I caught up with a single family office over the holidays. Let’s call him Mark. Mark told me that he had caught up with a Fund I GP that I had passed on. Let’s call her Susan. In that conversation with that GP, he told Susan that I introed him to another GP “Charlie” whom she knew and whom I invested in, which he eventually passed on. And Susan asked Mark why I invested. That it made no sense. That Susan herself would have never invested in Charlie. As such, she didn’t know why I would invest in Charlie and not her. After sharing that last line, with no explicit question that plead for an answer, Mark looked at me, waiting to see how I’d respond.
I stared back at him. And he to I. And I to him.
As he felt seemingly unsatisfied with my reaction, I asked him, “If I put both of these GPs on a report card, how would you score each?”
He followed up, “Susan is more experienced. She’s done X and Y. And she came from Z.”
“You’re right. Susan is all of that. In fact, on a report card, it’s fair to say that her GPA is a solid B+, maybe an A-.”
He concurred.
I went on. “And Charlie would probably score a B, maybe B-, if we were really critical. But to you, did anything about Susan jump out at you?”
“Not exactly.”
“What about Charlie?”
“Well, there’s that…”
“I agree. For me, and you don’t have to agree with my assessment, Charlie is on paper a lower GPA than Susan, but Charlie spikes in very particular areas. Areas I personally believe puts him in a position to do really well. That he will have a good chance to outperform. Susan is factually better in almost every area than Charlie is, but she doesn’t spike in any area. At least it’s not obvious to me. I like her thesis. I think she has a great GP-thesis fit. And I do believe that her thesis has a really good chance of being right, but I’m not sure she’s the only person in the world who can do that, much less the best person in the world to do it. In fact, I can think of two other GPs who spike in that thesis area where she doesn’t.”
It’s harsh criticism. And it’s not my place to give non-constructive criticism. So what I said when I passed was that we had other deals in the pipeline that were a lot more interesting to us. Which is true. But it’s not my place to say “I don’t think you’re good enough.” And she probably felt my pass was unsatisfying. Because in her shoes, I’d probably feel the same.
I don’t invest in all-rounders. There’s a time and place and industry for those. But I don’t believe it’s venture. Even less early stage emerging managers. There’s a line I’ve long liked in the F1 world. “In Formula 1 it’s nearly impossible to go from 13th to 1st on a sunny day, but it’s possible on a rainy day.” In the uncharted territory of true early, early stage investing, it’s always a rainy day. And to go from 13th to 1st, you need to make bold decisions. Measured, well-timed, but risky decisions. You need to make certain sacrifices to do so.
To me, that meant comparatively lower grade-point averages, but much, much higher select individual subject grades. In fact, only an A++ would suffice. A spike must be at least three standard deviations from the mean. As an emerging manager LP, who plans to be an active participant in the journey, naturally with the GP’s permission, it falls on me and my peers to help our GPs raise their overall GPAs, but we can’t help them spike. But in that, we must know and recognize their flaws.
One of the most interesting spectacles I’ve always marveled at is how lumberjacks fell trees. The first cut is the notch cut that indicates the direction the tree will fall. The second is the felling cut that catalyzes the tree to fall, acting as the hinge.
In many ways, the GP spikes (and flaws) makes the first cut. Whether you count it as nature or nurture. The GP’s job is to figure out which direction they’d like to fall. Or to borrow a line from Mark Manson’s most important question of your life: “What pain do you want in your life? What are you willing to struggle for? How do you choose to suffer?” To further borrow, “What determines your success isn’t ‘What do you want to enjoy?’ The question is, ‘What pain do you want to sustain?’ The quality of your life is not determined by the quality of your positive experiences, but the quality of your negative experiences. And to get good at dealing with negative experiences is to get good at dealing with life.” All in all, it’s a GP’s job to make that choice. An LP cannot make that choice for the GP. And it is a function of the flaws they’re willing to overcome, and how they want to double down on their spikes.
The second cut is for investors, board and advisory members to nudge our investees towards the direction they so chose. As the great Tom Landry once said, “A coach is someone who tells you what you don’t want to hear, who has you see what you don’t want to see, so you can be who you have always known you could be.” But the prerequisite for the second cut is the first. The first requires intentional and special people.
Along a similar vein, my buddy Henry wrote a post recently I really liked.
“Is this founder special?” That’s probably the only question that has to be asked in every non-obvious investment decision. Maybe every investment decision. But especially true under imperfect information conditions. And special isn’t just about getting a high GPA.
Photo by Radek Skrzypczak on Unsplash
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.