Tag: patrick o shaughnessy

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Emerging Manager Products versus Features

mug, comparison

Inspired by John Felix in our recent episode together, as LPs, we often get pitches where GPs claim they’re an N of 1. That they’re the only team in the venture world who has something. Usually it’s the fact that they have brand-name co-investors. Or they run a community. Or they have an operating background, like John says below. And it isn’t that unlike the world of founders pitching VCs.

The truth is most “unfair advantages” are more commonplace than one might think. Even after one hears 50 GP pitches, one can get a pretty good grasp of the overlap.

For the purpose of this blogpost, the goal is to help the emerging LP who has yet to get to 50-100 pitches. And for the GP who hasn’t seen that many other pitches to know what the rest of the market is like. Obviously, the world of venture shifts all the time. What’s unique today is commonplace tomorrow.

For the sake of this post, and to make sure I’m not using some words too liberally, let’s define a few terms I will use quite often in this blogpost:

  • Product: A fully differentiated edge that an emerging manager/firm has. In other words, a must-have, if the firm is to succeed.
  • Feature: A partially differentiated edge, if at all, an edge. In many cases, this may just be table stakes to be an emerging manager today. In other words, a nice-to-have or expected-to-have.

Networks

ProductFeature
Differentiated community
(high/consistent frequency of engagement)		Alumni network (school or company)
Downstream investors that prioritize your signalsIn-person events
Keeper testVirtual events
Co-investors

Networks, in many ways, are synonymous with your ability to source. It’s the difference in a lot of ways from co-investing versus investing before anyone else (versus investing after everyone else). The latter of which is least desirable for an LP looking for pure-play venture and risk capital.

The quickest check is simply an examination of numbers. LinkedIn or Twitter followers. Newsletter subscribers. Podcast subscribers. Community members. While it’s helpful context, it’s also simply not enough.

Here’s a simple case study. Someone who has 5,000 followers on LinkedIn with hundreds of people engaging with their content in a meaningful way is usually more interesting than beat someone who has 20,000 followers on LinkedIn, who only has 10s of engagements. Even better if one generates a substantial amount of deal flow with their content alone.

One thing that is hard to evaluate without doing an incredible amount of diligence is your founder network referring other founders to you. From one angle, it’s table stakes. From another, true referral flywheels are powerful. In the former, purely having it on your pitch deck without additional depth makes that section of the deck easily skippable.

One of my favorite culture tests is Netflix’s Keeper test. That if a team member were to get laid off or fired, would you fight to keep them or be relieved? The best folks, you would fight to keep. And as such, one of my favorite questions during diligence to ask the breakout / top founders in each GPs’ portfolios is: If, gun to head, you had to fire all your investors from your cap table and only keep three, which three would you keep and why?

Do note I differentiate breakout and top founders. They’re not mutually exclusive, but sometimes you can be brilliant and do everything right and things still might not work out. But smart people will keep at it and start a new company. And maybe it was a smaller exit the first time, but the second or third time, their business may really take off. Of course, sometimes I don’t have the same amount of time to diligence each GP as an LP with a team, so I generally ask the question: If all of your portfolio founders were to drop what they’re currently doing regardless of outcome, and start a new business, who are the top 2-3 people you would back again without hesitation?

At the end of the day, for networks, it’s all about attention. It’s not about who you know, but about how well you know them AND who you know that TRUSTS what you know. In an era, where there is more and more noise and information everywhere, a wealth of information leads to a poverty of attention. But if you have a strong foothold on founders’ and/or investors’ attention in one way or another, you have something special.

Experience/expertise

ProductFeature
Early hire at a unicorn company
+
Grew a key metric by many multiples		Operating background
(marketing, sales, operations, talent, community, etc.)
Hired top operators who’ve gone on to change the worldExperience at a larger firm where you didn’t lead rounds / fight for deals
Independent board member

Experience only matters here where there are clear differentiations that you’ve seen and can recognize excellence. In a broader sense, having an operating background is unfortunately table stakes. As John mentioned, any generalities are.

While strong experiences help you source, its main draw is that it impacts the way you pick and win deals. Only those who have experience recognizing excellence (working with or hiring) know the quality in which A-players operate. Others can only imagine what that may look like. That’s why if you’re going to brag that you’re a Xoogler (or insert any other alumni), LPs are going to care which vintage you were at Google. A 2003 Xoogler is more likely to have that discerning eye than a 2023 Xoogler. The same is true for schools. Being a college dropout from a Harvard and Stanford is different from dropping out of college at a two-year program. Not that there’s anything wrong with the latter, but you must find other ways to stand out if so.

