In 1968, NASA tasked the late George Land to create a test that would help NASA hire more creative geniuses. Does genius and creativity come from nature or nurture? As such his job was to create a test so simple that even children could take it. And he found that for children ages 4-5, out of 1,600 children, 98% of them qualified to be a genius. Divergent thinkers. Then, he waited five years to assess these same children. To which he found, only 30% qualified. Then another five years later, only 12% of the same children were what he counted to be geniuses.
It begged the question: What percent of adults are geniuses?
The answer, 2%.
For those curious, I’d highly recommend George’s 2011 TEDx talk about the topic.
Of course, the lesson from all of this is the fallacy of modern-day education. And the same is true for the adult world between convergent thinkers and divergent thinkers. I believe in the world of venture at least, we have terminology that’s little less palatable (at least for me, although on occasion I’m guilty of using them myself): insiders and outsiders.
My friend Anne sent me this piece by Auren Hoffman recently on insiders and outsiders. An incredibly well-written piece, and quite thought-provoking. I’ve largely thought about how outsiders can become insiders, but silly me, less about the value of staying an outsider or an insider aiming to become an outsider. Moreover, that to be successful as an insider, there’s actually a rather predictable path to become one. Or at least to help your children become one. Go to Harvard. Play insider sports, like gold, or horse-riding, or sailing. And son. But in Auren’s words, to be successful as an outsider, well, “being [an outsider] is MUCH higher beta. They could end up changing the world for the better. They also could blow it up. Or just never be accepted and live less happy.”
And while I may not agree with everything that Auren proposes, a lot of it makes sense. In fact, 11 words definitely caught my eye. “Outsiders take things from insiders. Insiders inherit things from other insiders.” And as such, insiders play the status quo; outsiders change the status quo.
It’s interesting. Every generation of VC, there’s a changing of the guard. Many of the new regime are outsiders. People who think different. People who exhibit a level of creativity that is uncommon in VCs. Either in the form of business models or how they provide value. How they build brand. Or simply how their brain works. People that in bringing a fresh perspective were able to find the next great companies unlike any other.
Interestingly enough, in my buddy and Superclusters guest Jaap’s recent study of 2,092 North American and European VC funds, he found that these are the folks who are more likely to hit fundraise targets than any other GP persona. Aka 45% success rate. And perform highest at 2.4X net TVPI, but only average on DPI and IRR.
My guess here is that these outsiders, in being artisanal about their craft and — well, at least with respect to the VC industry at large, divergent thinkers — find their tribe rather quickly because LPs quick self-select themselves in or out of a relationship with them. They’re the round pegs in the square holes, to borrow a Steve Jobs moniker. So when most others look square, the few round holes instantly identify with these round pegs. And more often than not, they’re new to the asset management game, so have lower fund targets and a more precise strategy. Downside to that is they’re still learning the ropes of exit strategies and fund management. Which also explains the high volatility in returns.
And while there’s much higher beta in being an outsider, there’s plenty of research to suggest that there is also greater alpha. But it’s going to be unfair. The deck is rigged against you. There’s a great Marcus Aurelius line. “Mental toughness is knowing life isn’t fair and still playing to win.”
The outsiders who win exhibit exactly that mental fortitude against stacked odds. Besides, there’s joy in doing things differently.
Photo by Randy Fath 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.