-term thinking shareholders allowed him to make constant innovations, despite having failures from time to time. He was able to be aggressive in making investment decisions where he had an opportunity in gaining market leadership advantages even when he knew that some of his investments would not pay off.
“We like to invent and do new things, and I know for sure that long-term orientation is essential for invention because you’re going to have a lot of failures along the way.”
— Jeff Bezos
The Marshmallow Experiment
This idea that long-term vision can enhance innovation reminds me of the Marshmallow Experiment, where Professor Walter Mischel would bring a child into a room and sit them down at a table. On the table, he would place a single marshmallow. Then, he would tell the child that they could either eat the marshmallow right away, or they could wait for a little while and then they would get two marshmallows instead of just one.
The child would then have to sit there and try to resist the urge to eat the marshmallow, even though it was right in front of them and it probably looked really, really delicious. Some kids were able to wait the whole time and then got the two marshmallows as a reward. But other kids just couldn't resist and ended up eating the one marshmallow right away.
The experiment proved that the children who were able to wait and resist the temptation were different from the ones who couldn't wait. He found that the kids who were able to wait tended to be better at things like focusing, solving problems, and making good decisions later in life.
Stay Informed
“A wealth of information creates a poverty of attention.”
— Herbert Simon
In Doriot’s view, the successful management of a business requires more than just technical expertise or domain-specific knowledge. The true mark of a capable business leader is the ability to access and leverage the right information at the right time. As he once said to his students, "I do not expect you to know many specific facts but I will insist that you know where to find them. Furthermore you must have enough general information to stay abreast of new business developments.“
As a matter of fact, this emphasis on information literacy and continuous learning was a fundamental tenet of Doriot’s approach to business management. He recognized that the ever-evolving landscape of industries, technologies, and market trends demanded a dynamic mindset that could adapt and respond to new information. By nurturing this skill set, Doriot believed that business leaders could make more informed decisions, anticipate challenges, and seize emerging opportunities. In an era of rapid change, the ability to quickly access and synthesize relevant information is a crucial advantage that could propel organizations forward.
"You must realize that every day many people are working hard to make obsolete all that you have done so far. If you have invested a lot of money in a big, new plant, you have to understand that before it is complete the scientists will have started to work on projects which might make this plant almost worthless."
— Georges Doriot
In fact, Doriot explains that in order to stay ahead of the curve, one must take a proactive approach to learning new information and insights. In order to do so, he advices that you “should spend a full evening every two weeks, either alone or with a group of friends, discussing new scientific developments. You must use this time in order to get a feel. But do not rely on scientists or technical people to help you size up the business implications of new findings. The business feel is something which you yourself must develop."
Doriot reminds us that this is the only way in order to avoid uncertainty which is a business killer:
"Remember that the thing which kills you in business is uncertainty. To prevent uncertainty in the field of technological evolution, you must have a hunch about these new developments. In the field of science, you cannot predict. You cannot aim at a definite goal. You can only have the sense of direction."
— Georges Doriot
This concept reminds me of what we have learned from Andy Grove on the power of paranoia. As the former CEO of Intel, Grove was known for his unrelenting focus on staying ahead of the competition and anticipating the next big shift in the technology landscape. At the heart of Grove's philosophy is the idea that healthy paranoia is an essential quality for business success. As he once said, "I believe in the value of paranoia. Business success contains the seeds of its own destruction." This notion may sound extreme, but Grove's logic is hard to refute. In fast-moving, hyper competitive markets, complacency is the main reason for the downfall for even the largest companies.
This risk comes from the fact that when companies are doing well, the leadership teams can become complacent as they fail to recognize the warning signs that the industry is slowly changing beneath their feet. Grove saw this dynamic play out time and again, as once-dominant players in the tech sector found their fortunes suddenly in free fall.
Furthermore Grove believes that it is important for a company to understand and to identify any “10X” factor, a concept he uses to describe dramatic technological or competitive inflection points that reorder the entire industry.
Grove explains the “10X” factor as the following:
“Technology changes all the time. Typewriters get better, cars get better, computers get better. Most of this change is gradual: Competitors deliver the next improvement, we respond, they respond in turn and so it goes. However, every once in a while, technology changes in a dramatic way. Something can be done that could not be done before, or something can be done "10X" better, faster or cheaper than it would have been done before.”
