Category: Venture Capital

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To Court or Not to Court (Big LPs)

volkswagon, mini, big, van

I’ve had multiple conversations with emerging managers currently fundraising over the past few weeks, and the common theme, outside of the usual no’s, seems to be that larger LPs are saying, “If you were raising a larger fund, we would invest.”

And so there’s this catch 22 in the market right now. In one Fund I GP’s words, “either raise a larger fund and be told by the large checks that they don’t do Fund I’s. Or do a smaller fund, and be told by the high quality LPs that they’re too small.”

As a note, for the uninitiated, most large, seasoned LPs usually don’t want their check to be more than 10% of the fund. Why? Too much exposure in a single asset. And the need to diversify. Every year, there are really 20 great companies that are made. Or on the higher end, as Allocate’s Samir Kaji recently wrote, “30-50 companies drive the majority of returns.” Your goal as an LP, is to get as much exposure to those as possible. And they rarely all come out of just 1-2 funds.

If LPs are open to taking up more than 10% of the fund, they usually come with rather aggressive terms. For instance, investing into the GP stake, as opposed the to the LP. That’s a conversation for another day though.

As such, I’ve seen many a manager play both angles. They call it the “toggle.” If we raise a target of $10M fund, we’ll only do pre-seed. We’ll also have no reserves. If we raise a $25M fund, we’ll have 20% reserves and more seed checks. But if we’re able to close a $50M fund, we’ll have 33% reserves and do 50% pre-seed and 50% seed. The deltas between some fund managers’ targets and caps have grown as wide as the Grand Canyon. I was chatting with a Fund I GP yesterday who had a $10M target with $40M cap. Still relatively reasonable. Another GP raising their Fund I two weeks ago told me he had a $15M target and $70M cap. Far less reasonable. In fact, I might even say, a $15M fund and a $70M fund are two completely different strategies.

So begs the question, as a Fund I or II GP, is it worth raising a larger fund to possibly close large LPs or staying disciplined in your pre-product-market fit fund?

Spoiler alert… I don’t have the silver bullet. So if you’re looking for one, this blogpost isn’t worth your time.

But if you’re not, here’s how I’ve been thinking about it.

The short answer is really, whoever’s willing to give you money. Not the most sophisticated answer, but if you know large LPs well and they’re willing to invest in you, go bigger. Otherwise, you need to consider a more grassroots approach.

If you have a strong, portable, relevant track record that’s either returned good distributions already OR that has persisted for at least 6-7 years, larger LPs may be more open to investing in you. If not, you may need to play the numbers game with smaller LPs, that are liquidity-constrained as of now. And for that, you either take smaller checks, or prove you are the best option for their $250K LP check, that it somehow outcompetes the S&P, 3-year treasury bonds (because of interest rates), real estate and so on.

Also, remember that LPs are always nice in meeting #1. I’ve heard of very few instances where they’re not. A lot are just in exploratory mode. No pressure to commit. You will also need a great barometer of what nice looks like and what kindness looks like. Otherwise, you will waste a lot of time.

What does that mean? It is easier for a large LP to tell you “I will invest if your fund was bigger” than to tell you “No.” It’s the equivalent of VCs telling founders, “You’re too early for me.” And the same as recruiters and hiring managers telling job candidates “We have a highly competitive pool, and while we loved meeting you and you’re great…” There might be some truth to it, but a lot of smokes and mirrors, and a fear to offend people. I get it. We’re all people.

Just don’t lie to yourself.

Taking the hard road, which will be true for the vast majority of managers raising now, is to keep the fund size small and disciplined. Aim for a minimum viable fund. And deploy.

The minimum viable fund

Simply put, what is the minimum you need to execute your strategy? To set yourself up to raise a larger fund 1-2 funds from now?

What assumptions are you trying to prove?

What does your ideal Fund III look like? And What does fund-market fit look like to you? Be as detailed as you can. It could be that you’re getting four high quality deals per quarter. And that you have $30-40M to deploy per senior partner. That you’re leading rounds for target post-money valuations between $10-20M. That you have early DPI from Fund I by then. And so on.

Then work backwards. If that’s what Fund III looks like, what does Fund II look like? What does Fund I look like? As you’re backcasting, to borrow a Mike Maples Jr. term, each fund when you work backwards in time is focused on testing 1-2 key assumptions that you and LPs need to get conviction on. Assumptions that require data.

I’ll give an example of one kind of assumption. Your ability to win allocation.

If Fund III is where you lead pre-seed and seed rounds and have strong ownership targets, then Fund II is where you have to test if founders and other downstream investors will let you take pro rata for more than one round. And, if you can win or negotiate for that pro rata. It all comes down to, will a founder pick you over another awesome, possibly brand-name VC? And if so, why?

Some LPs prefer co-investment opportunities. And while it is helpful for them to go direct, part of the reason for it, is even if your fund can’t execute on the pro rata, just the ability to negotiate that is powerful for the day you need to lead. And if that’s Fund II, Fund I may be, can you win allocation in hot rounds and/or can you discover non-obvious companies before they become obvious?

Let’s say your Fund I is focused on the latter. You’re probably investing on $5-10M post-money valuations, and you’re going to try to maintain 5% ownership till the A-round. That’s $250-500K checks. $250K would be your base check, trying to get at least 30 shots on goal. That’s a $9-10M minimum viable fund, hoping for more than a 2% outlier rate in the generalist market, or north of a 10% outlier rate in bio, hard sciences, healthcare, or deep tech space.

Any less than 30 companies, you’re going for the hyper-concentrated portfolio and it’s a lot more about ownership and the greater the pressure, you need to pick well. But the goal is to get to a 3x net minimum for your fund by the time you get to a Fund III.

I heard from LPs with more miles on their odometer that once upon a time, it was normal for GPs to give undeployed capital back to their LPs. Circa 2002-2005 vintage funds. Where GPs don’t execute on 50% of their capital calls. But we don’t live in that era anymore. For better or worse.

Some LPs don’t even want their capital back early because then they need to pay taxes AND find another asset that compounds at the same or better rate your fund currently is. Say 25% IRR or CAGR. That’s hard. Because minus the inflated marks of the last 5 years, 25% is a hard benchmark to hit for the vast majority of funds.

So sometimes to be the best fiduciary, that means raising a small fund today (easier to return too) to set you best up for tomorrow.

