Finding Genius Page 5
In recent years, Thiel has become known for his support of President Donald Trump during the 2016 election. However, prior to that, Thiel was famous within the Silicon Valley community and beyond for his role as an innovator and astute investor in entrepreneurial geniuses including Elon Musk and Mark Zuckerberg. In 2005, Thiel launched Founders Fund to invest in revolutionary technologies. And it did. Founders Fund went on to invest in Spotify, Lyft, Knewton, Airbnb, Stripe, ZocDoc, Palantir, and SpaceX. If anyone had the ability to spot entrepreneurial genius, it was Peter Thiel and the investors he surrounded himself with, including his partner, and Stephens’ mentor, Brian Singerman.
Trae Stephens and Peter Thiel grew close while Stephens was still at Palantir. Recognizing the insights Stephens had developed, Thiel approached him to join Founders Fund in its early days as a venture investor. Stephens’ response was, “I don’t know much about investing and I have no knowledge of finance,” to which Thiel responded, “the best venture capitalists are not finance people.”
The best venture capitalists are not finance people. The venture capitalists who shared their insights for this book were former journalists, medical doctors, military, government employees, entrepreneurs, professional athletes, bankers, lawyers, and teachers. Trae Stephens is one of the many investors who find themselves working in venture capital after operating in a diverse role for several years prior. They offer unique insights to companies and are the ‘trail-wise sidekicks’ that entrepreneurs want in their corner. They want individuals who will support them as they embark through unchartered territory and bring an alternate perspective. While a role in venture capital was once the landing pad for semi-retired executives or successful entrepreneurs, venture capital has expanded, and individuals now arrive at this role from a slew of different professions much like Trae Stephens did with Founders Fund. The common qualifier is often an interest in technology or profound fascination with entrepreneurs. But the venture capitalists who thrive are those who approach the career from a unique perspective: from a role as an operator, a unique set of experiences in an industry, or as a former founder. The venture business is less about understanding financial models to quantify genius but instead relying on intuition that is developed over time.
Venture capital, as Andrew Parker of Spark Capital admits, is a mentorship-driven business. Parker, who shadowed Fred Wilson, a reputable investor with Union Square Ventures, before striking out on his own, believes it will be difficult for an investor to develop that intuition unless it is tested and refined by more experienced investors. After Stephens joined Founders Fund, Brian Singerman (an investor in companies such as Airbnb, Postmates, and Oscar Health) became his informal mentor. He told Stephens: “I don’t expect anything out of you in the first year. All I want you to do is to just take 1,000 meetings with different entrepreneurs. The only way you’re going to get good at this is to meet with as many entrepreneurs who are willing to meet with you as possible. Take every meeting with every person at our fund and begin building your own network. Start building opinions about what things are good in the meetings and what things aren’t. What do partners like about companies? What do they hate? What founders stand out to you? Why? Develop these opinions.”
Like most entrants into venture capital, Stephens began his career through this approach. He took over 200 meetings in the first two months and quickly understood Peter Thiel’s statement that venture capital is not a finance-based profession. Stephens expands on this:
“I started to realize that one of the key reasons that investments in the seed or series A companies happen is that it’s not well suited for the finance thing. What I learned through those meetings and by watching Brian Singerman, was that this is not about finance at all. It is more about developing an intuition about the difference between a truly exceptional founder and a good founder. After taking my first 100 meetings and not understanding this, Brian called me into a meeting he was having with a founder that is now in our portfolio. He recognized genius in that founder and wanted to show me. It became so apparent how one founder can be different from hundreds of others that you’ll meet in your career.”
Developing this intuition is a critical skill for venture investors as they grow into their careers. Like most successful investors, Stephens’ intuition has been shaped through a set of unique experiences in his past. When I asked Stephens if he believed his unique advantage as an investor was his non-finance background, Stephens responded:
“As far as my experience goes, I am confident that if I did not have the Palantir experience, I would be useless to Founders Fund. People have this bias where they think they can come out of college and be a VC intern and help with deal flow or evaluate deal flow. I think that’s nonsense. I do not think I would be remotely valuable to a venture fund if I didn’t have some meaningful operational experience. The only reason I have any insights into what works and what doesn’t work is that I’ve lived through it and I’ve seen a company do a lot of things right and make many mistakes. I don’t have any confidence I’d be good at this had it not been for Palantir. Does this go for all investors? No, but I think you need to have a blend. You need individuals who can go through the spreadsheet and figure out how well your business model is working, but the real gut intuition about a founder comes from unique experiences. There is an enormous information edge of knowing what works and doesn’t work.”
I’ll discuss this ‘information edge’ more through a deeper dive on venture theses in the next chapter.
