Tag: josh wolfe

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Anecdotal Telltale Signs of Exceptionalism

dune, sand, great

I’ve been lucky enough to meet a number of founders and fund managers over the years. Many of which I probably have no business of meeting and getting to know. And I count myself fortunate every day to have the opportunities to do so.

Nevertheless, and as an FYI, all of this is completely anecdotal. Maybe at some point I’ll find data to support this. Hell, maybe there’s already data on this. But as is the perk of this blog, I get to write about just things on my mind.

Per some recent conversations with friends, having already shared with them, thought I’d share the below. Some telltale signs I’ve noticed in founders and fund managers that are world-class before the rest of the world knows it:

  • Highly responsive. It’s insane to think about this given their busy lives. But the folks I’ve been lucky to invest in and (gosh darn it) passed on who’ve gone on to create hundreds if not thousands of jobs respond remarkably fast. Sometimes within minutes of me sending them a message/email. But on average before half the day is over. I will say I’m personally slipping here a bit as of late. But I guess, that just means I’m not world-class by my own definition. Many seem to be night owls, at least when they’re still hustling. I’m not personally sure if they’re working deep into the night, but at least, they’re responding to me at 2AM, and I’m trying to figure out what they’re doing then.
  • They exercise in the morning, or have a morning routine that they do every day without fail, even when on vacation. It could be writing, journaling, making that morning cup of espresso just right, or making breakfast for their kids EVERY morning. It’s ritualistic, so that they perform just as well on the first meeting of their day as they do their last.
  • Operationally disciplined. They’re really good at saying no. They set clear boundaries. Often times, boundaries that most people have not heard of. And many, even after hearing them, may find bizarre or strange. But in an odd way, they make a lot of sense if you give them the time of day. I was calling a friend recently on this, and he was sharing that he’s not the kind of friend that most people want. He doesn’t show up at birthday parties or celebrations. He also doesn’t post to socials regularly to congratulate friends on promotions or otherwise. But he aimed to be, and ends up being the first call friends make when shit hits the fan. And because of that practice, he can be laser focused on his priorities every day.
  • They’re really good at using analogies. In many ways, it’s the classic 7-year old test or the grandma test. They’re extremely high context individuals in a lot of different disciplines. And if I were to define it (not original, but I forget the attribution, might be Tim Urban), high context individuals are those that are well-versed on a given subject. Low context folks are those are out of the loop. For example, a PhD in neuroscience is high context on how different reward systems affect dopamine, but possibly low context on Marvel Cinematic Universe lore. And when someone is high context in not just one area but in a lot of areas — in other words, people might call them polymaths, or at the very least, well-read — it’s easy for them to pull analogies in ways that best help relay what they want to say to the other person’s ears. Like a crypto founder (probably one might be able to guess who) who once described to me one-way hash functions as putting fruits in a blender. Or Josh Wolfe who describes the battle of ethics in a company a battle between intentions and incentives. Or that society is a constant battle between deception and detection.
  • They ask really good questions. Questions you’ve likely never heard asked before. And many can get to proficiency on any subject quite quickly. Largely, probably because of how they think and how they eventually arrive at an answer.
  • Words are used intentionally and with specificity, and rarely, if ever, use amorphous terms and superlative adjectives. Like success, community, unique, compelling, unfair advantage, best, better, and so on. And if they do, they are quick to define what they personally mean when they use those words.

Photo by Linhao Zhang 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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Thesis is a Lagging Indicator of Outperformance

thread, yarn, pull

In the process of catching up with a number of fund managers this week, I was reminded of two things:

  1. That I still have an outstanding blogpost on intuition and discipline sitting on my desk, having gone through more revisions than I would like
  2. That Fund I’s mostly start by drawing trendlines in your previous portfolio’s winners.

Now it’s not my job to call anyone out, but many of those I caught up with this week, told me in confidence (no longer in confidence now that I’m writing about it) that their best investments were simply due to being in the right place at the right time. That they were lucky. Others invested often off-thesis to accommodate for a brilliant founder that looked and sounded like nothing they had seen before. Then retroactively, went back to LPs in a subsequent fundraise armed with the knowledge to account for their previous outlier.

