I'm Shipping Up

One of the key aspects of the MBA experience is the summer internship. This is an opportunity to get experience in your desired role or industry and it is especially important for people looking to use the MBA as a pivot in their careers (like me).

I couldn’t be more excited to announce that I’ll be spending the summer as a Product and Operations Associate at Catch, a Boston-based fintech startup building portable benefits for modern workers. In this post, I will talk about the journey that led me to Catch, but for anyone looking for a TLDR, I couldn’t be more excited about the opportunity to work alongside a seriously impressive team on solving the problem of how to make benefits work for modern workers.

Back to the Future (of Work)

Anyone who has read this blog before will know that one of the topics that has interested me the most in recent years is the future of work. Credit for my interest in this space goes to my wife. She is from a small town in rural Virginia near the Chesapeake Bay. When I say small, I mean small. We are talking 1 stoplight and 3 restaurants small. Her town is absolutely beautiful, but its charm is belied by the fact that her town is dying. What once was a robust example of small-town America has become a shell of its former self. The Northern Neck is one of the most beautiful regions you will find anywhere in the country, located only a short drive from DC and yet the area has been in a downward spiral for years. There simply aren’t the kind of economic opportunities in the region that there once used to be. The smartest and most ambitious leave for school and don’t come back, finding opportunities and a lifestyle more to their liking in the urban centers that have become magnets of modern culture and commerce. Those that don’t leave are forced to contend with an opportunity set that is constantly eroded by offshoring, poor public education, and decades of underinvestment in core infrastructure and services. I think this phenomenon of the divergence of economic fortunes and the feeling that so many workers have been left behind by the modern economy underlines much of the social, political, and economic strife that the US and many other countries around the globe find themselves facing.

The juxtaposition of the Northern Neck’s natural beauty compared to its bleak economic outlet was what first made me begin to ask questions about why this divergence was occurring. I thought about why our work hasn’t kept pace with our needs as workers. I thought about how you could bring economic prosperity back to small-town America and why opportunities were so limited during a time when technology allows almost anyone to work almost anywhere. I thought about the different aspects that compose work and how the preferences of modern workers differed from that of our parents and grandparents.

Ultimately, I kept asking myself “What would the corner store of the future look like, and what can be done to help more people participate in the modern, digital economy?”

As an investor, my interest in the future of work coalesced around two fundamental pillars.

1)      What can be done to increase access to the digital economy?

2)      What can be done to decrease friction for modern workers?

For me, the future of work was never about the latest and greatest productivity tool or as simplistic as work that is simply remote. Maybe those are aspects of the future of work, but I have been chiefly concerned with the larger questions of how workers are changing and how the role of work would have to evolve to keep up.

My interest in this space led me to spend time delving into the creator economy. My thesis was that creators monetizing their unique interests, skills, and resources was an excellent example of an onramp into the digital economy for non-technical workers. As I transitioned from an investor into a full-time student, the creator economy continued to dominate the lion’s share of my attention as an area poised for opportunities.

The Jobs to be Done by Jobs

My interest in the creator economy really came to a head during my most recent semester at Wharton. I took an innovation class that tasked us with developing startup ideas and doing the groundwork for reaching initial validation of our concepts. I started exploring the financial side of the creator economy and hypothesized that current financial solutions wouldn’t be able to serve the needs of this emerging workforce. I thought that the biggest pain point for creators would be difficulty getting access to financing based on the unpredictability of their cashflows and incumbent financial institutions’ utter inability to underwrite income from platforms like Youtube, Twitch, or Substack. When I actually took the time to talk with creators and experts in the space, what I found surprised me. Yes, financing was a pain for creators, but the far greater pain revolved around their access to benefits. The need to take out a loan was something that, while painful, occurred infrequently. Benefits were, on the other hand, were a top-of-mind issue on a nearly daily basis. I realized that income was only an aspect of the “job to be done” by our jobs. We also rely on our jobs for insurance, community, security, prestige, value, identity, and so much more. New platforms provide creators, gig workers, freelancers, and other modern workers with income, but what about insurance, paid time off, family leave, retirement savings, and the other benefits that have been supplied by employers for nearly 100 years (side note: Catch’s CEO has an excellent examination of the historical drivers that led to the creation of the modern system of benefits)