Given a large pool of noise when it comes to titles, it’s for that reason I love questions like: “What did you do in your last role that no one else with that title has done?”

Additionally, when it comes to references, positive AND negative references are always better than neutral references. Even better is that you stay top of mind for your founders regularly. A loose proxy, while not perfect, is roughly 2-3 shoutouts per year in your founders’ monthly updates. It takes a willingness to be helpful and for the founders to recognize that you’ve been helpful.

Process

ProductFeature
Response time/speedSome generic outline of an investment process
Evidence of a prepared mindDoing diligence
Asking questions during diligence most others don’t know how to

Yes, response time (or speed in getting back to a founder, or anyone for that matter) is a superpower. It’s remarkably simple, but incredibly hard to execute at scale. By the time, you get to hundreds of emails per week, near impossible, without a robust process. One of my favs to this day happens to be Blake Robbins’ email workflow who’s now at Benchmark.

Now I’m not saying one should rush into a deal, or skip diligence, but making sure people aren’t ghosted in the process matter immensely. As my buddy Ian Park puts it, it’s better for a founder or an LP to know that a GP is working on it than to not feel heard.

You’ve probably heard of the “prepared mind.” The idea that one proactively looks for solutions for a given problem as a function of their lived experiences, research, and analyses over the years.

Its origin probably goes as far back as Louis Pasteur, but I first heard it popularized in venture by the folks at Accel. Anyone can say they have a prepared mind. From an LP’s perspective, we can’t prove that you do or don’t have it outside of you just saying it in a pitch meeting. That’s why a trail of breadcrumbs matter so much. Most people describe it as a function of their track record or past operating experiences. Unfortunately, there may be a large attribution to hindsight bias or revisionist’s history. Being brutally honest with yourself of what was intentional and what was lucky or accidental is a level of intellectual honesty I’ve seen many LPs really appreciate. As an example, I’d really recommend you hearing what Martin Tobias has to say on that topic.

But the best way to illustrate a prepared mind is easier than one thinks. But it also requires starting today. Content. Yes, you can tweet and post on social media or podcast. But I’d probably rank long-form content at the top.

Public long-form writing (or production in general) is arduous. The first draft is rarely perfect. Usually far from it. With the attentive eye and the cautious mind, you go back to the draft again and again until it makes sense. Sometimes, you may even get third parties to comment and revise. Long-form is like beating and refining iron until it’s ready to be made into a blade. And once it’s out, it is encased in amber. A clear record of preparation.

In closing

Pat Grady had a great line on the Invest Like the Best podcast recently. “If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good. A compelling value prop is a comment on high operating margins. You shouldn’t need to spend a lot on sales and marketing. So the metrics to highlight would be good new ARR/S&M, LTV:CAC ratios, payback periods, or percent of organic to paid growth.”

In a similar way, as a venture firm, if your value prop is truly unique, you’re a price setter. You can win greater ownership and set valuation/cap prices. If your value prop is compelling, the quality of your sourcing engine should be second to none, not just from being present online, but from the super-connectors in the industry, be it other investors, top-tier founders, or subject-matter experts.

Of course, all of the above examples are only ones that recently came to mind. The purpose of this blog is for creative construction and destruction. So if you have any other examples yourself, do let me know, and I can retroactively add to this post.

Photo by Mel Poole 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 Re-Upping

baseball, follow on

Soooooooo… (I know, what a great word to start a blogpost) I started this essay, with some familiarity on one subject. Little did I know I was going to learn about an entirely different industry, and be endlessly fascinated about that.

The analogy that kicked off this essay is that re-upping on a portfolio company is very much like re-signing a current player on a sports team. That was it. Simple as it was supposed to sound. The goal of any analogy was to frame a new or nuanced concept, in this case, the science of re-upping, under an umbrella of knowledge we were already familiar with.

But, I soon learned of the complexity behind re-upping players’ contracts, as one might assume. And while I will claim no authority over the knowledge and calculations that go into contracts in the sports arena, I want to thank Brian Anderson and everyone else who’s got more miles on their odometer in the world of professional sports for lending me their brains. Thank you!

As well as Arkady Kulik, Dave McClure, and all the LPs and GPs for their patience and willingness to go through all the revisions of this blogpost!

While this was a team effort here, many of this blogpost’s contributors chose to stay off the record.

The year was 1997.

Nomar Garciaparra was an instantaneous star, after batting an amazing .306/.342/.534. For the uninitiated, those are phenomenal stats. On top of batting 30 home runs and 11 triples – the latter of which was a cut above the rest of the league, it won him Rookie of the Year. And those numbers only trended upwards in the years after, especially in 1999 and 2000. Garciaparra became the hope for so many fans to end the curse of the Bambino – a curse that started when the Red Sox traded the legendary Babe Ruth to the Yankees in 1918.

