Arthur Rock made a habit of financing great businesses. He was venture capital before venture capital was a thing.
It all started in 1961. Rock left a cushy job at Hayden Stone to team up with Tommy Davis to invest in new companies.
Their first investment was Teledyne. Henry Singleton’s conglomerate would go on to make a fortune for shareholders. That was quickly followed by investments in Scientific Data Systems, Intel, Intersil, and more.
His partnership with Davis lasted until 1968. Over that seven-year period, Rock invested $3 million and earned $100 million in returns.
What was the secret to his success? First, his timing was impeccable. He was practically the only person investing in Californian startups at the time.
Second, he looked for opportunities that appeared to have no limits. The business should have the ability to capture a large share of a giant market.
Finally, he had a knack for making one of the more difficult parts of investing look easy. He focused on the people: “Ideas are a dime a dozen. It’s the execution that’s really the important thing and you need really good people for that.”
The combination of great business and great management is rare. Yet, Rock understood that without great management, most new businesses are doomed from the start. Finding the right people was key. They needed to be able to tackle the day-to-day obstacles of running a new business.
Over the years he shared what he looked for before funding budding entrepreneurs.
1. “I look for people who have been in a profit-making position, who have been at risk. I don’t just want scientists or experts. Their credentials in these senses are more important to me than their ideas.”
Henry Singleton was a vice-president at Litton Industries before starting Teledyne. Bob Noyce and Gordon Moore helped run Fairchild Semiconductor before they started Intel. Max Palevsky worked at Packard Bell before creating Scientific Data Systems. Rock wanted people who had experience in business. Resumes were more important than the business plan.
2. “I’m a really good listener. The first time you meet with somebody, everybody’s on their good behavior and everybody comes across as being good entrepreneurs. It’s not until you spend a lot of time with them that you figure out whether your first impressions were right or not… So I’ve spent a lot of time listening to people and figuring out whether I thought they were good people and whether I could get along with them.”
The goal is to get to know people’s character and how they think. Are they saying all the right things or what they think you want to hear? Does their story change? Do they contradict themselves?
Rock often asked questions completely unrelated to the business. He would ask about who they admired and why, how they viewed shareholders, and what they learned from past mistakes.
3. “Difficult decisions require intellectual honesty, being able to see things as they are, not as you want them to be, and then facing up to problems and doing something about them… I think intellectual honesty is really the key.”
Mistakes happen when people aren’t honest about what’s going on inside a company. And most new businesses lack the capital to recover from many mistakes.
That means watching out for CEOs that surround themselves with “yes men,” who don’t know who to listen to, or what questions to ask. Big egos and an aversion to criticism also get in the way of success.
Of course, rarely do CEOs have the skillset to run a business at each stage of its life. So how comfortable are they with ceding control to someone else?
Good management is often humble, open-minded, and brutally honest about the problems they face. They tackle issues quickly. They say “no” to what won’t work or is not a priority. They’re able to make hard decisions. Even when it might hurt in the short run despite being best for the long-term success of the company.
Rock believed one of the best management decisions ever made was Intel’s decision to scrap their memory business and focus on microprocessors. Most businesses would never shut down a profitable division (it was over 60% of Intel’s business at the time), lay off workers, and take a huge short-term loss on a gamble on the microprocessor. But Intel was better for it.
4. “I am especially interested in what kind of financial people they intend to recruit. So many entrepreneurial companies make mistakes in the accounting end of the business.”
A lesson Rock learned from one investment is the importance of finding the right CFO. Diosonics was a medical company that made MRI machines. Management was too caught up in meeting quarterly estimates, cooked the books, and Rock paid the price. He learned the importance of a tough CFO, who will scrutinize everything, and do what’s best for the long-term success of the business.
5. “Anyone who comes into the office and says, well, I have this business plan and you’re going to make a lot of money if you invest with me, doesn’t stand another two or three minutes with me because that’s not what it’s all about. It’s about building companies.”
If they’re only motivated by the money, Rock passed. He wanted people excited about building a successful business around their idea. Wealth is just a byproduct of that.
Simply put, Rock liked to build great businesses and wanted to help people who had a similar passion.
Source:
HBS: Interview with Arthur Rock
Strategy vs. Tactics from a Venture Capitalist
The Money Men
Related Reading:
Phil Fisher: Scuttlebutt and Assessing Management