Ask me what the Catch is

As I continued to explore the impact of benefits on modern workers, I realized that, if anything their effect was understated. Yes, benefits are a pain in the ass for modern workers and that is a huge problem. But what about the traditional workers who want the freedom and ability to pursue work more in line with their interests but never take the jump because they feel chained to their desk by their employer-provided health insurance and 401k? What about the modern workers that never were because of the hurdle provided by the outdated benefits system? If you reduce the friction to pursuing modern work by providing benefits to people no matter where they are and where they work, not only will you make life better for the large, growing group of modern workers, but I believe that you would also unleash a wave of entrepreneurship and economic opportunity for people who previously never had access to the modern economy.

And that’s what got me so excited about Catch! I was discussing my exploration of the space with one of my friends from my time as a VC and he immediately recommended I try to connect with the folks over at Catch. He was a big fan and knew that there were among the leaders in the space of modernizing benefits for modern workers. One conversation led to another and, as fortune would have it, the team had a need for exactly the kind of generalist operational role that I was looking for.

Catch is attacking the massive opportunity of decoupling benefits from work and rebuilding a modern safety net that allows people to take calculated risks and make plans for the future even as they pursue modern jobs that didn’t exist even a handful of years ago.

I am excited to bring what I’ve learned as an investor, operator, and student to contribute as much as possible to the company’s mission. Most of all, I am excited to work next to seriously impressive people working on solving a seriously important problem.

Whenever I have evaluated a company as a VC or angel investor, I have always tried to do a gut check of asking myself “will the world be a better place if this company is successful?”

I honestly believe that the answer to that question for Catch is an unequivocal yes.

And I couldn’t be more excited to do everything I can to try to help make that happen.  

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If you have thoughts on this post leave a comment below or reach out to me on twitter @abergseyeview where my DMs will forever be open.

If you enjoyed this post, you can subscribe here to receive all of my posts delivered directly to your inbox every Monday morning.

If this is the first time you are reading something I wrote and you want to learn more about me, this is a good place to start. It includes some background on me as well as a collection of my top posts.

Builder or Investor?

The summer before my junior year was one of the most impactful couple of months in my life. I had two internships that summer, one at a PE shop in Chicago and one at a medical device startup in New Hampshire. Chicago was the first time I ever really lived on my own. As a social extrovert, this was hard but, ultimately, really good for me. My summer in Chicago was a step function increase in my personal growth. I don’t think it is a coincidence that I met the woman who would go on to become my wife shortly after returning to school in the fall. I was finally mature enough for that kind of relationship, and my time in Chicago had a lot to do with that. 

If Chicago was an accelerant for personal growth, New Hampshire was a catalyst for significant professional development. 

I was working at a medical device company while also living with the CEO and his family. It was an intensive business boot camp. During the workweek, I did a rotation throughout the company working on a new project each week. Combined with daily 1v1s with departmental heads, the internship served as a fantastic introduction to the various dimensions of a technology business. 

Outside of work, the CEO had me do his P90X workouts with him every day before work at 5 am. This may sound early, but it was a luxury compared to the 4 am wake-up calls I had on the weekends for fishing. 

I learned a lot through this experience. I learned the importance of being able to speak just as easily with a dockhand as with a CEO. I learned what a world-class culture feels like and the impact of working at a mission-driven company. I learned that if you want to be truly successful, it is more important to be among the world’s best at something than what that something is. 

I think I learned as much out on the boat talking with the CEO as I did in the office. One conversation in particular sticks out. He told me, “at some point, every successful person has to decide whether they want to be a builder or an investor.” 