The questions to ask

If you are in the midst of conversation and trying to court a large LP, do ask the following:

  1. Have you invested in an emerging manager in the last two years? — If not, you’re unlikely to be their first. If you’re not seeing demonstrable progress from intro to partnership meeting to diligence within three meetings, move on. If they did so, 20 years ago, doesn’t count. That means investing in emerging managers is not top of mind for them.
  2. What is your minimum check size? And how often, if ever do you deviate from it? If so, why was the last time you did so? — Multiply this number by 10. If it’s greater than your fund size, you might find more success elsewhere.
  3. What is the typical process look like? — Find out what their process is and see if you’re progressing forward. If not, very clear they may not be interested.
  4. (If the person you are talking to does seem to really like you) What are the questions you’re being asking in your investment committee? — Figure out the bottlenecks as soon as you can. And determine if that’s something you can solve for in the near future or not. If it’s track record, you realistically can’t.
  5. What is the thing you hated most in the last few years? — Understand their red flags early on in the process. And cross your fingers, it’s not something that’s relevant to you or your fund. If it is, move on.

Of course, the above, while useful pre-qualifying questions, are mentioned in broad strokes. Your mileage may vary. Have there been examples of large LPs betting on small funds? Yes. But far and few in between. But don’t expect you will change many minds.

In closing

Fundraising is all about momentum and time you’re in market. You can theoretically spend six months trying to close one large LP, but your time might be better spent closing smaller checks in the beginning from people who believe in you and strong referenceable names. And if you so choose, come back to the large LP in the second half of your fundraise.

Photo by Alexei Maridashvili on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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Why No One’s Marking Down Their Portfolio

In one of the recent All-In podcast episodes, Bill Gurley shared that both VCs and LPs aren’t marking down their portfolios. For GPs, inflated numbers helps you raise the next fund. For LPs, they’re given their “bonus on paper marks. So, they don’t have an incentive to dial around to their GPs and say, ‘Get their marks right.’ ‘Cause it’s actually going to reflect poorly on them if they were to roll those up.”

The last few years, enterprise value has been largely based on multiple expansion. The truth is we’re not going to see much of it in the incoming years. Even AI that’s exploding right now will see a contraction of their multiples in due time.

Companies that should not be in business today will see their ultimatum too in the next few years. Hunter Walk recently wrote “they’re 2017-2021’s normal failures clustered into current times.”

So, while some GPs do pre-emptively mark down their portfolio by 25-30% — we’re seeing this behavior more so in pre-seed and seed funds — the only people in this whole dance that are incented to mark down portfolios are new LPs trying to figure out if they want to commit to a new fund.

Charles Hudson recently shared a beautiful chart:

Source: Charles Hudson’s The number one piece of advice I give to new VCs launching their investing careers

And while the advice applies to newer VCs, the same is true for experienced investors. Of course, most investors aim to be in the upper right-hand corner, but that’s really, really hard. In truth, most notable investors fall in two cohorts: marketers and tastemakers.

Marketers:

  • Share a high volume of deal flow,
  • Lower quality opportunities,
  • Have relatively low conviction on each deal compared to their counterparts, the tastemakers,
  • Have comparatively diversified portfolios,
  • And could have adverse effects on branding and positioning in the market.

Tastemakers, on the other hand:

  • Share a lower volume of deals,
  • Usually higher quality opportunities,
  • Higher conviction per deal,
  • Have comparatively more concentrated portfolios.
  • And the downside may simply be the fact that their volume may not warrant raising a fund around, and might be better off as an opportunistic investor.

And speaking of concentrated versus diversified, the interesting thing, as Samir Kaji shared on his recent podcast episode, is that “at 85 companies [in the portfolio], you had over 90% chance of getting a 2X. But a very low chance at getting anything above a 3X. And with smaller portfolio sizes [between 15-25 companies], there was much higher variance — both on the top and bottom. Higher chance that you perform worse than the median. But a much higher chance of being in the top quartile and even beyond that, in the top decile.”

It’s also so hard to tell what high quality companies look like before the liquidation event. Naturally, high quality funds are even harder to tell before the fund term. It’s ’cause of that that a few LPs and I wrote the post last week on early DPI. But I digress. At the end of the day, many, for better or worse, use valuation and markups as a proxy for quality.

But really, the last week’s valuation in this week’s market environment. Rather than chasing an arbitrary number, a lot more LPs when evaluating net new fund investments, and GPs making net new startup investments, care about the quality of the businesses they invest in. It’s not about the unicorns; it’s about the centaurs. The $100M annualized revenue businesses.

Samir Kaji’s words in 2022 ring true then as they do today. “Mark-downs of prior vintages are starting to occur but will take some time given valuation and reporting lags.” We’re still seeing many who have yet to go back to market. As many say, the flat round is the new up round. But until folks go back to market, there are many who won’t jump the gun in writing down their portfolio. But they are cautioning themselves, so that hopefully they won’t make the same mistakes again. The goalposts have changed.

I’m reminded of Henry McCance’s words channeled through Chris Douvos. “When an asset class works well, capital is expensive and time is cheap. What we saw in the bubble was that capital got cheap and time got expensive.”

We’re now back at a time when capital is expensive and time is cheap.

Photo by Frank Zinsli on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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The Science of Selling – Early DPI Benchmarks

The snapshot

Some of you reading here are busy, so we’ll keep this top part brief, as an abstract sharing our top three observations of leading fund managers.

Generally speaking, don’t sell your fast growing winners early.

Except when…

Selling on your way up may not be a crazy idea.

  1. You might sell when you want to lock in DPI. Don’t sell more than 20% of your fund’s positions unless you are locking in meaningful DPI for your fund. For instance, at each point in time, something that’s greater than 0.5X, 1X, 2X, or 3X of your fund size.
  2. You might consider selling when you’ve lost conviction. Consider selling a position when you feel the market has over-priced the actual value, or even up to 100% if you’ve lost conviction.
  3. You might consider selling when one is growing slower than your target IRR. If companies are growing slower and even only as fast as your target IRR, consider selling if not at too much of a discount (Note: there may be some political and/or signaling issues to consider here as well. But will save the topic of signaling for another blog post).

Do note that the above are not hard and fast rules. Every decision should be made in context to other moving variables. And that the numbers below are tailored to early-stage funds.

