Lessons Learned from 2017 E145

I just wrapped up my class on technology entrepreneurship (E145) here at Stanford for Winter quarter 2017. Here’s the final email I sent to the students.

Dear E145 students,

I took some notes on the lessons learned that the afternoon class presented today and thought I’d share them with you all. I did a small amount of editing but hopefully captured your meaning.

E145 Takeaways:

  • Blazing your own path – there are different ways to build a successful venture
  • Retaining focus vs. pivoting to new opportunities when necessary
  • Maximizing competitive advantage within Team
  • Difficulty and necessity of pretotyping
  • Adapting to sometimes conflicting feedback
  • Team / Product fit is important
  • Getting outside of the bubble
  • “Pretotyping” is valuable in many contexts
  • Challenges in contacting businesses and convincing them of our potential
  • Getting everyone on board with a decision to pivot/expand
  • Entrepreneurship requires resilience
  • The more adaptable our team was to new information the better
  • Making decisions as a team can be difficult
  • Confidence in starting a company in the future
  • How to work with a team
  • How to sort through ideas
  • How to get out of the building
  • Getting the first person perspective from Konstantin Guericke from LinkedIn and Toby from DoorDash
  • Availability of the mentors and guest speakers
  • Case studies were great for giving us the feeling that if you work hard and make good decisions then you can become successful
  • Being concise with how you explain your idea and not just dumping all of the information you have. Rather, let the other person ask questions.
  • The importance of marketing yourself, your company and your brand
  • Importance of persuading other people that your idea is worthwhile
  • Importance of pretotyping methodology
  • Speed can contribute towards entrepreneurial success
  • I did not have the experience of getting into the field with complete strangers to survey a product
  • How to do market analysis
  • Fast-paced pivoting – how to make very rapid pivots/decisions
  • The idea that consumers can drive the product design decisions was new to me.
  • Startups are hard – that means you should get started now
  • There are lots of ways to get involved as an entrepreneur – lawyer, developer, marketer, etc.
  • Entrepreneurial processes can be taught
  • Competitive edge doesn’t have to be specific to IP
  • Lots of people want to help
  • Pivoting is not scary
  • Pretotyping – experiential learning
  • Market sizing – top down and bottom up
  • Learning how to make a great elevator pitch and email pitch
  • What’s in your mind matters little if it does not reach and penetrate their mind
  • Benefits of bootstrapping vs. raising money
  • Being different is important
  • Having a good, compelling and believable story
  • The pre-launch is the most important part of the launch (marketing)
  • Friendly SEO and B2B marketing tips
  • Reward success and failure, punish inaction.
  • How to actually come up with pretotyping experiments
  • Product market fit is really important
  • Lots of customer interviews
  • Students don’t have much insight into B2B
  • Pretotype – objective and effective, minimum viable product, minimize effort, maximize experimental results
  • Be Proactive – talk to guest speakers, build relationships, develop your OAP
  • Emotional rollercoaster in founding a startup
  • Team dynamics are important
  • Long haul – one challenge after another, just tackle them one at a time.

Glad to see you all learned so many important lessons from the class! Thanks for all your hard work and great energy this quarter! Really impressive group!

Chuck Eesley

p.s. I was asked this afternoon about career advice and social advice from the perspective of your age. On career advice I basically said to work on a startup if it’s an idea you can’t imagine not working on, otherwise work for another company and with teammates that you honestly admire. I also replied that you should work hard while you’re young and have more energy. The only thing I’d add here is to try to only work with people who you truly respect and admire as their work habits will rub off on you over time. On social life I replied that I would focus on building long-term/deeper friendships with a smaller number of people and that in terms of relationships, you have to invest in them as you get out what you put into them. You will become more like your 2-5 closest friends over time, so choose them wisely. The only thing I’d add is to try to find a partner in life who you admire in terms of their personal characteristics (warmth, niceness, honesty, reliability, all the things we discussed at the end of the class) as it is hard to change these and you will be influenced in your personal development by the person you marry more than anyone else. Remember to find someone who complements you and who you respect and would like to become more like them over time (most likely you will). I’m very lucky as I married someone who is a much kinder, warmer person whose strengths complements my weaknesses and who I respect very much. It’s not easy being the spouse of an entrepreneur (or academic)! I hope each of you is just as lucky as I’ve been in life!