Then 2001 hit. A wrist injury. An injured Achilles tendon. And the fact he needed to miss “significant time” earned him a prime spot to be traded. Garciaparra was still a phenomenal hitter when he was on, but there was one other variable that led to the Garciaparra trade. To Theo Epstein, above all else, that was his “fatal flaw.”

Someone that endlessly draws my fascination is Theo Epstein. Someone that comes from the world of baseball. A sport that venture draws a lot of inspiration, at least in analogy, like one of my fav sayings, Venture is one of the only types of investments where it’s not about the batting average but about the magnitude of the home runs you hit.

If you don’t follow baseball, Theo Epstein is the youngest general manager in the history of major league baseball at 26. But better known for ending the Curse of the Bambino, an 86-year curse that led the Red Sox down a championship drought that started when the Red Sox traded Babe Ruth to the Yankees. Theo as soon as he became general manager traded Nomar Garciaparra, a 5-time All-star shortstop, to the Cubs, and won key contracts with both third baseman Bill Mueller and pitcher Curt Schilling. All key decisions that led the Red Sox to eventually win the World Series 3 years later.

And when Theo left the Red Sox to join the Chicago Cubs, he also ended another curse – The Curse of the Billy Goat, ending with Theo leading them to a win in the 2016 World Series. You see, in baseball, they measure everything. From fly ball rates to hits per nine innings to pitches per plate appearance. Literally everything on the field.

But what made Theo different was that he looked at things off the field. It’s why he chose to bet on younger players than rely on the current all-stars. It’s why he measures how a teammate can help a team win in the dugout. And, it’s why he traded Nomar, a 5-time All Star, as soon as he joined, because Nomar’s “fatal flaw” was despite his prowess, held deep resentment to his own team, the Sox, when they tried to trade him just the year prior for Alex Rodriguez but failed to.

So, when Danny Meyer, best known for his success with Shake Shack, asked Theo what Danny called a “stupid question”, after the Cubs lost to the Dodgers in the playoffs, and right after Houston was hit by a massive hurricane, “Theo, who are you rooting for? The Dodgers so you can say you lost to the winning team, or Houston (Astros), because you want something good to happen to a city that was recently ravaged by a hurricane.”

Theo said, “Neither. But I’m rooting for the Dodgers because if they win, they’ll do whatever every championship team does and not work on the things they need to work on during the off season. And the good news is that we have to play them 8 times in the next season.”

You see, everyone in VC largely has access to the same data. The same Pitchbook and Crunchbase stat sheet. The same cap table. And the same financials. But as Howard Marks once said in response how you gain a knowledge advantage:

“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.”

For the purpose of this blogpost, we’re going to focus on the first one of the three.

What is value?

To begin, we have to first define a term that’ll be booking its frequent flier miles for the rest of this piece – expected value.

Some defined it as the expectation of future worth. Others, a prediction of future utility. Investopedia defines it as the long-term average value of a variable. Merriam-Webster has the most rudimentary definition:

The sum of the values of a random variable with each value multiplied by its probability of occurrence

On the other hand, venture is an industry where the beta is arguably one of the highest. The risk associated with outperformance is massive as well. And the greatest returns, in following the power law, are unpredictable.

We’re often blessed with hindsight bias, but every early-stage investor in foresight struggles with predicting outlier performance. Any investor that says otherwise is either deluding you or themselves or both. At the same time, that’s what makes modeling exercises so difficult in venture, unlike our friends in hedge funds and private equity. Even the best severely underestimate the outcomes of their best performers. For instance, Bessemer thought the best possible outcome for Shopify was $400M with only a 3% chance of occurring.

Similarly, who would have thought that jumping in a stranger’s car or home, or live streaming gameplay would become as big as they are today. As Strauss Zelnick recently said, “The biggest hits are by their nature, unexpected, which means you can’t organize around them with AI.” Take the word AI out, and the sentence is equally as profound replaced with the word “model.” And it is equally echoed by others. Chris Paik at Pace has made it his mission to “invest in companies that can’t be described in a single sentence.”

But I digress.

Value itself is a huge topic – a juggernaut of a topic – and I, in no illusion, find myself explaining it in a short blogpost, but that of which I plan to spend the next couple of months, if not years, digging deeper into, including a couple more blogposts that are in the blast furnace right now. But for the purpose of this one, I’ll triangulate on one subset of it – future value as a function of probability and market benchmarks.