Chris Paik once wrote, ““Invest in companies that can’t be described in a single sentence.”

Josh Wolfe said last year, “We believe before others understand.” And sometimes the investor themselves may not fully grasp what makes someone special other than that person is special.

Other times the company in which you initially bet on may not look like the company that earns you the most capital. As Mike Maples Jr. once said, “90% of our exit profits have come from pivots.

Of course, many LPs don’t want to hear that. They want to hear that you know exactly what you’re doing. That you can predict the future. But you can’t. In many ways, VCs invest in what stays the same. Not what changes. Human nature. Great hires. Network effects. Talent pools. Intellectual curiosity. Rigor. It’s a long list.

An amazing VC once told me. The job of a VC is to:

  1. Have a wide enough aperture so enough light can come in
  2. But have a fast enough trigger finger to catch the light, the reflections, the shadows just at the right time so that you get a good enough shot.

The rest is all done in the editing room, where you massage the photo with your expertise and experience to help it stand out.

I love that line. But simply put, the job of a VC is to:

  1. Cast a wide enough net so that you can see as many great companies as you can,
  2. Have the ability and awareness to know a great company when you see it.

After all, as an investor, you don’t have to invest in every great company, but every company you invest in must be great. Big anti-portfolios don’t mean much in this world if you can still get great returns.

All that to say, the job of an angel is to increase the surface area for luck to stick. And once enough do, a thesis blossoms.

A thesis, at the end of the day, is retroactive. And the best thing a fund manager can do is that the thesis the fund ends on is as close as possible to the initial. As LPs, it is our job to bet on the future of the thesis and the discipline of the fund manager. Both are equally as important. If things do change, a fund manager must preemptively communicate strategy drift and do so in the best interest of their investors.

It’s not ideal in many cases. For individual LPs and smaller family offices, strategy drift matters less. For large institutional LPs, it matters more. Because the latter don’t want you to be investing in the same underlying asset as other funds they’re invested into are.

Photo by Kelly Sikkema 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 #77 When People Conflate Intentions and Incentives

thinking, confused, mixup, intention, incentive

Earlier this week, I tuned into an episode that come out in late March on the 99% Invisible podcast about the panopticon effect. In all honesty, until this week, I pled ignorance to that second to last word — panopticon. Something that had been omitted from my anecdotal Meriam Webster. But maybe you’re less ignorant than I am and you’re already familiar with this term. Maybe we’re in the same boat.

Nevertheless, it turns out the panopticon was a relic of the late 1800s. It was a time, not too unlike today, when they were tackling the age-old problem of reforming prisons. Brought to life by Dutch architect Johan Metzelaar, the panopticon is a cylindrical prison, further defined by a single pillar at the center of it all — a guard tower. Unlike previous prison designs, this one was specifically designed so that the guards could keep their eye on every prisoner. Or at least that was the idea. For those in the prison to feel like they were always being watched, in hopes that would aid in the correction of their behavior.

And in that same episode, rewinding even further back in history, Roman Mars, the host of the 99% Invisible podcast, shared a fascinating piece of trivia. The Dutch were once again one of the first to introduce prisons as an alternative to torture, capital and/or corporal punishment. These houses of correction were meant to be opportunities for inmates to develop discipline and morality. Spoiler alert. It didn’t work out as expected. He mentions, “The goal of rehabilitating inmates was quickly lost. The houses of correction devolved into just convenient sources of very cheap labor.” Simply put, while the intentions for correctional facilities were good, the incentives led them astray.

When incentives lead people astray

Interestingly enough, Lux’s Bilal Zuberi, in a recent chat with his partners, Josh Wolfe and Peter Hebert, stumbled across a similar discussion.

In the thread, he brings up three examples:

  1. Nuclear was invented to harness renewable elemental power, but became a means to create weapons of mass destruction.
  2. Social media started as a means to bring people together, but devolved into a tool for gaming eyeballs and invasive ads.
  3. Vaping started as a way to help people quit smoking, but to create a sustainable business, the companies have started marketing “fun” flavors.

The battle between intentions and incentives is no less true in the past with prisons and empires and political beliefs as is in the present and future with technology, generative AI, deep tech, crypto and blockchain… The list goes on.