Interview with National University of Singapore

  • In your opinion, why are alumni from some universities much more prolific than alumni from most universities when it comes to starting companies?  E.g. what are some things that MIT and Tsinghua have rightly put in place to nurture and engage their students/alumni to bloom into successful entrepreneurs? Is it the entrepreneurial and innovative culture of these universities, or do other factors come into play?

The first is top quality, cutting-edge research. It is these breakthroughs that form the basis for new products and sometimes, whole new industries. While MIT and Tsinghua have both emphasized basic research, the faculty have also had to find outside, non-government sources of money which gives them some interaction with industry and knowledge of what problems need solved. High-tech entrepreneurship, at it’s heart is about using technology to solve real-world problems. Students become exposed to these elements of technology breakthroughs and industry problems in the research lab and in the classroom. The second element, which is important, but hard to replicate is a university that is known for entrepreneurship and so attracts students who have entrepreneurial inclinations. At MIT, the percentage of entrepreneurial alumni who say that they chose to come to MIT because of its entrepreneurial reputation has increased from 12% in the 1960s to 42% in the 1990s. Finally, entrepreneurial universities provide role models to students in the form of successful entrepreneurs who generously come back to campus and give talks or mentor students, explaining to them that they were once sitting where the students are sitting before they created their successful companies. So the most important elements in my mind are cutting-edge research, a reputation for applying technology to solve problems, and entrepreneurial role models.

  • In the context of Q1, then what are some things that universities should perhaps be looking at doing (or not doing), if they want their alumni to be more entrepreneurial?

Consistent with these three elements, the university should Invest in recruiting entrepreneurial faculty who are doing high quality, cutting-edge R&D in their labs. Recruiting materials sent out to prospective students and admit weekends should include information about successful entrepreneurial alumni. Alumni programs and entrepreneurship classes should seek to engage with recent and older alums to come in and give talks on campus or mentor students and alumni interested in starting companies in their industry. Universities should not be encouraging that everyone needs to be an entrepreneur, but rather to expose students to entrepreneurship so that they can decide whether it’s for them. Also, universities should seek to encourage intellectual risk-taking. At MIT, this takes the form of the celebrated culture of “hacking” (clever, benign, and amusing pranks – http://hacks.mit.edu). Universities should also not focus exclusively on faculty spin-offs. Far more startups are created by alumni entrepreneurs.

  • Is there any matrix to measure the impact of alumni entrepreneurship?

In the MIT Founders survey we measure the economic impact in a number of ways including the number of companies currently active, the number of jobs created and the worldwide revenues generated. For MIT, we find that these numbers are 25,800 currently active companies, 3.3 million jobs and almost $2 trillion in annual world revenues. However, these are not the only ways to measure impact. Many entrepreneurs start a company to produce innovative new technology, to change the world in some tangible way, or to improve society through social innovation. All of these are valid and important impacts. There are many ups and downs in starting a company and so it’s very important to be doing it for some reason beyond simply to make money. It’s the passion that allows you to get through the hard times.

  • In your research findings on trends and patterns in entrepreneurship among the alumni of elite research universities, how important is tertiary education to an entrepreneur? Is tertiary education the key differentiating factor that sets apart a good entrepreneur and a great entrepreneur?

Tertiary education is very important. Don’t be fooled by survivor bias and the anecdotal examples of Bill Gates, Mark Zuckerberg, etc. Research shows that on average for technical founders, Master’s degree holders have the highest performance on average. Tertiary education provides skills, a social network, and a backup plan for if your venture fails. I wouldn’t call it the key differentiating factor. But being a quick learner certainly helps. Many would agree that the key is probably something more intangible, some optimal combination of initiative, optimism, paranoia, persistence, and smarts. However, research shows that there is no one personality type for the entrepreneur – they come in all shapes, types and sizes.

  • What’s your advice for a team of budding entrepreneurs who has a viable business idea but has two more years of university studies to complete?

First of all, realize that the idea is only a small, small part of it. Every entrepreneur believes they have a viable business idea. However, even the ones who do often lack the ability to execute on it. My advice would be to talk to as many potential customers (who aren’t your friends) as possible and try to really, truly listen to what feedback they are telling you. Try not to hear what you want to hear but what they’re actually saying. Try to figure out what the big problems are that someone is willing to pay for. Use your years of university studies to develop your business, hone your independence of thought and your critical thinking skills, to learn as much about your industry and to meet as many people as possible. A university is full of opportunities and open doors. Use it to your full advantage in creating your business. Only leave if you are picking up so much traction in the market that you can’t possibly keep up with both schoolwork and your exploding number of customers.