In other words, doubling down. Or re-upping.

For the world of startups, the best way to explain that is through a formula:

E(v) = (probability of outcome) X (outcome)

E(v) = (graduation rate) X (valuation step up from last round) X (dilution)

For the sake of this blogpost and model, let’s call E(v), appreciation value. So, let’s break down each of the variables.

Graduation rates

What percent of your companies graduate to the next round? I shared general benchmarks in this blogpost, but the truth is it’s a bit more nuanced. Each vertical, each sub-vertical, each vintage – they all look different. Additionally, Sapphire’s Beezer recently said that it’s normal to expect a 20-30% loss ratio in the first five years of your fund. Not all your companies will make it, but that’s the game we play.

On a similar note, institutional LPs often plan to build a multi-fund, multi-decade relationship with their GPs. If they invest in a Fund I, they also expect to be there by Fund III.

Valuation step ups

How much greater is the next round’s valuation in comparison to the one in which you invested? Twice as high? Thrice? By definition, if you double down on the same company, rather than allocate to a net new company, you’re decreasing your TVPI. And as valuations grow, the cost of doubling down may be too much for your portfolio construction model to handle, especially if you’re a smaller sub-$100M fund.

It’s for the same reason that in the world of professional sports, there are salary caps. In fact, most leagues have them. And only the teams who:

  • Have a real chance at the championship title.
  • Have a lot in their coffers. This comes down to the composition of the ownership group, and their willingness to pay that tax.
  • And/or have a city who’s willing to pay the premium.

… can pay the luxury tax. Not to be too much of a homer, but the Golden State Warriors have a phenomenal team and are well-positioned to win again (at least at the time of this blogpost going out). So the Warriors can afford to pay the luxury tax, but smaller teams or teams focused on rebuilding can’t.

The Bulls didn’t re-sign the legendary Michael Jordan because they needed to rebuild. Indianapolis didn’t extend Peyton Manning’s contract ‘cause they didn’t have the team that would support Peyton’s talents. So, they needed to rebuild with a new cast of players.

Similarly, Sequoia and a16z might be able to afford to pay the “luxury tax” when betting on the world’s greatest AI talent and for them to acquire the best generative AI talent. Those who have a real chance to grow to $100M ARR, given adoption rates, retention rates, and customer demand. But as a smaller fund or a fund that has a new cast of GPs (where the old guard retired)… can you?

Dilution

If a star player is prone to injury or can only play 60 minutes of a game (rather than 90 minutes), a team needs to re-evaluate the value of said player, no matter how talented they are. How much of a player’s health, motivation, and/or collaborativeness – harkening back to the anecdote of Nomar Garciaparra at the beginning – will affect their ability to perform in the coming season?

Take, for instance, the durability of a player. If there ‘s a 60% chance of a player getting injured if he/she plays longer than 60 minutes in a game and a 50% of tearing their ACL, while they may your highest scorer this season, they’re not very durable. If that player missed 25% of practices and 30% of games, they just don’t have it in them to see the season through. And you can also benchmark that player against the rest of the team. How’s that compared with the team’s average?

Of course, there’s a parallel here to also say, every decision you make should be relative to industry and portfolio benchmarks.

How great of a percentage are you getting diluted with the next round if you don’t maintain your ownership? This is the true value of your stake in the company as the company grows.

How does one use the appreciation value equation?

E(v) = (graduation rate) X (valuation step up from last round) X (dilution)

If the expected value is greater than one, the company is probably not worth re-upping. And that probably means the company is overhyped, or that that market is seeing extremely deflated loss ratios. In other words, more companies than should be, are graduating to the next stage; when in reality, the market is either a winner-take-all or a few-take-all market. If it is less than or equal to one, then it’s ripe to double down on. In other words, the company may be undervalued.

And to understand the above equation or for it to be actually useful (outside of an abstract concept), you need market data. Specifically, around valuation step ups as a function of industry and vertical.

If you happen to have internal data across decades and hundreds of companies, then it’s worth plugging in your own dataset as well. It’s the closest you can get to the efficient market frontier.

But if you lack a large enough sample size, I’d recommend the below model constructed from data pulled from Carta, Pitchbook, and Preqin and came from the minds of Arkady Kulik and Dave McClure.

The model

The purpose of this model is to help your team filter what portfolio companies are worth diving deeper into and which ones you may not have to (because they didn’t pass the litmus test) BEFORE you evaluate additional growth metrics.

It is also important to note that the data we’ve used is bucketed by industry. And in doing so, assumptions were made in broad strokes. For example, deep tech is broad by design but includes niche-er markets that have their own fair share of pricing nuances in battery or longevity biotech or energy or AI/ML. Or B2B which include subsectors in cybersecurity or infrastructure or PLG growth.