The allure that drives young professionals into a career in venture capital is that many of these people are enamored by entrepreneurship, are intellectually curious, and are often humbled by the entrepreneurs they are surrounded with. It is a career that is constantly changing. Spencer Lazar, an investor with General Catalyst, describes his affinity for his career in venture capital after pursuing a startup of his own:
“The idea of working with and being surrounded by entrepreneurial genius is something even a young person can fall in love with. The entrepreneurial geniuses who know how to affect insanely large numbers of people and change their lives is a really powerful thing. You can do that as a doctor or as a teacher but that’s generally with fewer people at a time. For me, the Internet and technology was this new force factor for change in the world where young people could build things that would monumentally change billions of people’s lives. You have to be a lot of things but you don’t need to be old or seasoned to affect that change. Getting excited about being around those types of people is a big part of this job. The second part about this job that people have to be excited about is the investing piece. Some people don’t get excited about capital allocation. You have to find the entrepreneurs who want to change the world in a small way for a ton of people but to do it in a capital efficient way. You have to want to do the work to price deals, size the markets, evaluate exit opportunities, and make only a few picks over a long career.”
Measuring Performance
William McQuillan, a partner with Frontline Ventures, approaches his role as a venture capitalist with a similar humility and fascination to Lazar. He also recognizes that despite the excitement and allure of being around founders all the time, his instinct or intuition may often be off when he meets founders. He captures this understanding through a unique methodology to make him a better investor:
“Venture capital has a slow feedback cycle and it is extremely frustrating not knowing if you are good at your job or not. Forestry has quicker feedback cycles than venture capital. I started this practice of tracking my decisions on when I have said no to a company and why I said no. I track these companies with publicly available data on the total amount of capital each company has raised since we passed and divide it by the number of months since then. This allows me to compare companies on a level playing field. I group companies that we passed on in a few categories: weak founders, small market, competitive market, product or technology, price of round, and speed (the deal closed
too quickly.) The weak teams raised the lowest follow-on capital, but this practice helps me gut-check which areas I’m right in and where I am wrong when evaluating companies. The analysis shows that we should not be investing in small markets, even if there is a great team. We should avoid investing in companies with highly competitive markets unless we think the team is incredible. I learned that my gut instincts on founders were pretty good and that I should trust this instinct more often. Finally, at the seed stage, product and technology are not good reasons for rejecting a company. This practice has already solidified my previously held views on weak founders or small markets, questioned my view on how I evaluate business models and products, and changed some of our internal thinking with how fast we can get to a decision.”
Information Edge
Like that of an entrepreneur, the job of a venture capitalist is often lonely. It can be competitive from one partner to the next on who sources the best deals. Some investors I spoke with expressed their insecurities on whether or not, after two decades of being in venture capital, they had proven that they were truly capable venture investors. One such investor, a partner at a reputable fund, candidly speaks about the challenges of being a venture investor:
“Venture is a tough business to be in. The learning curve is long because you don’t know for a long time if an investment was in fact, a good investment. It can be many years before you know if something was a good investment and you’ll get a lot of false signals along the way because companies raise additional capital and increase valuations to be exorbitant but then ultimately go out of business. Terminal value is all that matters. When your feedback cycles are long, your learning curves are slow. People who have this job should treat it like it’s the last job they’ll have because if you do it for just a few years, you won’t get much out of it.”
An ‘information edge’ is something venture capitalists strive to create in order to remain competitive in this industry. The job of an investor is to make major investment decisions through a series of short meetings about a technology, company, or founder, all of which they have little knowledge about. Investors who develop theses in specific focus areas are at a unique advantage and focus on ‘thesis-driven’ investing. The venture capitalists themselves admit their fascination with colleagues who are able to quickly comprehend the intricacies of a business within a short period of time. Sitting at the forefront of innovation, investors often need to ramp up their knowledge quickly in order to compete. Ellie Wheeler of Greycroft details what acquiring this information edge has looked like for her over a decade of investing:
“Talking to people is more effective than individual, solitary research. Venture capitalists don’t become deep experts; they become broad experts and focus on the big picture. The VC looks at a space, where the gaps are, where companies should be started if they don’t see it. That’s a model of research that can be adopted by incubators, startup studios and a model that some investors do well with. That’s likely why you’ll see some investors focused on thesis-driven investing because it is difficult to stay ahead of the curve on every business model, every industry, every founder type. I’ve also learned, in the number of years I’ve been doing this, that I have to remain nimble in my thinking and approach every new idea as its own despite what patterns I have seen in the past.”
On this knowledge gap, most investors astutely recognize that their ability to match a founder’s dedication and knowledge of an industry will be a nearly insurmountable feat. Instead, funds and venture investors form investment theses and approach genius through a framework.