  • How has your tertiary education at Duke and MIT changed or shaped your outlook about entrepreneurship?

What I owe to Duke is the ability to break away from the traditional path, to take the initiative and strike out on my own. I learned that there is a way to both do good for society and do well to support your family. To realize that the only way to never work a day in your life is to free yourself to follow your passion and to solve whatever you see to be big, important problems in the world. Time on this Earth is limited. In the words of Steve Jobs, it’s not worth it living someone else’s life.

From MIT, I learned that entrepreneurship is about more than just being passionate and working crazy hours. That there is a way to be smart about it, or at least to increase your odds of success. In addition, I learned through many late nights of problem sets that even if a problem appears to be impenetrable, that if you chip away at it, little by little, you can make progress and solve even the most complex problems. In many ways, creating a business is nothing more than a series of problems that must be solved as quickly as possible. MIT was a training ground that big problems represent big opportunities when tackled step by step.

  • What is the most interesting experience you had in teaching Technology Entrepreneurship in Stanford?

Each year the most fascinating part to me is seeing the creative ideas my students come up with and the incredible feeling it is to see the teams work like crazy at all hours throughout the quarter and then how happy I feel when they thank me for the experience afterwards. I got into teaching because I had a failed startup in my first experience and I wanted to help more of my students to experience the incredible joy of a successful startup, rather than the frustration of a failure. I felt like I could leverage my time more by helping my students to be successful, rather than doing my own startups one at a time. I almost can’t believe they pay me to do this!

Why I used to buy index funds

I have been investing in index funds for many years. The reason is quite simple: indexes beat 80- 90% of the active managers. This is very true! For the average investor (Buffett says, for 99% of investors) who do not enjoy a Sunday afternoon spent sipping good coffee and evaluating individual companies to invest in, index investing is definitely the way to go. Ben Graham also recommended this for the defensive investor (as opposed to the enterprising investor). However, if you’ve read our first newsletter and are now interested enough to read the second one, you might not be the defensive investor type. For now, I want you to imagine this scenario: if you are given $1 million to invest in your hometown, most likely you won’t choose to invest in every single business in the town in small amounts. You know your hometown well enough to know that some businesses are better than others. Most likely you’d ask who the CEO/founder is and to read the financials (and would compare the earnings against the asking price) and would want to know how profitable and how quickly growing the business is. You’d probably seek to at least avoid those unprofitable, debt-ridden, shrinking businesses run by your less than scrupulous former high school classmates. People become very logical and careful when considering an investment in their hometowns, but suddenly lose all perspective when the stock market offers daily prices for all businesses around the world.
That is what happened to me throughout my ETF investment days. I started to question which index is optimal and that led me down the rabbit hole, so to speak. The SPY is a standard one but is only large cap stocks. So you could look at IWM or VT, which cover smaller companies (which tend to have better, though more volatile returns). However, most of the growth and undervaluation right now is international, so you’d want to look at EFA or EEM and rebalance among them and IWM or SPY. However, then you learn that value (and momentum) stocks consistently outperform growth stocks, so you see that RPV or GMOM consistently outperforms and you start to look into small cap and value funds. You start to question when the optimal timing to rebalance is and whether you should tilt towards more undervalued markets. This is the path that led me to Buffett and to want to look beyond just investing in indexes. Indexing has become very popular and that is a great advantage to us as rational, business-like value investors. When over 30% of the stock market is bought and sold without any consideration for underlying, intrinsic value or quality of the companies, it creates great opportunities for those who are able to understand business quality and value.
But you will be surprised by the return that can be generated by utilizing a little bit more information than just the fact above that indexes beat most active managers over time. Take a look at the study findings by gurufocus (a great resource for investors). They divided 2,403 stocks into three categories: undervalued, fair-valued, and overvalued by using a simple indicator PEPG (we actually prefer Discounted Cash Flow valuation, but this valuation is not an exact science, so we look at multiple measurements). PEPG is P/E ratio (Price to Equity) over Past Growth, which is defined as P/E ratio divided by average EBITDA (Earning Before Interest, Taxes, Depreciation, and Amortization) growth rate over the past 5 years. Here, the advantage to using PEPG to measure the valuation of the business, instead of P/E, is that P/E ratio fails to take into account of the “growth” part of the business (they actually get very similar findings from utilizing P/E). Stocks can be roughly considered undervalued if the PEPG ratio is below 1.