Take for instance…

Energy

Energy sector appreciation values and follow-on recommendations

The energy sector sees a large drop in appreciation value at the seed stage, where all three factors contribute to such an output. Valuation step-up is just 1.71X, graduation rates are less than 50% and dilution is 38% on average.  

Second phase where re-upping might be a good idea is Series B. Main drivers as to such a decision are that dilution hovers around 35% and about 50% of companies graduate from Series A to Series B. Mark ups are less significant where we generally see only an increase in valuation at about 2.5X, which sits around the middle of the pack.

Biotech

Biotech sector appreciation values and follow-on recommendations

The biotech sector sees a large drop in appreciation value at the Seed stage. This time, whereas dilution seems to match the pace of the rest of the pack (at an average of 25%), the two other factors shine greater in making a follow-on decision. Valuation step up are rather low, sitting at 1.5X. And less than 50% graduate to the next stage.

In the late 2023 market, one might also consider re-upping at the Series C round. Main driver is the unexpectedly low step-up function of 1.5X, which matches the slow pace of deployment for growth and late stage VCs. On the flip side, a dilution of 17% and graduation rate of 60% are quite the norm at this stage.

In closing

All in all, the same exercise is useful in evaluating two scenarios – either as an LP or as a GP:

  1. Is your entry point a good entry point?
  2. Between two stages, where should you deploy more capital?

For the former, too often, emerging GPs take the stance of the earlier, the better. Almost as if it’s a biblical line. It’s not. Or at least not always, as a blanket statement. The point of the above exercise is also to evaluate, what is the average value of a company if you were to jump in at the pre-seed? Do enough graduate and at a high enough price for it to make sense? While earlier may be true for many industries, it isn’t true for all, and the model above can serve as your litmus test for it. You may be better off entering at a stage with a higher scoring entry point.

For the latter, this is where the discussion of follow on strategies and if you should have reserves come into play. If you’re a seed stage firm, say for biotech, using the above example, by the A, your asset might have appreciated too much for you to double down. In that case, as a fund manager, you may not need to deploy reserves into the current market. Or you may not need as large of a reserve pool as you might suspect. It’s for this reason that many fund managers often underallocate because they overestimate how much in reserves they need.

If you’re curious to play around with the model yourself, ping Arkady at ak@rpv.global, and you can mention you found out about it through here. 😉

Photo by Gene Gallin 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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Non-obvious Hiring Questions I’ve Fallen in Love with

read, book, child, question

Recently, I’ve been chatting with a number of GPs and LPs looking to make their first hires. Many of whom hadn’t built a team prior. Now I’m no expert, nor would I ever claim to be one. But I’ve been very lucky to hire and work with some stellar talent.

They asked me how I think about interviewing, selecting, as well as onboarding. I’ll save the last of which for a future blogpost, but for the purpose of this one, if you frequent this blog, you’ll know I love good questions. And well, I get really really nerdy about them. So, as I shared my four favorite, nonobvious interview questions as of late with them (some I’ve used more than others), I will also share them with you.

I won’t cover the table stakes. Why are you excited to be here? What skills are you a B+/A- at? And what are you A+++ in? Why you? Etc.

If you had to hire everyone based only on you knowing how good they are at a certain video game, what video game would you pick?

I recently heard Patrick O’Shaughnessy ask that question to a guest on his podcast, and I found it inextricably profound. While the question was directed at Palmer Luckey, who has a past in video games, the words “video game” can easily be replaced by any other activity or topic of choice and be equally as revealing. Be it sports. Or an art form. Or how they grasp a certain topic. Even, putting them in front of a Nobel Prize winner and see how quickly they realize they’re in front of one.

The last example may be stretching it a bit, but has its origin in one of my favorite fun facts about the CRT — the cognitive reflection test. Effectively, a test designed to ask the minimum number of questions in order to determine someone’s intelligence. But in a parodical interpretation of the test, two of the smartest minds in the world, Daniel Kahneman and Amos Tversky, decided to make an even shorter version of the test to measure one’s intelligence. The test would be to see that if one were to put you in front of Amos Tversky, one of the most humble human beings out there despite his intelligence, how long it would take you to realize that the person sitting across from you was smarter than you. The shorter it took you, the smarter you were. But I digress (although there’s your fun fact for the day).

The reality is that any activity that requires a great amount of detail, nuance, resilience, frustration and failure probably qualify to be mad-libbed into that question. Nevertheless, it’s quite interesting to see what someone would suggest, and a great way of:

  1. Assessing how deep a candidate can go deep on a particular subject,
  2. How well they can relay that depth of knowledge to a layperson, and
  3. How they build a framework around that.