CHAPTER 4
INVESTMENT THESES AND DEVELOPING AN INFORMATION EDGE
“The commitment to a thesis is part of the fiber of USV — a shared set of ideas creates a framework that allows us to operate with focus and work on what matters most to our team. But what that thesis is has evolved over time and will continue to evolve. It reflects both a changing world as well as the shifting interests of our partnership.”
Rebecca Kaden, Union Square Ventures
Thesis Building
Theses are the bedrock of entrepreneurial endeavors. The most successful entrepreneurs observe systems in place around them, develop a set of forward-looking hypotheses about behaviors within that system, and identify a gap ripe for them to take advantage of. These gaps, which ultimately transform into businesses, persist across consumer behaviors, enterprise patterns, and general world movements. Vishal Vasishth, the former Chief Strategy Officer of Patagonia and co-founder of Obvious Ventures, recognizes in the entrepreneurs he invests in ‘an amazing ability to develop a view of the world and fight for that new world without being stopped until their thesis is either proven right or wrong. An entrepreneur’s thesis about how the world should operate fuels their conviction to persistently chip away to create change.
Venture capitalists take dozens of meetings each day with founders who all arrive at their doorstep from starkly different backgrounds and with unique visions and expertise. To better understand the intricacies of a company, to fully comprehend or push back on a founder’s vision where unrealistic, investors look for systematic approaches to understand new industries and technologies quickly. In parallel to these entrepreneurs, venture investors operate in silos, developing their own robust theses on human, enterprise, and world behavior. Venture capitalists use their meetings with diverse founders to add to their thinking or to challenge their own reasoning or assumptions. As a result, their frameworks factor in the rapid disruptions enacted by the entrepreneurs around them. While an entrepreneurial thesis may be myopically focused on a problem and how a solution solves it, an investor accounts for the problem and examines the investment opportunities across a vast landscape. The investors match multiple entrepreneurial theses against their own to piece together a jigsaw puzzle.
As Ellie Wheeler of Greycroft suggests, investors are compelled to adapt and be ahead of the knowledge curve with sectors of interest or technologies. If they are not, they are at risk of falling behind when the next best idea is introduced to them. This desire to surface new information and identify new patterns is tied to their ambition to prove that they, as investors, stand out from their peers because of their original thinking or hypotheses. Theses are the bedrock of entrepreneurial endeavors, but also act as a fundamental driver behind the strategic venture investment funds. In the absence of strong theses, investors can be easily swayed by the latest trend and fall victim to a herd mentality.
In the latter part of this book, investors from preeminent funds such as First Round Capital, Tribeca Venture Partners, Northzone Venture Partners, and others share their informed theses on sectors such as transportation, digital healthcare, financial technology, artificial intelligence, and the future of language, blockchain, genomics, and other interest areas. It’s with this in-depth view into how investors form their theses that entrepreneurs can get a glimpse into how investors approach radical ideas and changing industries.
Software Eats the World
In 2011, in a contribution to the Wall Street Journal, venture investor Marc Andreessen outlined the thesis of the fund he co-founded, Andreessen Horowitz (known as a16z.) Most investment theses are grounded on the impact technology can potentially have on a sector and a16z’s investments in Facebook, Airbnb, Box, GitHub, Lyft, and Slack were centered in the concept that “software eats the world.” An excerpt from this WSJ piece details that strategy:
“More and more major businesses and industries are being run on software and delivered as online services — from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not. Why is this happening now? Six decades into the computer revolution, four decades since the invention of the microprocesso
r, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale. Over two billion people now use the broadband Internet, up from perhaps 50 million a decade ago, when I was at Netscape, the company I co-founded. In the next 10 years, I expect at least five billion people worldwide to own smartphones, giving every individual with such a phone instant access to the full power of the Internet, every moment of every day. On the back end, software programming tools and Internet-based services make it easy to launch new global software-powered startups in many industries — without the need to invest in new infrastructure and train new employees. In 2000, when my partner Ben Horowitz was CEO of the first cloud computing company, LoudCloud, the cost of a customer running a basic Internet application was approximately $150,000 a month. Running that same application today in Amazon’s cloud costs about $1,500 a month. With lower start-up costs and a vastly expanded market for online services, the result is a global economy that for the first time will be fully digitally wired — the dream of every cyber-visionary of the early 1990s, finally delivered, a full generation later.”
When this thesis was developed, the Internet was still a recent development in the history of the world. Even in 2019, however, PC and smartphone penetration is still bringing most of the world on to the Internet with access to modern tools, technologies, and access. The ‘software eats the world’ thesis expands to all industries, be it media or finance, and how software and the Internet will continue to change consumption patterns or behaviors as the global population comes online. Given this fairly broad approach, the partnership invests in categories that they believe will fall first to the forward-looking belief that “software eats the world” and then find the geniuses who can execute against that vision.