A few weeks ago I asked the internet why there are no copycats of Berkshire Hathaway, despite Warren Buffett telling the world exactly how he and Charlie do what they do. This week, Buffett’s annual letter to shareholders was published, and now that Africa Eats is copying parts of Berkshire Hathaway’s model, I found it more fascinating than usual to both learn as well as compare and contrast.
Some of my favorite quotes:
BRK: Charlie and I allocate your savings at Berkshire between two related forms of ownership. First, we invest in businesses that we control, usually buying 100% of each. Berkshire directs capital allocation at these subsidiaries and selects the CEOs who make day-by-day operating decisions. When large enterprises are being managed, both trust and rules are essential. Berkshire emphasizes the former to an unusual – some would say extreme – degree. Disappointments are inevitable. We are understanding about business mistakes; our tolerance for personal misconduct is zero.
Africa Eats invests in businesses run by their founders, buying 5%-40% minority stakes. We thus conflate investing with hiring as we believe entrepreneurs are best capable of building businesses. This is the biggest difference in our strategies, but ultimately the end result is similar, as we also expect our CEOs make day-to-day operating decisions, we also have relationships strongly built on trust, and our peers also find our desire to hold our non-controlling, minority stakes to be both unusual and extreme.
BRK: Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.
Africa Eats has a similar philosophy of long-term performance, with no expectation of selling our interests. This is where Africa Eats breaks from the venture capital and private equity fund strategies, both of which expect to liquidate their investments within 10 years, ideally sooner, with liquidation through either an acquisition or IPO. Africa Eats instead expects to still be helping our investees grow in the 2030s, 2040s, 2050s, and into the 2100s.
BRK: Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public. Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.”
This is so refreshing to see. I raised money from California VCs for almost two decades back in the 1990s and early 2000s. The VC culture is to tout the successes and not talk about the failures, despite the vast majority of VC investments being failures.
Not every Africa Eats company is a wild success. Three years in we are expecting to declare our first failed business this year, and while we are trying to help the laggards catch up to the 50% average growth rate, we know not all of them will get there.
Like Berkshire Hathaway, as long as the fastest growing investees are growing faster than the laggards are lagging, i.e. as long as the aggregate revenues of the whole portfolio are growing year-over-year, then Africa Eats as a whole is succeeding. Those aggregate revenues have grown from just under $7 million in 2019 to over $23 million in 2022. We’re quite happy with 3x growth in three years.
At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.)
I’d love to still be working for Africa Eats in 2078, 58 years after incorporation, as I’d be turning 109 years old. Buffett did say he hoped to retire from Berkshire Hathaway 10 years after he dies. I’d also love by the time I’m Buffett’s current age to have built the sixth most valuable public company based in Africa, mirroring Berkshire Hathaway’s ranking on the largest public American companies. And to do that claiming my capital-allocation decisions were no better than so-so.
BRK: Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire. Let’s take a peek behind the curtain.
For Africa Eats, the secret sauce is that we find great companies before anyone else even cares that they exist. Companies that are typically earning just $50,000-$100,000 USD in annual revenues. SMEs that are too small for 99% of both debt and equity funds. We provide these companies with the right amount of capital in the right form, add in a lot of guidance and mentorship, and give them the space to grow. Do that for a few years and many of them grow 10x-20x in size, topping $1 million in annual revenues, then $2 million, and one so far past $10 million.
Buffett and Munger are instead looking for big, established companies with long track records but some short-term issue that caused an under-valuation. Berkshire Hathaway is happy when these companies have 5% annual growth. We’re unhappy when our companies only grow 25% instead of 50% or 100% or in the early years, 500%.
Maybe someday in the 2030s we’ll add a second strategy to Africa Eats, trading publicly traded shares of African companies that have already succeeded, mirroring the public trading that Berkshire Hathaway does too. For now, we’re happy working with our fast-growing SMEs, aiming to be more and more like Berkshire Hathaway over time, but for now showing how a slice of Buffett’s ideas can create more impact along with better returns than traditional VC and PE fund strategies.