We can see that for the top 100 most predictable companies (business has consistent increases in earnings every year), there were 25 undervalued stocks in Jan. 1998. This group of stocks gained about 20% annually if held for 10 years and 8 months. The fair-valued group has an annualized median gain of 12.1%, even the over-valued group has an annualized median gain of 9.5%. For the second 100 most predictable companies, the gain is lower, as expected. The undervalued group has an annualized median gain of 13.8%. The over-valued group has 7.6%. All these numbers are much higher than the 3.1% of the annualized median gain of all 2403 stocks (the index). The S&P 500 gained 2.7% annually over the same period and the SPDR S&P 500 index (SPY) gained 3.08%.
What does this tell us? It tells us the safest way to invest is to buy great businesses at a fair price. We can also see how a little bit more knowledge could get much higher return than investing small amounts in everything/ETFs. In finance departments across business schools and economics departments the prevailing theory is that of the efficient markets hypothesis and the importance of wide diversification. The investment strategy that Buffett and Munger take and that we take does not believe wholeheartedly in these theories. We believe markets are only somewhat efficient and occasionally they’re completely crazy (those are the very best times to be a rational, disciplined investor) and that diversification is good if you’re investing only in indexes. However, if you’re picking individual stocks with discipline and care, then it’s more likely to result in “de-worsification”. It’s very hard to have 50 or 100 good, well-researched ideas in investing (ask any VC investor this). So the average outcome of your 10th through 50th ideas is likely to be a lot worse than the average outcome of your 6 best ideas. It’s a simple notion that the more stocks you invest in, the closer you will get to the average outcome. (The idea of risk management on the other hand probably deserves a separate newsletter in itself.)
Of course I don’t want to make it sound like easy. As Buffett said “it is simple, but it is not easy.”  The trick is, as he emphasized “stay invested within your circle of competence”. That is why sometimes it is even more important to know what you do NOT understand than what you do. For example, Buffett is never a big fan of technology companies, and has publicly expressed that he doubted whether “the internet will change how people chew gum (Berkshire Hathaway is the biggest holder of Wrigley’s).” In our next newsletter, we are going to write about “durable competitive advantages”, one of the most important characteristics Buffett looks for in the businesses he wants to invest in.

Why Warren Buffett Bought Coca-Cola and Why I Would Not

We want to start our first post by writing about Warren Buffett since we feel our investment philosophy is deeply influenced by this legendary investor. Since last year, we have started to write about what we have learnt in investment in the past few years. We also started to build our first investment fund “Refuge Advisors”. We would like to share some of our learnings (and lessons) with you. If you’re also interested in investment, we will be happy to hear your opinions

Warren Buffett is a big fan of businesses with what he calls a customer monopoly as opposed to a commodity business. One of his most famous investments of this type is Coca-Cola. Buffett famously pointed out that if you had invested $40 in Coca-Cola in 1919 and reinvested all dividends, it would be worth over $10 million today. Let’s take a look at Coca-Cola when Warren Buffett bought it in 1994.

Year Earnings Year Earnings
1983 $.17 1989 .42
1984 .20 1990 .51
1985 .22 1991 .61
1986 .26 1992 .72
1987 .30 1993 .84
1988 .46 1994 .98

If we calculate Coca-cola’s
Earnings per Share (EPS) , we could see that the EPS grows at an annual rate of 17.2% during 1984 to 1994, and at an annual return of 18.4% during 1989 to 1994. How did we get that? Treat the 1984 per share earnings as the present value and the 1994 per share earnings as the future value, the time length is 10 years, then it is converted into an easy compounding math equation. It is similar for the 1989 to 1994 equation. Well, what does this mean? Imagine you were Warren Buffett in 1994 and what would these numbers help you make the decision? If I’m bold enough, I think Buffett may reason that if he pays $21.95 for a share of Coca-Cola and had per share of earnings of $0.98, he would get an initial return on this investment of 4.5% ($0.98/21.95=4.5%). Later (depending on how long he decides to hold the stock), the return may expand to 17.2% to 18.4% every year. That is exactly what Buffett did in 1994! (He purchased $257,640 shares of Coca-Cola at $21.95)