Net TVPI Benchmarks from Years 5-15
Net DPI Benchmarks from Years 5-15

Let’s go deeper…

On a cloudless Friday morning, basking in the morning glory of Los Altos, between lattes and croissants, between two nerds (or one of whom might identify as a geek more than a nerd), we pondered one question:

How much of selling is art? How much is science?

Between USV selling 30% of their Twitter stake, Menlo selling half of their Uber, Benchmark only selling 15% of their Uber pre-IPO shares, and Blackbird recently selling 20% of its Canva stake, it feels more like the former than the latter. Then when Howard Marks says selling is all about relative selection and the opportunity cost of not doing so, it seems to reinforce the artistic form of getting “moolah in da coolah” to borrow a Chris Douvos trademark.

Everyone seems to have a financial model for when and how to invest, but part of being a fiduciary of capital is also knowing when to distribute – when to sell. When RVPI turns into DPI. And we haven’t seen many models for selling yet. At least none have surfaced publicly or privately for us.
The best thought piece we’ve seen in the space has been Fred Wilson’s Taking Money “Off the Table”. At USV, they “typically seek to liquidate somewhere between 10% and 30% of our position in these pre-IPO liquidity transactions. Doing so allows us to hold onto the balance while de-risking the entire investment.”

Source: Fred Wilson’s Taking Money “Off The Table”

In aggregate, we’ve seen venture fund distributions follow very much of the power law – whether you’re looking at Correlation’s recent findings…

Source: Correlation Ventures

Or what James Heath has found across 1000+ firms’ data on Pitchbook.

Source: James Heath

As such, it gave birth to a thought… What if selling was more of a science?

What would that look like?

Between two Daves, it was not the Dave with sneakers and a baseball cap and with the profound disregard to healthy diets, given the fat slab of bacon in his croissan’wich, who had the answer there.

“To start off, in a concentrated portfolio of 30 investments, a fund returner is a 30x investment. For a 50-investment fund, it’s 50x. And while hitting the 0.5x DPI milestone by years 5-8, and a 2x DPI milestone by years 8-12, is the sign of a great fund, you shouldn’t think about selling much of your TVPI for DPI unless or until your TVPI is starting to exceed 2-3x.” Which seems to corroborate quite well with Chamath Palihapitiya’s findings that funds between 2010 and 2020 convert have, on average, converted about 25% of their TVPI to DPI.

“Moreover, usually you shouldn’t be selling more than 20% of the portfolio at one time (unless you’re locking in / have already locked in 3X or more DPI). You should be dollar-cost averaging – ensuring time diversity – on the way out as well. AND usually only if a company that’s UNDER-growing or OVER-valued compared to the rest of your portfolio. Say your portfolio is growing at 30% year-over-year, but an individual asset is growing slower at only 10-20% OR you believe it is overvalued, that’s when you think about taking cash off the table. Sell part (or even all) of your stake, if selling returns a meaningful DPI for the fund, and if you’re not capping too upside in exchange for locking in a floor.”

Meaningful DPI, admittedly, does mean different benchmarks for different kinds of LPs. For some, that may mean 0.25X. For others that may mean north of 0.5X or 1X.

“On the other hand, if a company is outperforming / outgrowing the rest of the portfolio, generally hold on to it and don’t sell more than 10-20% (again, unless you’re locking in meaningful DPI, or perhaps if it’s so large that it has become a concentration risk).”

I will caveat that there is great merit in its counterpart as well. Selling early is by definition capping your upside. If you believe an asset is reaching its terminal value, that’s fine, but do be aware of signaling risk as well. The latter may end up being an unintended, but self-fulfilling prophecy.

So, it begged the question: Under the assumption that funds are 15-year funds, what is meaningful DPI? TVPI? At the 5-year mark? 7.5 years in? 10 years? And 12.5 years?

The truth is the only opportunities to sell come from the best companies in your portfolio. And probably the companies, if anything, you should be holding on to. By selling early, you are capping your downside, but at the same time capping your upside on the entire portfolio. When the opportunity arises to lock in some DPI, it’s worth considering the top 3-5 positions in your fund. For instance, if your #2 company is growing quickly, you may not be capping the upside as much.

Do keep in mind that sometimes it’s hard to fully conceptualize the value of compounding. As one of my favorite LPs reminded me, if an asset is growing 35% year-over-year, the last 20% of the time produces 56% of the return. Or if an asset is growing 25% YoY, if you sell 20% earlier (assuming 12 year time horizons), you’re missing out on 45% of the upside.

As a GP, you need to figure out if you’re IRR or multiple focused. Locking in early DPI means your IRR will look great, but your overall fund multiple may suffer.

As an LP, that also means if the gains are taxable (meaning they don’t qualify for QSBS or are sold before QSBS kick in), you need to pay taxes AND find another asset that’s compounding at a similar or better rate. As Howard Marks puts it, you need to find another investment with “superior risk-adjusted prospective returns.”

And so began the search for not just moolah in da coolah, but how much moolah in da coolah is good moolah in da coolah? And how much is great?

Net TVPI Benchmarks from Years 5-15
Net DPI Benchmarks from Years 5-15

Some caveats

Of course, if you’ve been around the block for a minute, you know that no numbers can be held in isolation to others. No facts, no data points alienated from the rest.

Some reasons why early DPI may not hold as much weight:

  • Early acqui-hires. Usually not a meaningful DPI and a small, small fraction of the fund.
    • There’s a possibility this may be the case for some 2020-2021 vintages, as a meaningful proportion of their portfolio companies exit small but early.
    • In other words, DPI is constructed of small, but many exits, rather than a meaningful few exits.
  • TVPI is less than 2-3x of DPI, only a few years into the fund. In other words, their overall portfolio may not be doing too hot. Obviously, the later the fund is to its term, the more TVPI and DPI are alike.
  • As a believer in the power law, if on average it takes an outlier 8 years to emerge AND the small percentage of winners in the portfolio drive your return, your DPI will look dramatically different in year 5 versus 10. For pre-seed and seed funds, it’s fair to assume half (or more) companies go to zero within the first 3-5 years. And in 10 years, more than 80% of your portfolio value comes from less than 20% of your companies. Hell, it might even be 90% of your portfolio value comes from 10% of your companies. In other words, the power law.
  • GPs invested in good quality businesses. Some businesses may not receive markups, but may be profitable already, or growing consistently year-over-year that they don’t need to raise another round any time soon.
  • Additionally, if you haven’t been in the investing game for long, persistence of track record, duration, and TVPI may matter more in your pitch. If you’ve been around the block, IRR and DPI will matter more.
  • As the great Charlie Munger once said, “selling for market-timing purposes actually gives an investor two ways to be wrong: the decline may or may not occur, and if it does, you’ll have to figure out when the time is right to go back in.” For private market investors, unless you can buy secondaries, you’ll never have a time to go back in until the public offering. As such, it is a one-way door decision.