I hate surprises. Can you tell me something that might go wrong now so that I’m not surprised when it happens?

Simon Sinek has always been one for great soundbites. And the above question is no exception. It’s a great way of asking what is one of your weaknesses. Without asking what is your weakness? Most, if not all hiring managers are probably accustomed to getting a rose-tinted “weakness” that turns out is a strength when asking the weakness question to candidates. It is, after all, in the candidate’s best interest to appear the most suitable for the job description as possible. And the JD doesn’t include anything about having weaknesses. Only strengths… and responsibilities.

At the same time, while the weakness question makes sense, when there is an honest answer, I’ve seen as many hiring managers use the associated answer to discount a candidate’s ability to succeed in the role, before given the chance. While this is still throwing caution to the wind, for one to be open-minded when asking this question, at the very least, you’re more likely to get an honest one. At least until this question becomes extremely popular.

Another version, thought a lot more subtle, is: What three adjectives would you use to describe your sibling?

I won’t get into the nuances here, but if you’re curious for a deeper dive, would recommend reading this blogpost. The TL;DR is that when we describe others (especially those we know well), we often use adjectives that juxtapose how we see ourselves in relation to them.

What did you do in your last role that no one else in that role has ever done?

This is one of my favorite professors, Janet Brady’s, favorite questions, and ever since I learned of it, it’s been mine as well. Your mileage may vary. Of particular note, I look for talent with entrepreneurial natures to them. Most of what I work on are usually pre-product-market fit in nature. In other times, and not mutually exclusive to the former, requires us to re-examine the status quo. What got us here — as a team, as a company, as an industry, or as a citizen of the world — may not get us there.

And there is bias here in that I enjoy working with people who push the boundaries rather than let the boundaries push them. And I love people who have asked the question “What if?” in the past and has successfully executed against that, even if it meant they had to try, try again.

What haven’t you achieved that you want to achieve?

Steven Rosenblatt has always been world-class at hiring. By far, one of the best minds when it comes to scaling teams. For a deeper dive, and some of his other go-to questions, I highly recommend checking out this blogpost.

When you’re building a world-class team, you need people to self-select themselves in and out of the culture in which you want to build. Whether it’s Pulley’s culture of move fast and ruthlessly prioritize to build a high-performance “sports team or orchestra” or On Deck’s non-values, it’s about making it clear that you’re in not because you’re peeking through rose-tinted glasses, but that you know full well, that you will be confronted by reality, yet you still remain optimistic. To do that, you need:

  1. A tight knit team who hold the same values
  2. And folks with a chip on their shoulder

The latter is the essence of what Steven gets at with the above question. And does one’s selfish motivation align with where the company wants to go and what the role will entail.

Photo by Aaron Burden 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 #64 An Intellectual Renaissance

“Good writing is always about things that are important to you, things that are scary to you, things that eat you up. But the writing is a way of not allowing those things to destroy you.”
— John Edgar Wideman

I go through these sinusoidal episodes where I write about my journey as a person. A world where things just aren’t perfect. And I, like everyone else who graces this planet, am struggling to find where I fit in the world. And when I’m swimming in the depths of self-discovery, I find that for an audience of entrepreneurs and investors, I really haven’t written much about my discoveries and re-discoveries in the wonderful land of innovation. The other half of it is for my fear of knowledge atrophy.

And so, I spend back to back to back weeks writing about the inner workings and the robust mental models of some of the world’s top intellectual athletes. Then in hindsight, once again, I realize that my blog begins to read just like any other business blog – any other startup, VC, tech blog – out there. And I fear that I’ve lost my voice. So, I re-embark on a literary path of introspection and growth.

The great Charlie Kaufman once said about his time on Adam Resnick’s show, Get a Life, “Adam Resnick’s scripts were the best on the show. And we all tried to write in Adam’s voice. That was the job. And I was frustrated with my results. But it occurred to me that there was no solution to this problem as long as my job was to imitate someone else’s voice. I can maybe get close but I was never going to get better at it than Adam.

“The obvious solution was not to throw my hands up but try to find myself in a situation where I was doing me, not someone else. Do you. It isn’t easy, but it’s essential. It’s not easy because there’s a lot in the way. In many cases, a major obstacle is your deeply seated belief that ‘you’ is not interesting. And since convincing yourself that you are interesting is probably not going to happen, take it off the table. Agree.

