In yesterday’s post (see here), I shared a quarterly letter written by an institutional investor that gives his thoughts on investing in public software companies. The letter references a 1997 email exchange between Warren Buffett and Microsoft executive Jeff Raikes, which caught my attention. Here’s that section of the letter:

SaaS is an amazing business model, which makes us reluctant to give up on the category entirely without deeper analysis. Buffett always says that the best business is a royalty on another fellow’s sales—someone else puts up the capital and takes the risk, leaving you a high-margin, capital-light, recurring revenue stream (particularly relevant during troubled times like recently with the Iran war, when traditional companies face oil/margin/ consumer demand risk and can become difficult to analyze). Traditionally, these royalty-like businesses were rare, expensive, and often no longer fast-growing. Software is a pure expression of that thesis (Jeff Raikes at Microsoft made this point to Buffett in his famous 1997 email) and happens to have the added benefit of continued high growth. When that royalty is offered cheaply, it’s worth looking into more deeply.

This “famous” email is new to me. I’m really curious to understand why it’s so famous and to learn more about Raikes’s and Buffett’s thinking on royalty-like businesses.

I’m going to see if I can dig up this email exchange. If I find it, I’ll share what I learn in another post.

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