Sunday, June 30, 2013

Warren Buffett and the Circle of Competence

Continuing my Sunday afternoon Buffettology, I want to highlight one of Warren Buffett's key principles, "The Circle of Competence".

What Buffett means is that the size of the circle and the area it encloses is less important to success than understanding the clear boundaries of that circle.  As long as you know the area where you have a major competitive advantage, you can focus your efforts there and be successful.

For example, Buffett famously eschews tech investments, believing them outside his circle of competence.  He was offered the opportunity to be a founding investor at Intel, but declined.

When it comes to the Circle of Competence, Silicon Valley has exactly the opposite problem as Buffett.  We have a tendency to believe our circle of competence to be far larger than it actually is. One friend relayed a conversation she heard while at a school board meeting; a number of VCs-cum-parents wanted more decision-making power.  "This is what we do," said one General Partner/Mom, "We know how to ask the right questions."

Within the realm of high-tech startups, it is possible to be a process expert without being an expert on every technology.  However, you shouldn't conclude from this that the Silicon Valley process can be just as easily applied to other situations.  It's one hell of a hammer, and it's changed the world many times.  But that doesn't mean it can solve any problem.

Sometimes, naivete about one's circle of competence can be helpful; VCs famously like investing in young founders who don't know what isn't possible, because sometimes, they prove conventional wisdom wrong.  But being aware of your circle of competence is always useful; if you choose to venture outside it, you can do so knowingly, and with an experimental spirit.

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