Intentions are usually about personal motivations, morality, ethics, and the greater good. The force that drives us forward. I truly believe that most people don’t start off wanting to take advantage of others. Incentives, on the other hand, are business motivations. They’re optimizations. A rationalization of decisions that conflict with goodwill for the sake of, well, insert your choice of blame and delegation of responsibility. Often times it is for the broader organization.

It reminds of a saying that I first heard in The Dark Knight. “You either die a hero or you live long enough to see yourself become the villain.” I can’t speak for every individual out there, neither is it my place to preach. That said, with the world progressing exponentially, selfishly speaking, I’d hate to see good people and good businesses overly optimize for the wrong reasons. And lose themselves in the journey up.

Photo by Tingey Injury Law Firm 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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Finding Product-Market Fit and “Idea-Market Fit”

Photo by Loic Leray on Unsplash

I was recently inspired by a fascinating conversation between Mike Maples Jr., co-founder and partner at Floodgate, and Andy Rachleff, co-founder of Benchmark Capital and Wealthfront, but more interestingly, the founder of the term, product-market fit, or PMF – a term that signifies when a product is recognized by a strong demand in the market. Over the years, there have been various ways entrepreneurs, go-to-market strategists, and investors have defined when an idea reaches product-market fit. But before I dive into the PMF, let’s take a look at market definitions first, which admittedly is a step off the beaten path.

The Markets

How I Like to Think about Market Sizes. *Not drawn to scale

Traditionally, the total addressable market (TAM), serviceable addressable market (SAM), and the serviceable obtainable market (SOM) are defined according to the geographic location of your market. It makes sense – your market is as big as where you can offer the service. But now, in an increasingly connected world, technologies are less and less inhibited by the geographical boundaries that plagued the decades before. That said, there are still cultural, social and economic differences when accessing new demographics, which is why I like to characterize the TAM, SAM, and SOM by psychological resistances to new ideas. The TAM is still defined by the total upside potential of a product, where it still excludes laggards, or folks who would most likely never (seek to) use your product. The SAM is construed of people who would use the product after three to five friends in their network recommend and are using the product themselves. And finally, the SOM consists of customers who are desperate, as Andy Rachleff called it, for your product. They have spent sweat, blood, and tears finding or building their own solution. They have already traversed the idea maze themselves and put the dollar (or the euro, peso, krone, pound, yen, RMB, BTC, ETH… you get my point) here their mouth is at. And here, in the SOM, is where you find your product-market fit.

Product-Market Fit

PMF is most noticeable on the hockey stick curve. Before PMF, traction is slow and looks very much like the blade of a hockey stick. And after PMF, traction skyrockets and exemplifies exponential growth.

The Hockey Stick Curve

While there are many heuristics to assess PMF across different verticals, I’m the most fluent in consumer tech where I’ve spent most of my time in. And in consumer tech, I’d like to underscore the notion of ‘exponential organic growth’, and subsequently, a short analysis on each word of that phrase.

Exponential is probably the most straight-forward, where at the early stages of a business, we’re looking for rapidly compounding growth.

Organic growth, as opposed to paid growth, is a measurement for word-of-mouth. Investors tend to measure the effectiveness of a product by its virality from its initial customers to its nth customer – growth that is achieved without directly spending (ad) dollars on acquiring the new customers.

Growth is something I break down into – retention and adoption. Increasing adoption is great as measured by the growth of total users on consumer platform or for a consumer product, but focusing only on adoption leads to a leaky funnel, or in my case, trying to hold too many groceries in my hand without a shopping cart. Every time I grab another item on the shopping list, I drop some other item I was already trying to balance and hold. Of course, focusing only on retention means there’s no growth, which for keeping your best friend circle is fine (unless you want a thousand BFFs), but not for growing a startup.

