Google went public in August on terms that were unusual to the point of confrontation, and the public markets quietly accepted them. We did not invest in Google, but we have been sending its founders' letter to every founder we back. The lesson of this year is about the kind of company you build when you refuse to let public markets shape you.
On Going Public Without Being Owned
The Google IPO violated almost every convention of how a venture-backed company is supposed to enter public markets. Dual-class shares, a Dutch auction, an unconventional founders' letter, a refusal to provide quarterly guidance, and a willingness to disclose less rather than more about the underlying advertising business. Each of these decisions, taken individually, would have generated objection from underwriters; taken together, they amounted to a statement that the company would be running itself for its operators rather than for its short-term shareholders.
What is striking is not that Google made these choices. What is striking is that the public markets accepted them. The premium that high-quality companies can extract from investors, in 2004, is materially higher than it was in 1999. The post-bubble market has, perhaps unexpectedly, become more receptive to founder-controlled governance than the bubble market was. The bubble market wanted growth at any cost; the post-bubble market wants quality, and is willing to surrender control rights to companies that demonstrably possess it.
We have read the founders' letter four times. We will read it again next year. The letter is more useful as an artifact than the IPO itself; it documents the level of internal clarity required for a company to defend non-standard governance terms in a public-market negotiation. Most companies we work with do not have that clarity. We are now actively asking them to develop it.
On the Companies We Want to See Follow
We are now actively encouraging founders we work with to plan their eventual public-market structures with the same care that they plan their products. Specifically: dual-class voting, where defensible; conservative guidance practices, where defensible; and a settled relationship with the long-term shareholder base before the IPO rather than after it. None of this is universally appropriate. All of it is more available than it was a year ago.
The hardest of the three, in our experience, is the third. A company that has not built relationships with its long-term shareholders before the IPO finds itself, after the IPO, captive to the shareholders that the bankers placed it with — many of whom are not long-term shareholders by disposition. The relationships have to be built two years out, in conversations that have nothing to do with the eventual transaction. We have begun introducing our portfolio CEOs to long-term holders we know personally, with no expectation that the introductions will mature into anything specific. Several of them already have.
On Mobile, Quietly Beginning
Two-thirds of new mobile phones sold globally this year are capable of executing third-party applications. Internet-capable mobile devices outnumbered, for the first time, the installed base of personal computers. We do not know what the dominant mobile-native business will look like — and we suspect that the people who will build it have not yet started — but we are now reading every quarterly report from every handset and carrier we can.
The pattern we are watching for is the moment at which mobile usage becomes additive to PC usage rather than substitutive of it. Substitutive usage produces incremental devices; additive usage produces a new consumer behavior, which is what we want to underwrite. The early evidence, drawn from Japanese carriers, suggests that additive usage is already occurring there at a level the rest of the world has not yet reached. We have begun spending more time in Tokyo. The Asian leadership in mobile consumer behavior is, in our reading, three to five years ahead of the United States, and the founders building on the Asian stack are operating with intuitions that their American counterparts will have to acquire by observation.
On Why the Best Founders Are Reading Annual Reports Again
Buffett's annual letters circulate in our portfolio companies more than they did three years ago. The phenomenon is real and we believe it is healthy. Founders who read public-market disclosures from operators they admire become better at writing their own disclosures, which makes them better at thinking about their own businesses. The discipline of writing for an audience that is paying attention forces clarity that internal communication does not.
We have, this year, recommended specific letters to every founder in our portfolio: the 1996 Buffett letter on the durability of competitive advantage; the 1990 Soros analysis of reflexivity; the 1995 Bezos shareholder letter on long-term thinking. These are not novel recommendations. The volume at which our founders are now reading them is, however, novel; ten years ago a founder reading shareholder letters would have been considered unusual. We expect, in another ten years, that the practice will be standard among the operators who eventually compound.
A Closing Note
The most useful thing we can do for our companies is to read out loud, occasionally, the letters of the operators we wish they would become. We will continue. The 2024 partners — whoever they are by then — will have a longer reading list than ours, and a deeper bench of companies to draw it from.
The Partners
Winzheng Family Investment Fund · December 2004