The concept of builder vs. investor has informed much of my career thus far. 

After school, I had the opportunity to work at an elite, global investment shop like The Carlyle Group. I got so much from that experience, but I knew pretty early that I wanted to try to find a way back into the startup world as my next step. I knew that I wanted to be part of building companies that make an impact through solving important problems, but I didn’t know the first thing about actually working at a startup. 

I thought through my potential options as follows: 

1. I could go try to work at a startup. 

2. I could go try to work at a big tech company. 

3. I could try to get into venture capital. 

My only tangible skills were financial management and analysis, so if I did pursue being an operator, it would have to be in some sort of financial analyst role. As positive as large swathes of my Carlyle experience had been, it had also made me realize that I didn’t want to be a cog in the wheel at another big company. Spending the previous two years working on billion-dollar oil & gas transactions also made me want to work with more nascent companies. 

So I actually saw my options as follows: 

1. Try to find a startup to join. It would have to be in a financial analyst role, which generally only more mature companies recruit. I would be buying a single lottery ticket, but it would really pay off if the company became super successful. 

2. Try to become a VC. I hoped to leverage my investor’s skill set to land a role at a seed-stage investing shop working with early-stage companies. Instead of a single lottery ticket, I rationalized that I would have visibility on a whole host of different startups. I would develop a broad view of what success looked like, which could inform whatever was next. 

I decided to pursue the VC path. My logic was that I could be a real growth partner to startups. I may not be doing the building myself, but I would be an integral part of that process as an investor. I thought I could be a builder through being an investor. 

And I was wrong. 

Now I don’t regret my choice. It worked out well for me. I thoroughly enjoyed my time as a VC. I learned a lot, built a ton of great relationships, and ultimately ended up here at Wharton, which had been my goal for as long as I could remember.

I didn’t make a wrong choice, but I can see that my logic was fundamentally flawed with hindsight. 

The reality is that VCs aren’t builders. They may think they are, and maybe as partners on boards, VCs are adjacent to the building process, but they aren’t builders. Not really. Especially not junior-level VCs. 

I had this deep desire to build something meaningful. To be part of creating something new that I could hang my hat on, point to, and say, “I did that.” And as much as I wished it could, I realize now that VC was never going to scratch that itch. 

I think a lot of junior and would-be VCs fall into this builder trap. They want to be a company builder, but they don’t have any sort of technical or operational background, so they pursue being a VC. The career provides access to startups has a sheen of sexiness (to its ultimate fault, I would argue).

After a couple of years, all the associates who wanted to be builders end up pretty disillusioned because they aren’t making the impact they had hoped they would.

What generally happens next is these aspiring builders leverage the network they have cultivated and their knowledge of startups to land an operating role at a company. Going from VC to operator isn't a bad route at all (at least I hope not because it is the one I am pursuing!). You will leave VC with a robust network in the space, a high-level view of what it takes to build a successful tech company, and the ability to evaluate what strong companies look like. 

I don't think this path is as good as jumping straight into an operating role at a future unicorn, but it probably has a lower variance. Worst comes to worst, you can always go and get your MBA and use that as a springboard onto the operating side of the table 😊.

You can't really make a wrong choice when deciding between being an operator and an investor, but I do think you can make a suboptimal one based on your ultimate aspiration. 

The number one piece of advice I have for folks interested in pursuing venture capital is to take the time to think about why they want to become a VC. Do they want to be a builder or an investor? 

With the benefit of hindsight, my recommendation is only to pursue being a venture capitalist early on in your career if you want to be an investor. 

If you want to be a builder long term and pursue VC as a path into that world, you'll get broad exposure, but you'll likely be frustrated with how little impact you make on companies (the extent to which VCs make a tangible impact on companies in general is a debate for another post). 

Instead, join a high-growth company. Optimize more for growth and sitting next to brilliant people. Optimize less for the particulars of your role. You can always get into VC down the road. Operating experience will only make you a better, more empathetic, and more credible investor.  

