The “Perfect” Investment

By Edward D. Hess,
Distinguished Executive in Residence and
Adjunct Professor of Management, Goizueta Graduate School of Business

Emory University
Atlanta, Georgia


Many people have asked me what characteristics are common in successful entrepreneurial ventures. What circumstances are more likely to produce success? This is an intriguing question taking into account that over 70% of all new business ventures fail in their first five years. The following is based on a review of the academic research, personal experience, and a non-academic study I did on the issue when I was an investment banker. Before discussing the characteristics of successful entrepreneurs, let me discuss seven general points:


First, it is important to understand that most business ventures fail. Investing in them is a probability theory game. Professional venture capitalists and private equity investors understand this fact and, accordingly, they use a portfolio investment approach. They do not place one large bet on a company; to the contrary, they place many small bets across a diverse portfolio. These sophisticated investors realistically expect that 7 out of 10 investments will be losers or break even; 2 will be singles and one will be an extra base hit, earning returns high enough to average out across the portfolio and offset the “losing” 7 investments. What does this mean for a private investor or high net worth individual? It means you, too, should invest on a portfolio basis unless special circumstances dictate otherwise.


Every economy, industry, company, product, and capital market goes through up and down cycles. Down cycles are characterized by less liquidity, decreased transaction volume, and lower valuations. Up cycles are transaction frenzied with demand outstripping supply resulting in high valuations. Investing in up cycles requires you to hold your investment until the next up cycle and, hopefully, euphoria produces gains for you. What do the successful contrarian investors do? People like Bass, Rainwater, Anshutz, Davis, invest in solid companies and industries in down cycles. If there is a problem with the company, they are confident they can fix it before the next up cycle. Contrarians arbitrage the cycles. Financial engineers arbitrage the difference in private and public markets valuations. Two very different strategies. One of the early successful investors, Bernard Baruch, said, “I made all my money by selling too early.” – a good statement to remember. Also, understand who controls the decision when to sell in any investment. General partners may have different timing motivations than you as an investor. Some of my biggest missed investment payoffs came when I wanted to exit and could not control my destiny because someone else had the ultimate decision authority.


Many successful businesses solve existing problems or meet existing needs. And many of the problems are not complex, nor revolutionary, nor require genius solutions. If an entrepreneur tells you he or she wants to create a new market, be wary. It is risky, time consuming, and costly to try to create needs or new markets. The trashcans are full of good products and technologies that customers did not need and/or did not want to pay for. Business is really pretty simple – meet a customer’s known existing need. It is the execution that is hard.


I was very fortunate to work for one of the Bass Brothers in the mid-80s. They were very high up the sophisticated investor food chain. My boss, though, had a healthy skepticism which he stated this way:

“If this opportunity is so good, why didn’t someone else invest?”

Unfortunately, most of us are pretty low on the investor food chain. Absent personal relationships, by the time I see an opportunity many bright people have seen and passed on the specific opportunity. WHY?

Keep that in mind. Another way to approach this issue is to ask “Why am I so lucky to see this great opportunity?” At Bass, for example while I was there, we invested in less than 1.5% of the deals we saw.


Be wary of business opportunities that depend upon an IPO for the exit. Very few businesses go public. You may want to reread “Going Public To Get Rich” in the April, 2003 Catalyst.


All successful businesses must successfully navigate two major inflection points:

  1. The acquisition of enough profitable customers before they run out of capital; and
  2. The ability to scale and “ramp-up” to successfully service the growth.

Do not underestimate these 2 hurdles. First, most new businesses overestimate the quantity, speed, and profitability of customer acquisition. Getting customers to switch their buying habits is hard. Secondly, many entrepreneurs fail in scaling their business because they are unable to transition from being the doer to being a manager, and they can not handle the simultaneous conflicting time demands of hiring, training, implementing quality controls, implementing financial controls, marketing, customer service, etc. It takes, in most cases, different skills and experience to manage a growing business than a start-up and it may take different employees. Even successful entrepreneurs will tell you that they waited too long out of loyalty before upgrading their staff with more highly trained and experienced people. In looking at businesses, evaluate how they plan to navigate both of these hurdles – how realistic is management about the 2 hurdles.


Investing is a lot like betting on horses. What counts most? TRACK RECORD. In your case, the horse is the people leading the business. People execute business plans. What kind of experience is important? Two types of experience will increase the probability of success:

  1. Invest in people who have previously successfully executed business plans. Be cautious betting on a novice or a lawyer, accountant, or consultant trying to start an operating business; and
  2. Invest in people who have deep industry experience, knowledge, and relationships in the type of business they are trying to build. Sam Walton, Ross Perot, Bernie Marcus and Arthur Blank all had deep industry expertise in the businesses they built. And in each case their employers had previously rejected their idea or concept.


Successful business builders are generally people driven to succeed. This drive is motivated by a fear of poverty and by a desire to earn the love and respect of key “others.” This strong drive is masked though in most cases by a friendly demeanor and personable personality. There is evidence that successful entrepreneurs and business builders can be people:

  1. Who came from a humble background and were driven to escape that background – for example, Howard Schultz of Starbucks;
  2. If a man, the entrepreneur had a nice, weak father and a strong, ambitious mother whom he adored and who conditioned her love on his attaining success in school, jobs, sports, clubs, etc., for example, Sam Walton and Jack Welch;
  3. Who are nice, friendly, outgoing types (great sales people) who surround themselves with a strong, inside, detail-oriented compliment and work as a team – Mr./Ms. Outside and Mr./Ms. Inside. Look at Bernie Marcus and Arthur Blank; Look at Hewlett-Packard; Look at Disney; the Walton brothers; etc;
  4. Who are not great geniuses nor necessarily innovators, but are great learners who see opportunity by learning, copying, and imitating or extending what others have done. They are not rigid but are tinkerers trying to improve and to get it right; and
  5. Who were successful in team sports, student government, church leagues, etc., where they learned to lead at an early age and to convince people to follow.

As I half-jokingly say: I would bet anytime on a high achiever who came from a poor background, was trying to earn his mother’s love, was a great people person, who had deep industry experience, was a great sales person, and had a strong inside #2 person.