Some LPs are going to boast better portfolios, and we do admit there will be a few with portfolios better than the above “benchmarks.” And if so, that’s a reason to be proud. In terms of weighting, as a proponent of the power law, there is a high likelihood that we’ve underestimated the percent of crap and meh investments, and overestimated the percent of great investments in an LP’s portfolio. That said, that does leave room for epic fund investments that are outliers by definition. 

We do admit that, really, any attempt to create a reference point for fund data before results speak for themselves is going to be met with disagreement. But we also understand that it is in the discourse, will we find ourselves inching closer to something that will help us sleep better at night.

One more caveat for angels… The truth is as an angel, none of the above really matter all that much. You’re not a fiduciary of anyone else’s capital. And your time horizons most likely look different than a fund’s. It’s all yours. So it’s not about capping your downside, but more so about capping your regret. In other words, a regret minimization framework (aka, “spouse regret/yelling minimization insurance”). 

That will be so unique to you that there is no amount of cajoling that we could do here to tell you otherwise. And that your liquidity timelines are only really constrained by your own liquidity demands.. For instance, buying a new home, sending kids to college, or taking care of your parents (or YOU!) in their old age.

But I do think the above is a useful exercise to think through selling if you had a fund. You would probably break it down more from a bottoms up perspective. What is your average check size? Do you plan to have a concentrated portfolio of sub-30 investments? Or more? Do you plan to follow on? How much if so? And that is your fund size.

In closing

Returning above a 3x DPI is tough. Don’t take our words for it. Even looking at the data, only 12.5% of funds return over a 3x DPI. And only 2.5% return three times their capital back on more than 2 separate funds.

In the power law game we play, as Michael Mauboussin once said, “A lesson inherent in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters.” Most will return zero, or as Jake Kupperman points out: More than 50%.

Source: Jake Kupperman’s The Time Has Come to Modernize the Venture Capital Fund of Funds

But it’s in the outliers that return meaningful DPI, not the rest. Not the acqui-hire nor really that liquidation preference on that small acquisition.

At the end of the day, the goal isn’t for any of the above to be anyone’s Bible, but that it’d start a conversation about how people look at early returns. If there is any new data points that are brought up as a result of this blogpost, I’ll do my best to update this thread post-publication.

Big thank you to Dave McClure for inspiring and collaborating on this piece, and to Eric Woo and all our LP friends who’ve helped with the many revisions, sharing data, edits, language and more. Note: Many of our LP friends chose to stay anonymous but have been super helpful in putting this together.

Footnotes

For the purpose of this piece, we know that “good” and “great”, in fact all of the superlative adjectives, are amorphous goalposts. And those words may mean different things to different people. This blogpost isn’t meant to establish a universal truth, but rather serve as a useful reference point for both LPs, looking for “benchmarking” data, and GPs to know where they stand. For the latter, if your metrics do fall in the “good” to “great” range, they’re definitely worth bragging about.

And so with that long preamble, in the piece above, we defined “good” as top quartile, and “great” as top decile. “Good” as a number on its own, enough for an LP to engage in a conversation with you. And “great” as a number that’ll make LPs running to your doorstep. Or at least to the best of our portfolios, leveraging both publicly reported and polled numbers as well as our own.

Our numbers above are also our best attempt in predicting steady state returns, divorcing ourselves from the bull rush of the last 3-5 vintage years. As such, we understand there are some LPs that prefer to do vintage benchmarking, as opposed to steady state benchmarking. And this blogpost, while it has touched on it, did not focus on the former’s numbers.

EDIT (Aug 18, 2023): Have gotten a few questions about where’s the data coming from. The above numbers in the Net DPI and Net TVPI charts are benchmarks the LPs and I agreed on after looking into our own anecdotal portfolios (some spanning 20+ years of data), as well as referencing Cambridge data. These numbers are not the end-all-be-all, and your mileage as an LP may very much vary depending on your portfolio construction. But rather than be the Bible of DPI/TVPI metrics, the purpose of the above is give rough reference points (in reference to our own portfolios + public data) for those who don’t have any reference points.

Cover Photo by Renate Vanaga on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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#unfiltered #83 There Doesn’t Have to be a First Place

medal, winner, gold, first place

I recently learned that in FISM competitions — competitions hosted by the International Federation of Magic Societies (if the letters aren’t in order, it’s because FISM is in French not in English), that the judges don’t have to award any prizes. Meaning if they don’t think any of the magicians and their acts are up to par, they don’t have to dole out a first, second or third place. And according to Simon Coronel, it happens quite often. The goal is simple. That winning first place should mean something. Not just because you’re better than the rest that day or that year, but that you really deserve to stand among the greats.

And it got me thinking. Are there other fields that should strive for the same level of rigor?

For instance, does an Oscar need to be awarded every year for each category?

Or an Olympic gold medal for each event every four? (Although a caveat to my own, if the rules change, like when in 2010, they banned male full-body suits when swimming at the international stage, then there should be a reevaluation of excellence.)

And there might be some years that the best prize awarded should just be a second place one.

Then there are other contests, where the number of prizes only seem to increase. In other areas, namely to join certain rankings organized by members of the press, you have to pay for your spot. The latter of which I have no experience in. But had heard of accounts from friends who have.

The truth is it’s not my place to rate the world’s greatest artists or athletes. But it does make you wonder that if the magic society can hold themselves to that high of a regard, why can’t the rest of us do so?

Once upon a note

As all good Asian children did, once upon a time, I learned to play the piano since I was five. One of many teachers and admittedly the one I was with for the longest happened to this sweet lady who taught her students out of her home. And every year, usually around the beginning of summer, she would rent out a hall and host a recital between all her students. Every student (and she had 30-40 students) — from beginning to master — would play one song.

