One of the questions that seem to come up every so often, whether it’s when I’m on a podcast or a fireside chat or just in conversation, is: Between sourcing, picking, and winning, which one do you think is the most important that emerging managers have?
The cop-out answer is always: They need all three. Or, they’re all important. Which is theoretically true. One in isolation is really hard to pull off ’cause then you need to account for sheer dumb luck (hope is never a strategy). And while everyone is subject to their own answer, I’m a big believer that the lead domino between the trifecta is sourcing. If you never see it, how do you even pick or win it?
We can talk about how you’d theoretically and systematically pick the best founders or how your value-add is something that is something truly valuable to your investments, but if you never have the opportunity to interact with a generational founder, I don’t care how smart you are. Or how well-connected you are. Or how experienced you are. I don’t care if you’re the world’s greatest X if no one’s heard of you or thinks of you when they or someone close to them starts a company.
Venture is a game of outliers. (I feel like a broken record at this point writing and saying this.) And I would much rather a GP see and miss generational founders again and again (and well, learn each time they do) than to have only seen one their entire life. Obviously, both are better than not having met any ever. You don’t know what quality looks like if you’ve never seen quality before they became obvious. No amount of books you’ve read or podcasts you’ve listened to will help you with that. I would rather you have a large anti-portfolio than build one for the first time as you’re starting your first fund. And in that anti-portfolio, it’s a lot of “I didn’t pick it” or “I didn’t win it” or “I didn’t even know I wanted to be an investor yet.” Yet despite all of that, I’ve chosen to stay in touch with these generational talents and they still value my presence in their orbit.
If you’ve only met one generational founder in your life before, I need to figure out if your network and sourcing channels would allow you to see another in the next 3-4 years (or whatever your deployment period is). And that when you see it, you’ll know that that is the one. But every generational founder looks different from the rest. So if you’ve only seen one in the past, how will I know if you have both the pattern recognition and the exception recognition to pick the next?
For those who have seen one or less generational founders in their lives, I have to bet that you somehow can “use the Force.”
That on the off-chance you do find one, can I trust your intuition to recognize it AND win it?
On the flip side, there’s this game that many of us grew up with. Whac-A-Mole. It’s an arcade game that has a series of moles hiding in holes. The goal is to whack as many moles as you can as they pop their heads up. Venture investing is similar. Each mole is a generational founder. That you may miss “whacking” many a generational founder, but as long as you keep seeing them, and as long as you keep trying to pick them, you’ll eventually hit one. And if you’re lucky, more than one. But in order to see multiple generational founders, you need the cards to be stacked in your favor. The ideal venture manager should be playing a constant game of Whac-A-Mole, as opposed to using the force. Although, damn, being a Luke Skywalker sounds a hell of a lot cooler than playing an arcade game.
To pull a line from Scale’s Rory O’Driscoll that I wrote about in a previous post, “Having to deal with the psychological burden of having an anti-portfolio is a privilege. If you never have the psychological tax of passing on multiple generational deals, you shouldn’t be in venture. Passing on 20 great companies out of 40 great companies you see is always more preferable than investing in 2 great companies after seeing 40 average companies.”
Then there’s the question of whether our definition of generational founders even match up. Does your definition lead you to find founders who will exit at $1B+ outcomes? $100B+ outcomes? Or $100M outcomes? But a topic for another day.
Photo by Yuheng Ouyang 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.