If you're not the best in your business, change the game

I had a great interaction with a friend several months ago. The question he asked was:

“How do you beat Michael Jordan at sports?”

I thought about it for a second. I knew Michael Jordan was a good golfer and I don’t play golf. I figured he was in better shape than me and could beat me on a track. There is no way I could ever beat him at basketball. Or baseball.

So I eventually said, “I don’t know.” My friend said:

“Take him surfing.”

What he meant, of course, was play a totally different game. Now, I’m not a surfer, but let’s presume neither is Michael Jordan (although he’s so physically talented that a dangerous assumption.) But let’s assume it’s true.

When we are both on a surfboard we are each beginners. Assuming he doesn’t already surf, he’s probably not inclined to get on a surfboard. So I can have a huge head start on him if I start surfing now and practicing every day. After a few years, if he eventually decides to try to surf, I’ll likely beat him at a sport.

I’ve been a long time believer in Jack Welch’s famous thesis that if you aren’t first  or second in a market, you should get out of it. Interestingly, for those who don’t realize it, he challenged his own thinking about this in his final shareholder letter at CEO of GE.

When I reflect on our investing approach, we have a very strong focus on helping the companies we invest in become the No.1 or No. 2 player in their market. When we find ourselves in an investment where we aren’t No. 1 or No. 2 in a market, we try to follow the meta-point of all of this, which is to change the game and have a different point of view.

When I go through our portfolio, there are a bunch of companies that are clearly first or second in their market. These are very satisfying to be an investor in and their paths are clear.

Then there are some that aren’t No. 1 or No. 2, or are in very crowded markets where it’s hard to figure out what those top two spots are. And there are some that are in unformed markets, or their ultimate product and strategy is not clearly defined, so it’s hard to put them clearly in a market segment. This is the blessing and curse of being an early stage investor.

Then there are some who should simply go surfing. We try to tell them that when we realize it, and in some cases, they’ve gotten very good at surfing. When this happens, it’s especially satisfying.