The whole recital would last about 2-3 hours. And at the close, there would be an award ceremony. For each skill category, there would be a Best of Show trophy. And for everyone else, a participation trophy. When I was first started off and was quite bad, that participation trophy felt great, even if I was only playing Twinkle Twinkle Little Stars. I put it at the top of my shelf next to my bed, so I would see it every morning when I woke up.

Then 1-2 participation awards later, they had lost their luster. The Best of Show is now what I was aiming for.

For a brief period of time, that was my goal. And eventually I got it. But I remember when I finally got it, I wasn’t nearly as elated as I thought I’d be. ‘Cause that year my teacher decided that one Best of Show wasn’t enough. Three felt right to her. To be fair, I don’t know if she had over-ordered or just felt the need to give more out due to some parental complaints. But I remember receiving mine alongside someone who I knew made a few hiccups on stage. And even though I did the best I could have, I didn’t feel like I deserved it.

So that night, I didn’t even put the Best of Show trophy on my shelf.

A side corollary to angel investing

The greatest feature of being an angel investor (as opposed to being a VC) is that you can be opportunistic. Your fund size is your own liquidity. You’re not tied down to a mandate. Or a deployment schedule. And if so, self-induced. What it means is that you invest only when you see a great company and team. Anything south of that means you don’t have to. You don’t have to award a check to a founder if you don’t feel they’re deserving of a first place. And because of that, “first place” actually means something. Not only to the founders you invest in, but to you.

That said, playing my own devil’s advocate, much of early-stage investing is luck-based game. And it is foolhardy to attribute to skill when a large amount of variables is unbeknownst at the time of investing — be it asymmetric information, or market conditions, incumbent moves, or purely black swan events in the future. The latter few, you need to count on luck more than once. And luck purely defined as “uncertainty in outcome,” in the words of the great Richard Garfield.

Photo by Brands&People on Unsplash

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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An Investor’s Job is to Hear the Silence

headphones, earbuds, listening, hearing

In the world of venture, hell, even in the broader world of investments, we are blessed and cursed a cosmos of information. A data ocean, as some may call it. In the words of the great Howard Marks,

“You have to either:

  1. Somehow do a better job of massaging the current data, which is challenging; or you have to
  2. Be better at making qualitative judgments; or you have to
  3. Be better at figuring out what the future holds.”

And while I go in length why the above are true in a former piece… today, I want to postulate a fourth.

Be better at listening to the silence.

Let me elaborate.

Facts and opinions

If I were to ask you, what day’s your birthday? I bet you could answer pretty quickly.

And the same would be true, if I asked you the color of the sky. Or what you ate for breakfast in the morning. Questions on facts have factual answers. There is either one immediate answer, or an answer you know exactly how to find, and at the very end, still a definitive answer. An example of the latter would be, What is the temperature right now?

On the other hand, if I were to ask you, what do you think about your life partner? The answer varies. You might say she or he is reliable. Or caring. And kind. And if I follow up with silence, you might spend some time thinking and filling the void with more words. Those words… are powerful. They simmer all of your life experiences and your stories — all your trials and tribulations, years, months, weeks, days, hours and minutes — onto a neatly organized platter for the other person. Those words that summarize it all are powerful. But what’s even more interesting to investor is the time it takes to come up with those words. That precious time, as your life is playing out like a flipbook, spends its precious milliseconds hugging silence.

No matter how miniscule those gaps are, they exist. And our goal as investors, and even more so for startup investors or emerging fund investors, with very little data to go on, is to create new datasets. In essence, to ask questions where the answers don’t just fill the air with vibrations, but to find answers that are dotted with tranquil stillness.

Great investors read between the lines. Listen to the pauses — the spaces between words. They look for the quiet thing out loud.

That silence is often more telling than anything you could put on a pitch deck or in a templated answer of “Tell me about your company.”

In closing

I know in this side of the world, we talk a lot about 10-year overnight successes. But let’s focus on the first two words of that phrase first. Ten-year. Startup journeys are long. They’re arduous. More things will go wrong than right. In the words of a serial founder with a few 9-figure exits under his belt, he once told me, “This shit sucks.” It’s tough. And if anyone discounts that — be it founder, operator, investor, friend or family — they don’t get it.

But that’s the very reason why investors look for grit, passion, and for me, obsession. But it’s also not a question we can really ask without getting a gift-wrapped, carefully-prepared answer. And so pushing the boundaries of questions is our job as investors. Why? Because even if for a moment, it sheds light into who we’re truly talking to.

And if there’s evidence of grit, passion, or obsession there, there might be something special.

Photo by Adrian Regeci on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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Venture Capital Is Not Made For Trillion-Dollar Businesses

fish, school, multiple, sea, ocean

Let me elaborate.

VCs win upon liquidity event. And that happens either via M&A or via going public. After that, the shares are transferred to the hands of the LPs and they choose how they’d like to liquidate or keep. To date, we have neither seen a trillion dollar acquisition nor a trillion dollar IPO. I’m not saying it’ll never happen. I’m sure it will, at some point. A combination of inflation and companies finding more liquidity when private markets are bullish.

As Charles Hudson suggests in his one of his latest posts, the venture world has been changing. What was once a cottage industry gave way to multi billion dollar funds. While there are still many small sub-$100M funds, LPs have started evaluating venture capital not as just one big industry, but segmenting it by size of fund. Small funds, sub-$100M. Medium-sized funds, $100-500M. And big funds, funds north of $500M assets under management (AUM for short). And as the Mike Maples dictum goes, your fund size is your strategy.

Returning a billion-dollar fund requires different kinds of investments and math for it to work compared to returning a $50M fund. And one day, as large funds continue to expand into multiple stages, check size, but also eventually into public markets, we might see them start to bet on trillion-dollar outcomes. Because to return a 11- or 12-figure fund, you need to do just that. But given the market we’re in now, I imagine that won’t be in the near future.

The 10,000-foot view

So the thing you have to gain conviction around, as a macroeconomist, is not how big a venture fund should be. Nor the debate on how many VC funds is too many. The number nor the size truly matter in the grand scheme of things.

For an illiquid asset class like venture, where you’re betting on the size of the home runs, not one’s batting average, what you have to gain conviction around is:

  1. How many truly great companies are there every year
  2. How much capital is needed to get these companies to billion dollar outcomes

For the latter, there are two main ways to get to billion dollar exits: going public or getting acquired. And while there are outliers, the best way is for these businesses to get to $100M of recurring revenue.