— Andy Grove
Grove mentions that, instead of waiting patiently for strategic inflection points, companies and business managers should be constantly on the lookout for these “10X” factors events and be prepared to adapt accordingly. He mentions that even by reading the newspapers, one can identify potential strategic inflection points through a “10X” lens.
As a matter of fact, in Grove’s opinion, it would be ill-advised for a company to not look for ways to outperform your competitors especially if you aren’t the industry leader. As he once said, “A far superior competitor appearing on the scene is a mandate for you to change. Continuing to do what worked before doesn't work anymore.”
People-Centric Approach
“Four Seasons is the sum of its people—many, many good people.”
— Isadore Sharp
Another tenet at the heart of Doriot’s business management philosophy lies a deep appreciation for human capital. As a matter of fact, he firmly believed that a company’s greatest assets were its people and their ideas. This people-centric approach was not just about hiring talented individuals but also about nurturing and developing them to reach their full potential. As he once said, "My pattern for successful business leadership is simply this: act like a teacher and an educator. The best teaching is based on a good example and you must be able to set this example in order to help those with whom you live and work."
Doriot mentions that it is primordial for management team to hire the right people and to learn how to motivate and evaluate them once they are in the company. As he once said, “I want you to have an ability to pick and lead people in such a way that they will do things they did not think they could do. This is the quality of a great business leader.”
"Men and ideas are our assets. Their measurement and evaluation are our problems."
— Georges Doriot
Furthermore, Doriot’s people-centric approach extends beyond employees. In fact, he reminds business managers to be ethical and responsible leaders not only towards their employees, but also their shareholders and to society as a whole. Notably, Doriot explains that it is difficult for a company to succeed if it doesn’t understand the importance of transparency and honesty in business relationships, which can only be done with a people-centric approach to business management. As a matter of fact, Doriot believes that trust is a crucial asset in business, and that maintaining it requires consistent ethical behavior. For example, here’s how Doriot advices entrepreneurs to treat their bankers:
"Once you have selected your bankers you must tell them the truth. You may be able to bluff other people but you cannot do so with your banker. Try to operate by this rule: Let him get the good news about you from someone else; always see to it that he hears the bad news from you first."
— Georges Doriot
This focus on business ethic in business reminds me of a few things I’ve learned from Charlie Munger. The ex-Vice-Chairman of Berkshire Hathaway has always been a prone supporter of doing things in an ethical way. Notably, he believes that business leaders have a moral obligation to act with integrity and to put the interests of shareholders, employees, customers and communities ahead of the sole single-minded pursuit of profits at all costs.
Funnily enough, Munger explains that the companies that have honest and ethical practices tend to be the most successful (in terms of profit) in the long run. As he once said, “You’ll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich—who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich—in money—not just in reputation.”
“Ben Franklin said: ‘I’m not moral because it’s the right thing to do – but because it’s the best policy.’” “We knew early how advantageous it would be to get a reputation for doing the right thing and it’s worked out well for us. My friend Peter Kaufman, said ‘if the rascals really knew how well honor worked they would come to it.’ People make contracts with Berkshire all the time because they trust us to behave well where we have the power and they don’t. There is an old expression on this subject, which is really an expression on moral theory: ‘How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.’ It’s such a simple idea, but it’s a correct idea.”
— Charlie Munger
All of this reminds me of what we have previously learned from Isadore Sharp, the founder of Four Seasons, on the Golden Rule, which tells us to "treat others as one would like others to treat oneself.” As a matter of fact, Sharp explains that Four Seasons’s competitive edge was its exceptional services and that this was heavily relied upon his employees especially those on the front line. As such, he believed that it is only by treating his employees well that they would in return provide exceptional services to the customers.
“Our customer-front line relationship is crucial. Customers seldom see or talk to you. They interact almost solely with our front line, three to seven junior employees. If that contact disappoints the customers we want as lifetime patrons, they become ex-patrons. But when our employees remember them, greet them, know what they want and provide it quickly, they create a loyal customer whose referrals and long-term repeat business can often run well into six figures. That’s a cycle of success, dependent entirely on junior employees.“
— Isadore Sharp
Beyond the Book
Read "Andy Grove and the Value of Facing Reality" by Farnam Street
Read "A Dozen Things I’ve Learned from Charlie Munger about Ethics" by Tren Griffin
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