I'm trying to wrap my head around the intersection of business and investing.
I think investors more or less invest in businesses, they may not be an operator but having some basic knowledge of how a business operates is arguably a necessary component of being a good investor.
Good is a relative and dynamic term here. Some businesses can operate for years on breakeven margins or even underwater and then later on become profitable.
This could make sense from the pov that the investors of such businesses are "okay" with sitting on a loss, especially knowing that the fundamentals are still sound.
Quick question, how long can you sustain losses while building for the future?
I'm not sure though how the mechanism plays out in reality. I'd probably not be able to stomach watching my investment decline year after year even when I intellectually believed in the long-term vision.
It's a bit lacking in common sense, but I do get the part also about logic not having a seat at the table in such matters.
Say I believe in the founders and what they're building, or personally know one of them, sitting on a loss will take on a different dynamic altogether.
It's no longer just about the money anymore. Relationships, trust, and personal conviction in specific people rather than abstract business metrics.
I think such nuances reduce some of the sensible-ness of pure financial analysis and introduce psychological and social factors that traditional investment theory doesn't adequately address.
Just recently, I came across this image below about businesses(companies) going bust within 10 years.
What the Survival Curves Tell Us
By year 10, roughly 85-90% of companies across all size categories have disappeared due to bankruptcy or liquidation.
I try to view it from a supply demand dynamic, in that the demand is concentrated within a basic segment while the supply gets over saturated and eventually died off. But this may be too simplistic and only a piece of the puzzle.
Several patterns do emerge from this data, some of them are:
Size matters, but not as much as you'd think. While larger companies (those in the $100M-$10B range) show marginally better survival rates, the difference isn't dramatic. Even billion-dollar companies have only about a 10-15% survival probability at the 20-year mark. Scale provides some protection but not immunity from market forces.
The first decade is the killing field. The steepest part of all curves occurs in the first 10 years, with the most dramatic drop in the first 5 years. This somewhat aligns with the common startup wisdom about the "valley of death", which is the period companies burn through initial funding while trying to find product-market fit.
Time is the ultimate test. This is the most sobering part in my view, it's how the curves continue declining even after companies have "made it" past the initial startup phase?
Impressions And Learnings
The patience paradox can be summed up as investors need patience to allow great businesses to develop. Patience can also mean holding onto dying investments too long.
The challenge is in distinguishing between temporary setbacks in fundamentally sound businesses versus structural problems that will lead to the graveyard.
Given these survival rates, I'm leaning towards concentrated bets on individual companies becoming extremely risky. The math suggests you need enough positions to capture the few winners that compensate for the many failures.
The personal relationship factor I mentioned earlier also starts getting more complex in this context.
Knowing founders personally could only give you better insight into their ability to navigate crisis, this may be a great advantage to have but just don't lean too much into making it harder for yourself to objectively assess when a company is heading toward that 85-90% failure cohort.
Even though they're exceptions that prove the rule, the companies that do survive and thrive tend to do so by defying conventional wisdom about profitability timelines with a bit of luck also.
For every Amazon that lost money for years while building an empire, there are thousands of companies that lost money for years and simply ran out of time and capital.
Thanks for reading!! Share your thoughts below on the comments.