And everything else is downstream of that.

As an LP once told me, “In the 1990s, it took $7 million to get to first revenue. In the 2000s and into the early 2010s, it took $700K. Now it takes $70K.” With each era and each wave of technological development, founders become more capital efficient. There are less barriers to get to market. Now with AI, it might just be $7K to get to first revenue, if not sooner.

The question is how much capital is needed to get to $1M ARR. If we take a decent burn multiple of 1.5x, then we underwrite an assumption that it’ll take $1.5M to get to $1M ARR. And possibly $4.5M to get to $3M ARR. And somewhere in there, that founder will find product-market fit and turn on the growth engine. CAC (customer acquisition cost) falls. And lifetime value increases. Payback periods shorten. And if all goes well, founders may find themselves with a sub-one burn multiple. And after they hit $1M ARR, and they triple the first two years, double the next three, they’re at $100M ARR. Of course, I’m illustrating the above all in broad strokes. The best case scenario. But most things don’t go according to plan.

Then an investor has to figure out if one should only make net new investments or re-capitalize a select few of their existing investments.

Then as LPs, what is the minimum ownership percentages that can return funds at each differentiated stage and fund sizes? And due for possibly another blogpost altogether, how does a 7-8x multiple on forward-looking ARR impact round sizes and valuations across bull and bear markets?

All this admittedly is both art and science. But I will admit that larger fund sizes and playing the AUM game may not be the answer.

In closing

My friend recently sent me this letter that Sam Hinkie wrote when he retired as GM of the 76ers. In it, he quoted the great Sage of Omaha when he closed down Buffett Partnership. “I am not attuned to this environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.” And it’s for that same reason, Sam stepped down. The same reason Jerry Seinfield turned down $110 million to do another season of Seinfeld. Even though the sequel business does quite well.

There is no shame in knowing when to hang up the cleats. And there is great power in being disciplined. In fact, it’s one of the most sought-after traits in fund managers. If not, the most sought-after.

In VC, it comes in all sizes, ranging from:

  • Fund size discipline. There a lot of GPs out there who have gone on to raise 9- to 10-figure early stage funds. A mathematical equation that becomes increasingly harder to prove true, given outputs need to reflect inputs. In other words, larger funds are harder to return. There are a lot of VCs who would rather play the AUM (assets under management) game than stay disciplined on returns. Not just paper returns, but real cold hard cash. In the words of my friend Chris Douvos, “moolah in da coolah.” To quote another line from Chris, “OPM (other people’s money) is like opium. It’s addicting.” Something one too many investors have gotten addicted to.
  • Thesis discipline. As a friend who’s been a VC across multiple economic cycles once told me, it’s much better to turn down an off-thesis hot deal led by a top tier firm than to take it.
  • Career discipline. To echo the words of Sam Hinkie above.

And of course, knowing that we underwrite billion dollar outcomes, rather than trillion dollar ones. Then again, that’s just a subset of fund size and portfolio construction.

Photo by NEOM on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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The Tale of Two Risks: Market and Execution

market, flea market, farmers market

Folks coming out of school and/or are still in school often ask me how they should break into venture. It’s surprisingly a timeless question. The goalposts change every era. And as the signal-to-noise ratio and regression line oscillates in bull and bear markets, young professionals chase a moving target.

That said, while my opinions will likely change when the facts change, as of now, this is my best proxy for a timeless answer. Market risk versus execution risk.

Let me elaborate.

Early in your career, you should take market risk. Bet where others are not willing to bet. Or have the same starting point as you do. If the starting line is even, it’s all about how much faster you can run compared to your peers. And if you can outlearn them, ideally because of internal drive and motivation, you’ll be the incumbent in the space in the future.

Execution risk is what you pursue as you grow. Your network, your expertise, and your experiences make you a more robust executioner. You’re an incumbent. You’re a juggernaut. There’s no reason to focus on this risk when you’re younger because you don’t have an unfair advantage here. In fact, you have an unfair disadvantage. Others more senior to you have a better network, more expertise, and have done more reps than you have.

Steve Jurvetson recently shared the only rule of business that is inviolate. “Take any company that is large or top three in their industry. They will never lead the charge to disrupt that industry.” He goes on to say, that even in recent years, Google didn’t fight to change search until OpenAI. Apple is innovative outside their core business, but never in their core business. So as a result, innovation needs to come from the bottom. People who are willing to take market risk.

Similarly, in venture, as a young VC, you need to build your own thesis. For as long as you are investing on the basis of someone else’s thesis, you are competing on execution risk. And every VC who’s older, wiser, and more connected than you are on that thesis will out-execute you.

So… the risk you have to take is betting on a brand new thesis. That no one else is pursuing. No one else is investing by it. And that… is market risk.

The above is no less true if you’re an emerging GP. Your fund lacks the resources, likely the connections, the experience, the talent, and the ability to out-execute your incumbent on your incumbent’s thesis. The solution is to just not play when they have the home field advantage.

It’s why thesis and the question “Why does another venture fund need to exist?” matter so much to LPs betting on new fund managers.

Photo by Kayle Kaupanger on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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The Anatomy of the Future

pinky promise, trust, future

There was a fascinating episode on the Tim Ferriss Show recently, where we get the inside baseball on how David Maisel, founder of Marvel Studios, raised half a billion on a promise for a company who’s public market cap at the time was only a fifth of a billion. Naturally, not only was he against a lot of headwind externally, but internally as well. According to the board at the time, they would only greenlight the idea of producing their own films (as opposed to licensing their IP out) if “Marvel had no risk. Not little risk, but no risk.”

On the cusp of Captain America and Thor being licensed away, David asked the board to give him six months. The “zero risk” pitch then came in the form of external funding, huge financial upside (if things worked out), market timing, and a promise.

Financial upside for Marvel

As David puts it:

“First to my board, the argument, was if we own our own studio, it means we get the full financial upside that they understood very well.” As opposed to licensing, their traditional business model. Where Marvel only got five cents on every dollar of profit. As was the case with SONY and Spiderman.

“Number two, we decide on greenlight when the movies get made that they also understood because they only sold toys really at the time, and the toys were contingent on a movie, which they then control the timing. Now when you’re doing a public company and you’re giving guidance every year, how can you give guidance if you don’t even know what movies are going to get made? And so controlling greenlight was important, full creative control.”

