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Comment by salmonlogs | Hacker News Reader

If the genius business model relies on trusting people because "we have tons of mutual friends" then its just friends of friends investing in each other. That is not even slightly comparable to Berkshire Hathway and shows a stunning level of naivety.

The typical process requires due diligence because there is no trust - there are a huge amount of dodgy businesses, sketchy owners and smooth talkers trying to extract cash from investors.

This model might work for a few years but inevitably requires moving further out of the trust network where deeper and further due diligence is required. Or, its not done and every deal will get worse quality and expose them to more risk.

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If it is naive the LPs signed off and agree with the strategy.

If it’s not, it differentiates them from competitors. Until you’ve received a 35 page word document from a big public company with bullet point questions (their “standard” catch all set) it’s hard to describe the sheer pain of certain diligence; it can take a team of 6-8 people up to 2-3 weeks to turn something (depending how much you prepared by predicting requests and prepopulating the answers into data room before).

Having worked in financial services, my intuition suggests they are correct. For example once on a buy side engagement helping a client find and acquire bolt-ons (outsourced Corp dev essentially), ran across a company where something didn’t feel right. Did exactly what the Tiny guys did: looked at the bank statements and credit card info and built my own set of financials from scratch in roughly a day. It’s doable.

Now… also had the opposite happen and found some really eyebrow raising stuff over the years. Probably more often than not at least something borderline material shows up if you dig deep and far back enough. The partner at large fund once told me: “No deal is perfect; if you waited for the perfect company you’d never invest.”

The investing thesis can probably be boiled down to: most companies are run as they say they are (honestly), a few companies are unknowingly run poorly (inaptitude), and a very few are run fraudulently (wilfull deception).

The due diligence process is designed to ensure the last one is ferreted out.

If you believe you can find other signals to identify and avoid those companies, then why still conduct it (aka the most painful part of the process)?

Honest companies are not an issue, and inept companies can be recognized through a less disruptive audit.

> The due diligence process is designed to ensure the last one is ferreted out.

That's the stated purpose, yes, but the author implies the due diligence process is made to be intentionally painful and drawn-out to gain leverage over the acquisition target, and to dig up dirt in the company. At the end of the process, the new leverage and new dirt is used to try to aggressively re-negotiate the deal. Most companies don't cave to this, so most deals don't go through.

Presumably, this guy short circuits the process by just low-balling right off the bat then moving on if they don't accept, which saves both parties time and money.

Maybe it comes out like 3 deals the BH way where one gets bad, versus 1 deal with the standard due diligence? Of course that won't work on naivete alone. But using keen business (Buffett) and psychological (Munger) sense, why not?

And you know this because?

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