“Perhaps I’m not interesting, but I am the only thing I have to offer. And I want to offer something. And by offering myself in a true way, I am doing a great service to the world. Because it is rare and it will help. As I move through time, things change. I change. The world changes. The way the world sees me changes.”

As a product of what I can only describe as a game of tug-of-war between my right and left brain, I start many essays and unfortunately, lose interest half-way through writing them. As such, I’ve amassed a far-reaching graveyard of zombie posts. Eclectic, disparate monologues. Neither fully alive nor fully dead. Some may see a phoenixlike revival. Others may forever rest as vestigial drafts until Indiana Jones excavates them.

But nevertheless, the act of writing to think – to express – hones my mind like a whetstone to a kitchen knife. The more I do so, the sharper I get. Yet too much so, without application, renders the act of sharpening useless.

A few days back, I stumbled across a fascinating tweet on atrophy and hypertrophy.

There are many things in life that atrophy over time – knowledge, skills, presence. Yet there are a handful of things that hypertrophy – brain, demand for proof, and space, just to name a few. For me, writing exists in both categories. Like most skills, it is perishable. Yet the more I see, hear, and learn, the more I demand to myself that I need to put pen on paper. A personal intellectual renaissance.

Photo by Ágatha Depiné 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!

Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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VCs Are Science Fiction, Not Non-Fiction Writers

science fiction, camera lens, city

With the crazy market we’re in today, VCs are frontloading their diligence. They’re having smarter conversations earlier. Before 2021, most investors would have intro conversations with founders before taking a deeper dive into the market to see if the opportunity is big enough. Nowadays, investors do most, if not all, their homework before they start conversations with founders. And when they’ve gotten a good understanding of the market and a more robust thesis, then:

  1. They go out finding and talking to the founders who are solving the problems and gaps in the market they know exist.
  2. They incubate their own companies that solve these same issues.

Subsequently, they are more exploratory than ever before. In frontloading their diligence, VCs have become more informed, if not better, predictors of not only where the market is today, but where the market is going to be tomorrow. They have a better grasp on the non-obvious. Or at the very minimum, have a much better understanding on the obvious, so that the boundaries of the non-obvious are pushed further. In turn, they can truly invest in the outliers. Outliers that are more than three standard deviations from the mean.

Startup ideas are often pushing the boundaries of our understanding of the world we live in. The team at Floodgate use an incredible breakdown to frame the amount of data that needs to be present to qualify the validity of a team and idea. “[W]e like to say some secrets are plausible, some are possible, and some are preposterous, all different types of insights. It matters what type it is because the type of team you need, the type of people you need to hire, the fundraising strategy, the risk profile, the amount of inflections that have to come together. All of those things vary, depending on the type of secret about future that you’re pursuing,” said Mike Maples Jr. recently on the Invest Like the Best podcast.

Science fiction is, by definition, preposterous. But so are the true outliers. And as any great investor knows, that’s where the greatest alphas are generated.

Preposterous ideas are backed by logic and insight

To quote PG from an essay he wrote earlier this year, “Most implausible-sounding ideas are in fact bad and could be safely dismissed. But not when they’re proposed by reasonable domain experts. If the person proposing the idea is reasonable, then they know how implausible it sounds. And yet they’re proposing it anyway. That suggests they know something you don’t. And if they have deep domain expertise, that’s probably the source of it.

“Such ideas are not merely unsafe to dismiss, but disproportionately likely to be interesting.”

But no matter how implausible your startup idea sounds, there still has to fundamentally be an audience. And while it may not be obvious today, the goal is that it will be obvious one day. Frankly, if it’s forever non-obvious and forever in the non-consensus, you just can’t make any money there. If Airbnb stuck only with the convention industry or Uber only with the black cab, or Shopify only with snowboards, they would never have the ability to be as big as they are today.

Shopify’s Alex Danco has this great line in his essay World Building. “If you can create a world that’s more clear and compelling than the complex, ambiguous real world, then people will be attracted to that story.”

As investors, we have to start from first principle thinking. Investors, in frontloading their diligence, find the answers to “why now” and “why this”. All they’re looking for after is the “why you.” The further down the line towards preposterous science fiction you are, the more you need to sell investors on “why you”.

Idea PlausibilityKey QuestionContext
PlausibleWhy this?Most people can see why this idea should exist. Because of the consensus, you’re competing in a saturated market of similar, if not the same ideas. Therefore, to stand out, you must show traction.
PossibleWhy now?It makes sense that this idea should exist, but it’s unclear whether there’s a market for this. To stand out, you have to convince investors on the market, and subsequently the market timing.
PreposterousWhy you?Hands down, this is just crazy. You’re clearly in the non-consensus. Now the only way you can redeem yourself is if you have incredible insight and foresight. What’s the future you see and why does that make sense given the information we have today? If an investor doesn’t walk out of that meeting having been mind-blown on your lesson from the future, you’ve got no chance.