Moreover, the team was able to take 5% of revenues as the producer fee AND keep all non-film revenues (i.e. toys, video games, etc.). And even if four out of the five films lost capital, they’d still make $25M in revenue each. In other words, $100M in sum. Half of Marvel’s public market cap at the time. Whose cap was only based on toy sales.

Market timing

“The bond bubble of 2004 was happening,” as David shared, “so it was a time where there was loans being made that shouldn’t have been made. And a lot of people were enamored with Hollywood as they get enamored every few years.”

Zero downside

Instead of funding the studio off balance sheet, David would go out to fundraise from others. So what was the external pitch?

“Give me four at bats, and if one of them hits, then every movie’s a sequel after that.”

On top of all the above, to me, there were some interesting terms for the investment that helped sweeten the deal:

  • Merrill Lynch got a 3% success fee upon the $525M closing.
  • David got a low interest rate loan from Merrill by getting it insured by MPAC, therefore the debt became AAA debt, which “was easy to sell to pensions and easy to sell to individual investors” in case things went awry.

Now I’m not sure if this is standard Hollywood practice. But I imagine it’s not, at least back in ’03 and ’04. I’m a venture guy after all. And as one, the above is news to me.

That said, the banks David went to fundraise from were not taking equity. It was “pure debt. So very low interest rate. And the only collateral were the film rights to ten Marvel characters of which we could make for the movies.” Which, to me, ten characters sounds like a lot for a company whose business is characters. I also imagine these were characters that had some level of historical fanbase, so they weren’t random ones from the archives.

But David clarifies. “A lot of people misunderstand that they think we pledged ten of our characters as collateral. It wasn’t that at all because in the worst case scenario, it only got collected if we lost money on those first four movies. And then those six characters, we owned all the rights besides film. And if a film was ever made by the bank, whoever collected this collateral, we got the same license fee that we get if we just license it that day to a party. So there was no opportunity cost.”

And the promise

This is history now, but at the time, was a bold claim. The idea was borne out of frustration as an entertainment investor. That:

  1. Marvel couldn’t capture a large part of enterprise value through productions with just licensing
  2. The first movie business was horrible. Sequels, on the other hand, were a lot more predictable. So, the focus after the first movie would not be on predicting profit, but maximizing profit margins.

So David had a thought. “What if after the first movie, every movie after that was a sequel or a quasi-sequel, which required all the characters, or a lot of the characters, to show up in multiple movies?”

The idea of sequel snowballed into what we now know as the MCU — the Marvel Cinematic Universe.

Bringing it back to venture

It’s a nice corollary to raising a Fund I, where you’re also selling a promise. A world vision. A painting of the future. Nothing’s proven yet. You’re sure as hell not selling a repeatable strategy yet, and definitely not any returns. Since there’s a good chance you haven’t returned capital to LPs before.

And this is true for not just funders, but also founders. In the words of Mike Maples, “Breakthrough builders are visitors from the future, telling us what’s coming. They seem crazy in the present but they are right about the future.

“Legendary builders, therefore, must stand in the future and pull the present from the current reality to the future of their design. People living in the present usually dislike breakthrough ideas when they first hear about them. They have no context for what will be radically different in the future. So an important additional job of the builder is to persuade early like-minded people to join a new movement.”

Dissent is a luxury

The truth is loads of people will disagree with you. You’re not looking for consensus. In fact, it’s better to be wrong and alone than right and with the crowd if you’re in the venture world. Either as a founder or an emerging GP. It’s something I recently learned from the one and only Chris Douvos. If you imagine a 2×2 matrix… On one axis, you have right and wrong. On the other, you have with the crowd and alone. You want to be in the right and alone quadrant for sure. That’s where “fortune and glory” exists. It’s where alpha exists. It is how you become an outlier and achieved outsized returns.

But the prerequisite to be there is to have the guts to start in the wrong and alone quadrant. If you start from being right and in the crowd, you’re one among many. And that doesn’t give you the liberty to have independent thinking. You’re constantly trapped in noise.

It’s as Abhiraj Bhal says. “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” You want people to question you. And as humans, we like to fit in. But to create something transcendent, external doubt is your best friend.

As such, your promise of the future must seem bizarre.

Don’t start with the product, start with your customers

When you have a promise, admittedly, the easiest way is to start engineering it right away. Without market validation. Without stress testing. Which pigeonholes a number of founders. I forgot the origination, but there’s a great line that says, “The only difference between a hallucination and a vision is that other people can see the latter.”

And in order to test that, you need to get in front of potential users and customers first. Max, someone I had the joy of working with, once wrote the below timeless tweet:

And I won’t go too deep into why I like it since I’ve written about it before. One way, like Max illustrated, is to write in public. Another is to sell without a product. It’s what Elizabeth Yin did back at LaunchBit.

As Elizabeth once shared: “We decided that we’d start with no product. We would not build anything. And, we just started selling ads. We manually brokered deals with publishers and advertisers and took a cut in between. We got our customers by emailing people and setting up the copy and links ourselves. People would pay me through my personal PayPal account. It was only when we realized we were onto something that we started building technology to remove bottlenecks.”

On the investor side, it’s building a thesis where great investments fall into. It’s a way of looking at the world in a perspective that may seem foreign to others, but almost obvious in retrospect. The thesis should elicit the response, “Why didn’t I think of that first?” But no matter how obvious, you are the best positioned to bring the thesis to life. That doesn’t mean you need returns yet. Although good graduation rates certainly help as a leading indicator.

In that regard, it’s quite similar to how David Maisel foretold of the Universe to come. Obvious once explained, yet still met with resistance from legacy players.

Photo by alise storsul on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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#unfiltered #79 After the Throes of SF Tech Week

party, event, conference

Surprisingly, last week was the first week I’ve gone to multiple events for a given conference. Also I’m using the word “conference” very loosely here since I’m counting a tech week as one. What started off as ‘I’m going to support just one friend,’ ended up being a slippery slope, and supporting many friends, and catching up with friends in town. I mean, c’mon, how do you not at least say hi to a friend who’s flown from NYC or Miami? Perks of being bad at saying no.

That said, for the founder focused on getting to product-market fit, or actively fundraising, or the GP fundraising, your time is better spent elsewhere. But if you’re exploring and trying to increase the surface area for luck to stick, these events are great. So many fun, interesting ideas floating around.