If you want to be an investor and want VC to be your asset class of choice, then great! You won’t make as much money as being a PE bro, but the companies you work with are about 1000x cooler, and you may even be able to invest in some companies that change the world. 

As with most things in life, there isn't one ideal path. The path you choose matters less than what you do while on it. 

But before deciding to jump into the VC rabbit hole, think about what you really want. 

Do you want to be a builder or an investor?

The answer will inform a lot. 

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If you have thoughts on this post leave a comment below or reach out to me on twitter @abergseyeview where my DMs will forever be open.

If you enjoyed this post, you can subscribe here to receive all of my posts delivered directly to your inbox every Monday morning.

If this is the first time you are reading something I wrote and you want to learn more about me, this is a good place to start. It includes some background on me as well as a collection of my top posts.

With Speed! With Speed!

With Speed! With Speed!

If you have ever watched an Arsenal game with me, there is a decent chance you have heard me repeat this refrain over and over again throughout the match.

One of the keys to soccer is the transition from defense to attack. Teams who are defending deep might get a key interception and have a chance to quickly progress up the field. These “counter-attacks” can be especially lethal as, instead of the usual 4-6+ defenders you would face against an opponent who is in formation, you find 2-4 defenders who are frantically back peddling and trying to get back into position. Counter-attacks can change the course of entire games and often give chances for underdogs to upset the competition, but the execution is of the utmost importance. There is a slim window with each counter-attack where you may find yourself out-manning the opposition, but if you dilly dally on the ball too long the other team will surely get back into position and negate any danger they may have previously faced.

So whenever Arsenal have a chance to counter-attack, I will likely be encouraging them to move quicker to take advantage of the situation before it passes them by.

I am pretty sure I got it from my Dad who is deathly allergic to players who slow-down play or have a habit of passing backward. Even some of Arsenal’s all-time great players like Henry and Sanchez have fallen out of favor with my father due to their proclivity to slow down our play.

Soccer is very much a game of momentum, but the unique beauty of the sport is how one single passage of decisive action can totally turn a game on its head.

I think life is a lot like soccer. It’s a momentum game. A game generally more of miles than milliseconds. But ever so often there is an opportunity that requires decisive action to capitalize on.

Back to School

I’ve been thinking about momentum recently as I have navigated the transition from the working world back to academia. As I discussed in my last post, the process was less than smooth. To top it off, we arrived in Philly the day after Hurricane Isaias swept through the area, flooding our building’s basement and knocking out our A/C. Unpacking in the Philadelphia summer was never going to be a life highlight, but doing so with no A/C turned it into a herculean effort. One which we lost badly. Once we were finally able to get our A/C back online we discovered that our movers had left us with a special going away present: COVID-19.

Suffice to say, our first couple of weeks in Philly didn’t exactly go according to the script. I had been so energized to hit the ground running and get the apartment straight ahead of school starting and instead I got absolutely stuffed on my way to the rim.

Life is like that sometimes. All the momentum in the world can come to a screeching halt due to something totally unforeseen or out of your control. It is impossible to avoid these speedbumps, so the real challenge lies in how quickly you are able to dust yourself off and get back up to speed.

It’s been slow going so far, but I am happy to report that I feel like I am starting to get my feet under me again. Caitlyn and I both feel 1000x better than we did at the beginning of the month and successfully navigated our isolation without exposing anyone else. Our apartment is (mostly) unpacked and school has gotten off to a great start. Normal classes start on Tuesday, but for the past two weeks, we have been engrossed in a business simulation course that was about as interesting and engaging as I could ever expect from a virtual course. The professor did a great job of leveraging the technology available to drive engagement like breaking us up into discussion rooms, utilizing real-time polls to gauge class sentiment, and encouraging us to share questions and comments in zoom chat. It is clear that the human element and opportunity for serendipitous conversations in the hallways are missing, but there are benefits to the remote classroom environment as well. As with many aspects of remote work, one is not inherently superior to the other for the majority of circumstances. It simply requires you to understand which trade-offs you are making and take action necessary to ameliorate downsides.