Below are some growth signs to pay attention to signify that your product is near/at PMF:

RetentionAdoption
> 25% DAU/MAU 100s of organic signups/day
40% are active day after signup> 30% MoM growth
Usage 3 days out of every week

“Idea-Market Fit”

As a founder with an ambitious idea, reaching product-market fit is a great goal to have, but the truth is PMF is a mystical beast – a chimera – in and of itself. Market demands change; what satisfied the definition of PMF a decade ago may not satisfy it now and will most likely not satisfy it ten years from now. Many studies have shown that most startups don’t fail from technological risk, but rather the inability to reach PMF, which ends up leading to lack of investor interest, demotivation, and the founding team falling apart. And quite obviously, before you reach PMF, the hardest part about starting a business is reaching PMF, or what Peter Thiel and many call the Zero to One. I’ll dive into the lessons I learned about the journey to “1” in future posts, but for the purpose of this post, I’m going to focus on the “0” – or what I like to call, “idea-market fit“, or IMF.

What differentiates a good idea from a great money-making idea? I’m going to borrow Andy’s thought calculus exercise. In a 2×2 matrix with right/wrong on one axis and consensus and non-consensus on the other, “you want to be right on the non-consensus.”

Andy Rachleff’s 2×2 Startup Idea Matrix

Why? Discounting the situations where you’re wrong (because you don’t make much, if any money), if you’re right on consensus, it means the market’s already mature, and perfect competition in a capitalistic market squeezes you out of your profit margins. If you do pursue this option as a founder, you’re more or less tackling an execution risk. On the other hand, if you’re right on the non-consensus, the market is still nascent, and you have the potential for monopolistic control of the market. In other words, you’re taking a market risk.

It definitely isn’t intuitive. At the very least, it wasn’t to me when I was on the operating side of the table. I wanted validation. When I was at Localwise helping build a community of local talent, I wanted people to say “I totally agree” or “You’re onto something.” But often times, I just received friction and resistance, with the toughest to receive from some of my friends.

“No one would ever buy that.”

“You’re wasting your time.”

“When are you going to get a real job?”

And at some points in time, I did think, “Maybe they’re right.” Until I started meeting a few people who thought a hiring destination for local mom-and-pop shops wasn’t a bad idea, and especially when small business owners started opening up about their frustrations. Hiring platforms, at that time, focused on the sexier brands and companies to get more demand side traction – the Googles, the Big Four’s, or the Bains, but had seemingly completely underrepresented the population of local businesses. Even if these SMBs were on these other platforms, they were overshadowed by the presence of bigger brands.

When validating startup ideas, you don’t want consensus. If your idea is truly revolutionary, people have yet to be conditioned to accept the idea. Take Uber or Airbnb, for example. If you asked the average person if they would use such a product, most would have thought that you’d be crazy to have a stranger sharing a car ride or home with them. These days, take e-sports or streaming. If someone told me in my pre-teen days that I could make a living off of playing video games, I’d most likely think I was dreaming. After all, I grew up playing Snake on my dad’s Motorola Razr, which admittedly seems to have made a return to the markets.

IMF is about challenging convention and the status quo. That’s what makes an idea revolutionary, or as people in Silicon Valley like to call it, disruptive. A crazy good idea challenges the explicit and implicit biases we have about society and ourselves. In other words, we have to detect the deception we bestow onto ourselves to find the gems in the rough, which Josh Wolfe of Lux Capital explains in his 2019 Lux Annual Dinner Talk – one of the best VC thesis-driven thought pieces I’ve ever seen.

In closing

As a geeky quote collector, I’d like to close this piece not in my own words, but in the words of three brilliant investors who have a few more patches of scar tissue on their back than I do now.

“Some of the best ideas seem crazy at first.”

– Curiosity, in my Thanksgiving blogpost

“Most of the big breakthrough technologies/companies seem crazy at first: PCs, the internet, Bitcoin, Airbnb, Uber, 140 characters…you are investing in things that look like they are just nuts… it has to be something where, when people look at it, at first they say, ‘I don’t get it, I don’t understand it. I think it’s too weird, I think it’s too unusual. “

– Marc Andreessen

“Breakthrough ideas have the traditionally been difficult to manage for two reasons: 1) innovative ideas fail far more than they succeed, and 2) innovative ideas are always controversial before they succeed. If everyone could instantly understand them, they wouldn’t be innovative.”

– Ben Horowitz, in his new book What You Do Is Who You Are
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