These principles often go hand-in-hand, allowing companies to compound earnings and drive meaningful, long-term value creation. Unlike commodity businesses, businesses with durable economic moats do not have to invest much back into the enterprise to maintain their moat. As Buffett stated at one of Berkshire Hathaway’s legendary Meeting of Shareholders:
“What we’re trying to find is a business that, for one reason or another—it can be because it’s the low-cost producer in some area . . . because it has a natural franchise . . . because of its position in the consumers’ mind . . . because of a technological advantage, or any kind of reason at all, that it has this moat around it.”
These principles came into play when my firm provided growth equity to a Chicago-based fixed wireless internet service provider, SilverIP Communications. SilverIP is a fast-growing, founder-led business with a technological competitive advantage that enables the business to operate at a lower cost. SilverIP offers a mission-critical service and, in passing on its savings to customers, continues to gain market share. We appreciate that this sustainable advantage allows the business to sign customers to multiyear service agreements, locking in contractually recurring revenues and supporting high customer retention upon renewal. Having learned from Buffett, we believe that so long as the business maintains its low-cost advantage, it will continue to benefit from higher-than-average returns on invested capital, allowing the enterprise value to meaningfully compound.
What if your business has neither a high ROIC or an economic moat? While perhaps not a great fit for Buffett, you can still build a great business based on his key principles.