One of my biggest concerns headed into school was what the social scene would look like. The number one reason why I wanted to pursue my MBA was not the education itself or the credential but the network. And less the “network” as in alumni or professional network and much more the fact that people who are willing to take themselves out of the workforce and potentially spend hundreds of thousands of dollars investing into their career are the exact kind of risk-on, long-term thinkers I want to surround myself with.

Would people still be able to socialize? Would other students move to Philly? Would there be safe ways to engage with one another?

I am pleased to report that the social side of things has gone about as well as I could have hoped. There are way more social activities than I could ever participate in even if it was is all I did. People are taking the initiative to get creative and come up with safe and responsible ways to build relationships. Just as I expected they would. It’s not perfect. I think it can be especially hard for students who are not in Philly even with the regular occurrence of virtual events, but it is about as good as I had any right to be optimistic about a few weeks ago.

Momentum Games

So much about life is maintaining positive momentum and recapturing lost momentum when life inevitably trips you up. I feel like I have more or less been successful in doing that after the gut punches of the last couple of months, but I know that it will occur again.

There are few abilities that are as important as one’s ability to roll with the inevitable punches. To be able to intercept the ball when their back is to the goal and to counter-attack with speed.

This ability to execute at speed was by far the biggest indicator of success that I came to recognize after spending the last two years as a VC. The companies that were successful weren’t the ones with the best ideas or the most funding. They were the companies that were able to quickly try something, learn the key lessons, and to iterate. They ran experiment after experiment and eventually worked their way to the solution.

I have written about the power of these kinds of loops before, but I also think of Boyd Varty’s tracking metaphor for life. You often won’t know exactly where you are going, but if you pay attention to the broken twigs and footprints in the mud, you can eventually work your way to the solution.

I am trying to build up structures in my life to support maintaining my own positive momentum and quickly getting back on track when I fall short. Something that has been absolutely key to keeping me on track recently is developing a weekly review. I spend 30-60 minutes on Friday afternoon taking stock of my surroundings and planning for the week ahead. I was inspired by Diego Forte’s thinking on the subject, but customized it for my own needs.

Here’s my current checklist:

This structure has really helped me to pick my head up and evaluate whether I am spending my time the way I want to be. A few items of note: I wrote about my attempts to be more intentional about crafting my identity here. I am utilizing that sweet, sweet student discount to get Superhuman’s help with achieving the mythical inbox zero on a consistent basis (it 100% lives up to the hype. Leave me a comment if you want a referral!) I’ve written about my Personal CRM before and am more grateful than ever that I have built some good habits around being intentional about staying in touch with people as I drink from the social and academic firehose that is grad school (I went ahead and updated my public Personal CRM template if you’d like to give it a shot!)

I’ve also been trying to be more diligent in blocking time for activities in my schedule which has helped a lot. These strategies may seem like a lot and I wouldn’t recommend trying to add them all at once. Pick one or two things to work on and slowly build on top of that foundation as you pick up speed. Putting in structures like a weekly review checklist is the absolute best way to keep yourself from sliding too hard when your life gets flipp-turned upside down.

My system is by no means perfect. My next step is to build out monthly and quarterly check-ins for myself as well. I also know that I will likely need to continue to reassess my priorities and chop things that are not worth the time I am investing in them, but that is a discussion for another day.

Life is gonna hit you. And it is going to hit you hard. You won’t always be able to avoid those punches, but you can be proactive about crafting systems that help you bounce back into the ring afterward.

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If you have thoughts on this post leave a comment below or reach out to me on twitter @abergseyeview where my DMs will forever be open.

If you enjoyed this post, you can subscribe here to receive all of my posts delivered directly to your inbox every Monday morning (or the occasional Tuesday).

