Mohnish Pabrai Interview
You know, people think there's a false mental model. People think entrepreneurs take risk. Entrepreneurs do not take risk; they do everything in their power to minimize risk. If you think about Buffett's pinball machine business, what was the risk those two 14-year-olds took? Nothing. Okay, it's 3 in parts. So the second pinball machine will only get bought when the first one's already producing cash, right? And the third one after the second one. So basically, there's no risk. If it fails, they sell those machines for more than they bought them.
Entrepreneurs are actually great risk reducers. They start with something that seems risky, but that's the other thing that is a commonality between entrepreneurs and value investors, which is why the same brain cells get used. Both are trying to minimize risk. You know, we as value investors want to go low-risk, high-return, and great entrepreneurs - that's exactly what they're doing. They're going low-risk, high-return. Nobody is doing high-risk, high-return.
If you look at the United States, probably around a million businesses - more than a million businesses - a year get formed in the United States. Venture-backed businesses are less than, much less than even 1% of that pie. It might be in most years less than one-tenth of 1%. So if there was no venture capital and no venture-backed businesses, it would make no difference to the landscape. Okay, we'd still have the million businesses being formed.
Venture-backed businesses are a different animal because they are high-risk, high-return. What the VC wants you to do - the VC's got 10 bets, he doesn't care whether your bet works or not, he just wants one of those 10 to work. So he wants you to step on the gas as aggressively as possible. If you blow up, you blow up. When you are an entrepreneur who's not venture-backed, that is not how you go. You don't just put foot on the gas; you're very careful about downside protection.
So what happened even with some of the big entrepreneurs? Richard Branson, I think, is the people see him as this free, you know, risk-taker, reckless sort of guy. But you've pointed out that that's not true about Richard Branson. In this case, one of the stories I love about Branson is when he had the idea to start Virgin Atlantic Airline. The minimum that you need to start transatlantic service is a Boeing 747, okay? Couple hundred million dollars, right? And Branson got Virgin Atlantic off the ground with no money.
So what he did is he calls directory assistance in the United States, 555-1212, in Seattle 206-555-1212, asks for the number for Boeing. Okay, gets the number for Boeing, calls the main switchboard and says, "I'd like to lease a 747 that you guys might have hanging around that you're not using." They hang up on him. Keeps calling them and finally, the lady at switchboard says, "Let me transfer you to someone who can get rid of you properly." So she transfers him to someone who's head of like commercial sales, and this guy tells him, "Listen, Mr. Branson, in every country we have one customer, and you are not the customer in the UK. It's British Airways, and so therefore there's nothing to talk about."
So Richard tells them, "Listen, I agree with you, that's fine, but just humor me for a second. Do you have an old Boeing 747 lying around that you're not using?" And he says, "Yeah, actually we do." "And if one of your customers, like the one in the UK, called you, like British Airways called you and they wanted a plane, what would you lease it for?" So he says, "Well, I really don't need to have this conversation, but we would lease it for about 200,000 a month." Okay, 2 or 300,000 a month.
And Branson was able to convince Boeing to lease him that 747 because it was sitting and doing nothing. Then when he set up Virgin Atlantic, he said you get paid for all the future flights in advance because people buy tickets. So the plane's going to fly in April, people already bought tickets in February. So you say, "I got cash coming in two months, three months before the plane's going to fly, and I'm going to pay for the fuel 30 days after that plane lands." Okay, so he had negative working capital, and the lease payment is also in arrears. So basically, he was able to get Virgin Atlantic off the ground with zero equity. Now the way I look at it is that if you can...