And when answering the “why you”, it’s not just on your background and years of experience, but your expertise. As Sequoia’s Roelof Botha puts it, “So what was the insight? What is the problem that you’re addressing? And why is your solution compelling and unique in addressing that problem? Even if it’s compelling, if it’s not unique there’re going to be lots of competitors. And then you’re probably going to struggle to build a distinctive business. So it’s that unique and compelling value proposition that I look for.” So before anything else, the best investors, like Roelof, “think of value creation before value capture.”

In order to find that earned secret – that compelling and unique secret sauce – in the first place, you have to love what you’re working. And not just passionate, but obsessive. The problem you’re trying to solve keeps you up at night. You have to be more of a “missionary” than a “mercenary” as Roelof would put it. If you’re truly a missionary, even the most preposterous idea will sound plausible if you can break down why it truly matters.

The Regulatory Dilemma

The most important and arguably the hardest part about writing science fiction – and this is equally true for funders as it is for founders – is that we have to self-regulate. Regulation will always be a lagging indicator of technological development. Regulators won’t move until there’s enough momentum.

But, as we learned in high school physics, with every action, you need an equal and opposite reaction. The hard about momentum, and I imagine this’ll only be more true in a decentralized world, is that it’s second order derivative is positive. In other words, it’ll only get faster and faster. On the other hand, regulation follows the afterimage of innovation. It sees where the puck was or, at best, is at, but not, until much later, where the puck is going. And truth be told, innovation will eventually plateau, as it follows a rather step-wise function, as I’ve written before. And when it does, regulation will catch up.

S-Curves
Source: Tim Urban’s “The AI Revolution: The Road to Superintelligence“

So, in the high school physics example of Newtonian physics, the reaction, in this case, regulation, needs to be equal and opposite force comparative to where the puck will be. But as you’ve guessed, that will stop innovation. And I don’t think the vast majority of the world would want that. Progress fuels the human race.

Science fiction needs rules

Brandon Sanderson, one of my favorite fictional authors, has these three laws that govern great worldbuilding. To which, he coined as Sanderson’s Three Laws. The second of which reads:

Limitations > powers

In fantastical worlds, we are often used to how awesome things can be. Making the impossible possible. But as Brandon explains, “the truth is that it’s virtually impossible to come up with a magical effect that nobody else has thought of. Originality, I’ve seen, doesn’t come so often with the power itself as with the limitation.”

As the infamous line goes, “with great power comes great responsibility.” If you end up having access to every single person on this planet’s data, what makes you a company worth betting on isn’t your power, but how you use that power. How you self-regulate in using that power. Take, Open AI’s GPT-3. Instead of sharing the entire AI with the world, they limited that power to prevent malicious actors through an API.

What does self-regulation mean? Simply, aligning incentives so that all stakeholders win. When you have two people, you have a 2×2 matrix to account for four possible outcomes. There’s a situation where both people win, two situations where one wins, one loses, and another where both lose. Needless to say, we want to be maximizing for win-win situations.

As Balaji Srinivasan said on the Tim Ferriss Show recently, “When you have three people, it’s a 2x2x2, because there’s eight outcomes, win/lose times win/lose times win/lose. It’s a Cartesian product.. […] When you have N people, it’s two by two by two to the Nth power. It’s like this hypercube it as it gets very complicated.” Subsequently, the greater the organization, the more stakeholders there, and the harder it is to account for the “win” to the Nth power outcome. Nevertheless, it’s important for founder and funders at the frontier of technological and economic development to consider such outcomes. And at what point is there a divergence of incentives.

There’s usually a strict alignment in the value creation days. But as the business grows and evolves to worry more about value capture, there needs to be a recalibration of growth and an ownership of responsibility as the architects who willed a seemingly preposterous idea into existence.

In closing

We live in a day in age that is crazier than ever before. To use Tim Urban’s analogy, if you brought someone from 1750 to today and had them just observe the world we live in, that person will not only be mind-blown, but literally, die of shock. To get the same effect of having someone die of shock in 1750, you can’t just bring someone from 1500, but you’d have to go further back till 12,000 BC. The world is changing exponentially. And new technologies further that. Who knows? In 50 years, we in 2021, might die of shock from what the world will have become.

And rightly because of such velocity, innovators – founders and investors – will have to lead the charge not only technically and economically, but also morally.

Photo by Octavian Rosca on Unsplash

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