Eight quick takeaways, before I go back and I let you go back to the rest of your week:

  1. For VC/founder events, most attendees are founders. Smaller VCs went to the GP events. Bigger VCs just host their own.
  2. For LP/GP events, most attendees are GPs. Went to an event of this type, and I kid you not, only met 2 LPs out of 15 people I chatted with. The rest were GPs. The folks you would like to show up at VC/founder events would rather pitch than to be pitched.
  3. Interestingly enough, for the events that have a good proportion of LPs, most don’t seem to be investing in emerging managers. Anecdotally, have heard three of my friends who are individual LPs get turned down from LP events during SF Tech Week.
  4. Smaller funds seem harder to raise than larger funds.
  5. US large family office and institutional LP market is drying up. Most have overextended to buyouts and still need therapy for being burned in 2020 and 2021. For those that haven’t, they’re resorting to intros from friendlies.
  6. Hosting your own events gives you better bang for your time than attending events.
  7. And as one would suspect, AI dominates 70-80% of conversation.
  8. Investing in unsexy industries is sexy. New moniker is to invest in industries where either 1/ people have scruffy beards or unkempt hair or 2/ meetings that require suit and tie.

Stay awesome, friends!

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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#unfiltered #78 The Gravitational Force of Accumulated Knowledge

apple, gravity, newton

You can’t always be the fastest or the brightest or the most talented. For the most part, anything that can be measured with a metric, or put on a business card or a baseball card — anything with an absolute ranking — is not something you can always control. You can be the fastest 100-meter dasher in the world today. But tomorrow, there will always be someone who’s faster. Today, you can be the youngest founder who’s raised venture capital. But tomorrow, someone will outdo you. Today, you can sell the most Girl Scout cookies. But tomorrow, someone will outsell you. The Guinness World Records is proof of that. You get the point. Because you’ll be in fashion one day, and out the next.

But if there’s anything I learned from hanging around the dragons and phoenixes — all pen names for perpetually and persistently world-class individuals, it’s that there’s gravity in being a voracious consumer of content. In being a voracious curator of what one feeds their brain. Information diet or fitness as one of my friends calls it. Being the most knowledgeable — or the pursuit thereof — has a longer shelf life and a half life than all other phenotypical isotopes. Or my fancy schmancy way of saying, all the other titles one can earn in their short lives.

It also happens to be closest pursuit where one unit of input roughly equals one unit if not more of output. For instance, to be the fastest sprinter, one extra hour of practice doesn’t consistently yield one second off your personal best. But if you’re regulating your content intake algorithm, for instance reading books, and not doomscrolling on TikTok, one extra page read is more often one more unit of knowledge you can apply in the future. Or if you’re asking good questions, one more coffee chat yields you another year or two saved of mistakes you could have made in your craft. As such, one should spend time reading, listening, watching and asking.

I spent the past weekend tuning into one of my favorite talks by Bill Gurley. (I knowww……. It really took me this long to actually write this essay.) In it, he shared that one should always “strive to know more than everyone else about your particular craft.” He goes on, “That can be in a subgroup. What do I mean by that?

“Let’s say you love E-sports. Let’s just say you’ve decided multiplayer gaming E-sports, like, this is it for you. You grew up gaming, “I love it.” All right? Within the first six months of being in this program you should be the most knowledgeable person at McCombs in E-sports. That’s doable. You should be able to do that. Then, by the end of your first year you should be top five of all MBA students, and, hopefully, when you exit your second year you’re number one of any MBA student out there. It doesn’t mean you’re the best E-sports person in the world, but you’ve separated yourself from everyone else that’s out there. I can’t make you the smartest or the brightest, but it’s quite doable to be the most knowledgeable. It’s possible to gather more information than somebody else, especially today.”

It so happens to be why VCs ask about your previous experience before starting the company. It’s why they look for passion. It’s why VCs ask for you to show that you have spent time in the idea maze. And it’s why the goal of a pitch meeting or any meeting with someone you hope to impress is to teach them something new. They’re all proxies for a founder’s rate of learning. The rate that one acquires knowledge is often directly proportional to the rate of iteration.

At some point later in the same talk Bill Gurley does above, he says, “Information is freely available on the internet. That’s the good news. The bad news is you have zero excuse for not being the most knowledgeable in any subject you want because it’s right there at your fingertip, and it’s free, which is excellent.”

It’s true. There’s a lot of things out there on the internet. But with anything that is known for its volume, there is much more noise than there is signal. And sometimes the best approach is to find the smartest people or most referenced and most peer reviewed sources. So while there is a world out there behind covers and a .com address, sometimes the best thing to do is ask.

Page 19 thinking

Seth Godin shared something recently I wish I had heard sooner — page 19 thinking. It was in the context of compiling an almanac — a compilation of world’s greatest thinkers about the climate crisis. When Seth and the team first started off with a blank page, they knew that “in the future there will be a page 19. [They] know that it will come from this group, but [they also knew] there [was] not anyone here who [was] qualified.” So, to resolve that dilemma, someone had to ink the first paragraph of page 19. Then, that person would ask someone else to make it better. And then, that someone else would ask another. And it would go on and on until page 19 looked like a real page 19.

What made this approach special was that ego was checked at the door, and people were empowered to co-create the best version of that work. Seth went on to share, “But once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.”

In the world on Twitter, the above goes by another name — build in public.

One of the greatest blessings in writing this blog is that I get to ask really smart people a lot of questions. While a lot of knowledge exists behind two cardboard slabs, or these days, in a six-letter, two-syllable word that starts with ‘K’ and ends in ‘E,’ the richest concentrations of insight exist in gray matter.

If you’re a founder or someone who’s embarking on a new project, there’s a saying I love, “If you want money, ask for advice. If you want advice, ask for money.” Ask people to pay you or to invest in you. You’re gonna get a plethora of feedback. Feedback that comes in flavors of noise and signal. But it’s up to you to figure out which is which. Nevertheless, that rate of learning, assuming you’re out asking, building, asking, and building some more, compounds.

In closing

I’m not saying you should only read books or only talk to experts. I’m saying you should do both. Be relentless in your pursuit to learn. As Kevin Kelly once said, “Being enthusiastic is worth 25 IQ points.”

Luckily, knowledge also happens to be one of the few things in life that no one can take from you.

Photo by Priscilla Du Preez on Unsplash

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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.

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