A venture capitalist can be described as an individual who invests in early stage, high potential and high growth start-up companies. Within its circle, Georges Frederic Doriot is perhaps one of its best known operators. But, Mr. Doriot is not your typical venture capitalist. He was one of the first to institutionalize venture capital investing and achieve success through a deceptively simple formula: “Bet the jockey, not the horse” As described by the book, “Forbes Greatest Investing Stories”, Mr. Doriot went on to provide his reasoning to his approach: “When someone comes in with an idea that’s never been…
A venture capitalist can be described as an individual who invests in early stage, high potential and high growth start-up companies. Within its circle, Georges Frederic Doriot is perhaps one of its best known operators.
But, Mr. Doriot is not your typical venture capitalist. He was one of the first to institutionalize venture capital investing and achieve success through a deceptively simple formula:
“Bet the jockey, not the horse”
As described by the book, “Forbes Greatest Investing Stories”, Mr. Doriot went on to provide his reasoning to his approach:
“When someone comes in with an idea that’s never been tried, the only way you can judge it is by the kind of man you’re dealing with.”
Tell me more!
But first, let me address an important question you might have: Why am I talking about venture capital when it’s a different sort of game to investing in the share market? Well, that’s because investing with great leaders in publicly-listed companies can also be a great route to success.
So coming back to venture capital and Mr. Doriot, when it comes to investing alongside great leaders, we first have to identify them. It is not easy to identify great leaders, as there is obviously no set mathematical formula to screen for them. This is definitely a more subjective exercise.
However, all is not lost. Mr. Doriot did provide us some useful hints in trying to identify great managers. Here are two things which he looks for: 1) Creativity; and 2) behaviour under stress
This is Mr. Doriot on creativity:
“A creative man merely has ideas; a resourceful man makes them practical. I look for the resourceful man. The man I want knows what to do with liabilities. “
And this is him again on a leader’s actions during times of adversity:
“I like to see trouble come early in our little companies. Unless there is trouble, I worry. I want to know early how a man will behave under adversity”
Let’s go hunting
When we look at companies listed in Singapore, we are often able to find interviews or stories of the leaders who are in charge.
In one instance, an interview and article of the current Chairman of Old Chang Kee Ltd (SGX: 5ML), Mr. Han Keen Juan, can be found. Among his many setbacks, the chairman recounted the company’s failed attempt in 1993 to expand internationally. The lack of quality and profits of Old Chang Kee’s overseas operations led him to close down 24 overseas stores at a loss of S$50,000.
However, he remained undeterred by this setback, and insisted: “… that doesn’t mean you can’t climb up again after a fall”. Instead, Mr. Han has been able to rise up and find more success beyond the stumbles. From his initial outlay of $70,000 paid in 1986 to start Old Chang Kee, the company has turned into one which earned $65.6 million in revenue in 2013.
Ever the resourceful company, Old Chang Kee is also using its knowledge in curry puffs and pastries to test new concepts such as pie-maker Pie Kia and dine-in retail outlets such as Take 5, Curry Times, and Mushroom. According to information from its website and its Annual Report for 2014, it has built five and six Curry Times and Take 5 outlets, respectively, within Singapore.
By all counts, Mr. Han’s tenacity to rise in the face of adversity, as well as his creativity, might have met Mr. Doriot’s guidelines.
Challenger Technologies Limited (SGX: 573) is also a company which had met similar challenges in overseas expansion as those faced by Old Chang Kee. But in Challenger’s case, it was CEO Mr. Loo Leong Thye’s ability to regroup and strengthen relationships with customers and suppliers which ultimately made the difference. The company has made strong strides since then. Based on its latest Annual Report, Challenger Technologies Limited now boosts an impressive customer base, with more than 500,000 ValueClub members.
Incidentally, the long term gains for both companies’ shares have handily beat the returns of the SPDR STI ETF (SGX: E53), a proxy for Singapore’s share market barometer, the Straits Times Index (SGX: ^STI).
From its IPO price of $0.20 in 2008, Old Chang Kee’s shares has risen 450% to last Friday’s closing price of $0.90 per share; the curry puff maker trades at a PE of 18.2 at that price. In the case of Challenger Technologies, its share price has increased by 780% to last Friday’s closing price of S$0.49 since its IPO in 2004. The electronic store retailer trades at a PE of 10.8, as of last Friday’s closing price.
Foolish Bottom Line
Betting on the long term success of companies would almost inevitably involve bumps along the way. It is unlikely that a company will have a smooth rise to success over decades. So, it makes sense to keep an eye on the “jockey” – the CEO and key executives of the company.
This also is not to say that success will roll on for these companies once they overcome their own adversities. Businesses often find ways to bring new, unexpected challenges for incumbents. For instance, Challenger Technologies may yet face a looming challenge from online retailers such as US e-commerce giant Amazon.
However, if we invest alongside leaders who have thrived in adversity, we can take heart that we will have a battle-tested executive on our side. In the game of investing that takes place over decades, the “jockey” might just prove critical to the success of the company, which is what ultimately provides great long term investing returns.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Amazon.