Conceptual vs. experimental entrepreneurs

One of the companies that I admire a lot, but that many people have never heard of is Danaher. Everyone has heard of Warren Buffett and his approach to buying high-quality companies that have a “moat” and can be held forever. Danaher has been doing something similar but with a slightly different twist.

Danaher has for decades bought companies that are operating in niche markets and were run by entrepreneurial founders. But Danaher has never been in the spotlight because it doesn’t look for the glamourous “conceptual entrepreneurs” like Elon Musk or Steve Jobs that revolutionise an industry. Rather, they have looked for “experimental entrepreneurs”.

What’s the difference?

Conceptual entrepreneurs, according to David Galenson are people who have “precise goals, formulate radical new methods to achieve them and execute their plans directly.” Steve Jobs is a great example of such a conceptual entrepreneur. He invented radically new gadgets like the Mac computer, the iPod and the iPhone that have changed the way we think and use computers, listen to music, and use phones. He knew what he wanted and he would push everyone who worked in his company to get it done without any compromises.

James Dyson, in comparison, is no Steve Jobs. James Dyson is an experimental entrepreneur, i.e. someone who, in the words of David Galenson, is someone who has “imprecise goals, which they pursue tentatively and incrementally by a process of trial and error.” A Dyson vacuum is still a vacuum. No new functionality, no new gimmicks. But it is the best vacuum in the world thanks to constant tinkering by Dyson and his employees.

James Dyson is in fact a rarity since he is an experimental entrepreneur who has become famous. Most experimental entrepreneurs can be found in the fields of engineering and hard sciences. And even though they develop revolutionary technology that changes lives, they are often unknown. Do you know who invented LED lights? I bet you know who invented the light bulb, though. Thomas Edison was a conceptual entrepreneur and his light bulb changed the world. Nick Holonyak was a consulting engineer for Thomas Edison’s General Electric and invented the first LED light in 1962. Today, LED lights are replacing lightbulbs everywhere and are used for applications that would be impossible for standard light bulbs.

That’s what experimental entrepreneurs do. They take a product and make it better, gradually, step by step, until it is perfect. They are not stars but unlike conceptual entrepreneurs, they fail less often. In our society, we worship the conceptual entrepreneurs who revolutionise the world. But for every one of these, there are hundreds, if not thousands that have failed. Does anyone remember John Miller-Kirkpatrick?

I don’t know if it is conscious or unconscious, but the leadership of Danaher has realised that you have a much higher success rate by buying businesses run by experimental entrepreneurs and helping them make their businesses even better. And while Danaher isn’t the world’s largest company by market cap, it has clearly outperformed both the US stock market and Warren Buffet’s Berkshire Hathaway, not just recently, but over the last 30 years.

As an investor, if you can find these experimental entrepreneurs or these businesses that are built on constant improvement and constant tinkering, you may not end up with the next Apple, but you will also not end up with the next dud that goes bankrupt. Most likely, you will end up with a great company that will allow you to reap superior returns without excessive risks.

Danaher vs. Berkshire and S&P 500

Source: Bloomberg