– Cigar Butts vs. Wonderful Companies

Pretty easy, right? It seems like you just need to find a good business (like Coca-cola) and keep on holding it. But that’s not what Buffett did to accumulate his fortune. Early on his career, Buffett was deeply influenced his professor at Columbia University, the father of value investing Ben Graham. Ben Graham liked to buy stocks that are 2/3 below its net current asset value (NCAV). This strategy focuses on under-priced/discounted stocks instead of the quality of the company. Sometimes, the company has very little value but it is cheap enough for investors to get the last penny. Buffett has a very vivid analogy to this kind of business: “cigar butt”, because they only have one last puff before people throw it away. For a while, by taking a large amount of last puffs of those “cigar butts” he quickly accumulated his early fortune. However, Warren Buffett is not the same investor now if he was when he was only dealing with those “cigar butts”. While it provides returns of >25% on small sums of money, this strategy is only scaleable to a point. With larger amounts, and during bull markets, it would never work out. Fortunately, he met Charlie Munger and learnt “buying a wonderful business at fair price” instead of “buying a fair business at wonderful price”.

If you follow us so far, you should know two important pieces of information I try to convey here:

  1. Buying great businesses;
  2. The business needs to be at a good or at least fair price.

These two pieces of information are very important because they are exactly what Buffett asks himself when he makes investment decisions: 1) should I buy this stock or not (if it is great business, yes! otherwise, no!); 2) when should I buy it? (if it’s good price, yes! otherwise, no!). Sooner, you will see no matter how complicated the decision making process is, it will always come back to these two basic rules.

That is my answer to the question I asked at the beginning: I’m not going to buy Coca-Cola now. Why? Let’s take a look at Coca-Cola’s earnings per share from 2003 to 2014. If you run the same calculation, you will see Coca-Cola’s EPS has dropped to 8.78%. Then, the next question is: is Coca-Cola cheaper now? At 1994 when Buffett purchased it, if you remember, he pays $21.95 for a share of Coca-Cola and had per share of earnings of $0.98. So the proxy P/E ratio is 22($21.95/0.98). Wondering how much will it cost him to get the same amount of per share earnings in 2015? One simple way is to use the P/E ratio in 1994 (22) to multiply the earning per share ($1.56) in 2015, and that will give you $35. Curious about the current market price for Coca-Cola?  $40.99! Now you know why it is not a smart decision to invest in Coca-Cola at today’s market price.

Year Earnings Year Earnings
2003 $0.89 2009 1.47
2004 1.00 2010 2.53
2005 1.02 2011 1.85
2006 1.08 2012 1.97
2007 1.29 2013 1.90
2008 1.25 2014 1.78

One thing I may also point out is that the downside of using P/E ratios to value businesses is that it does not take into account growth. Solely based on the P/E ratio, a P/E 22 is not often considered a very “cheap” price to buy a business. Many investors stick to businesses with a P/E ratio under 15 to make sure that they won’t overpay. However, the downside would be they miss the businesses with fast growth rate since the P/E ratio won’t take that into consideration. Of course, now you see why there are other, better ways than a P/E ratio to determine whether a company is undervalued, but this is a more complex topic for a future newsletter.

Our next post will consider a typical choice that many investors make – investing in index funds. Index funds are a very good choice, especially when you consider that 80-90% of active investment managers fail to beat the S&P 500. In addition, fewer than 3% of those are able to consistently beat the index. The question we will explore is what those individuals have in common who are able to consistently beat the market. Part of why we’re doing this is because we’ve always noticed our errors faster and gotten smarter more quickly through discussions with friends and family. Please let us know your thoughts and feedback. If there’s a topic you’d like to see us cover in a future posts, please let us know!


The information contained in this post represents our general opinions and should not be construed as personalized or individualized investment advice. No advisor/client relationship is created by your access of information on this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire initial investment.

Documenting our journey to financial independence

This is the blog we will use to document our journey to financial freedom. We look forward to sharing what we’re reading and thinking about on the topics of investing, philanthropy, and of course being frugal and living the best, happiest life possible!

We’ll also introduce you to our pet Betta fish “Frugal Friday” who will help to keep us focused on just the important things.