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The Equitymaster Research Digest

The India Letter May Recommend You Infosys of 2002 But Not Flipkart of 2016
Apr 1, 2016

Warren Buffett and venture capital don't mix. Venture capitalists pride themselves on investing in companies Buffett wouldn't touch with a ten-foot pole. They're often willing to invest in money-losing companies that may eventually make lots of money.

And that's the problem: A lot of these companies don't cross over to the other side. The money-losing phase isn't a phase at all. Eventually, the burn rate turns so high that the funding stops and the startup is laid to rest.

The reason I mention venture capital today is because of the funding madness I am seeing all around. The majority of the startups out there are nowhere close to turning profitable...and perhaps never will. Still, billions of dollars are pumped into them quarter after quarter in the hope that one day they will eventually make money.

Where does Warren Buffett fit into all this? Venture capitalists should do themselves a favor and look at how the Oracle of Omaha groups businesses into categories. As you might expect, he doesn't have many categories...

Sensational vs gruesome

Buffett's idea of a sensational business is one that produces excellent returns on invested capital. Sensational businesses not only make efficient use of capital; they're also able to fund most of their growth internally.

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