If this is the first time you are reading something I wrote and you want to learn more about me, this is a good place to start. It includes some background on me as well as a collection of my top posts.

Tempo versus Value

One of my favorite hobbies is gaming and one of my favorite games is Hearthstone.

Hearthstone is a digital trading card game set in Blizzard’s World of Warcraft universe. I was big into WoW when I was in high school. I fondly remember raiding Firelands and Dragonsoul with my brother two nights a week for at least 4 hours each night not to mention all the hours we would spend outside of raiding to optimally prepare our characters. His character, Nubrionis, was a druid healer. My character, Aberon, was a hunter who supplied massive quantities of sustained range DPS (Damage Per Second). In one funny anecdote, I remember the day I got into college my Mom went out to get pizza to celebrate. Unfortunately, it was raid night and so my brother and I had to eat our pizza and garlic knots in front of the computer.

As a big WoW fan, I was really excited when Hearthstone was announced. As a kid, I had been really into trading card games like Pokemon and Yu-Gi-Oh. To have a digital card game set in one of my favorite fictional worlds seemed like a dream.

I applied to be part of the closed beta for the game and fondly remember getting my access key my sophomore year of college and playing the crap out of Inner Fire Priest.

I’ve played the game on and off ever since. I take breaks and play other games, but I always seem to keep coming back to it. I love the strategy and coming up with new and interesting decks. Recently the game came out with a new “Battlegrounds” game mode which I have been having a lot of fun with,

I take you on this long and winding preamble because I want to talk about two concepts I learned through playing hearthstone and how they apply to startups.

Tempo and Value.

What are Tempo and Value in Hearthstone?

Tempo and Value were not created by Hearthstone. They are critically important aspects of any card game.

Value is generally a bit easier to understand. Value is how much bang for your buck you get with each card. Value is how much “stuff” that card does for you.

Tirion Fordring is a great example of a value card that has been around since the beginnings of the game. Tirion costs 8 mana (max you can have in a game is 10) so it is a big investment to play, but for that cost, Tiron gives you a decent sized 6/6 body that has Divine Shield (absorbs the first damage it takes) and taunt (your opponent must attack Tirion before attacking you or one of your other cards) AND when Tirion dies, you get to equip a 5/3 weapon. A normal 6/6 card with Divine Shield and Taunt would probably cost you about 7 mana. A 5/3 weapon would normally cost you at least 6 mana. So with Tirion you are paying 8 mana for a card that probably gives you at least 13 mana worth of “stuff”. Talk about value. Value is important because each player can only start with 30 cards in their deck. If you run out of value, you almost always lose the game. BUT, the deck that has more value doesn’t always win. That is where tempo comes in.

Tempo is a little bit trickier. The best way to think about tempo is as the momentum of the game. if you have a 4/4 and a 3/2 on your side of the board, and your opponent only has a 3/2, you have the tempo. You have the momentum. Tempo swings are really important in Hearthstone because the player who goes first almost always will begin the game with a slight tempo advantage. Backstab is an example of a tempo card. Backstab doesn’t do that much “stuff”. It does two damage to an undamaged minion for zero mana. For its mana cost, it has decent value, but where Backstab really shines is as a tempo card. Two damage in and of itself isn’t too much to write home about, but because of it’s 0 mana cost, you can play it on the same turn as another card. Let’s say it’s turn three and your opponent has a 3/2 on the board and you don’t have anything. Currently, they have the tempo. On your turn, you play a 3/3 and then backstab your opponents 3/2 which kills it. Now you have a 3/3 and your opponent has nothing on the board. You used backstab to swing the tempo in your favor. Now you have the momentum and the initiative until your opponent wrestles it back. Most games in Hearthstone come down to a constant tug of war between each player fighting for tempo. The further ahead you get on tempo, the harder it is for your opponent to get it back.

Tempo and Value in Startups

I can’t help but relate these concepts to the world of startups. In my experience, startups are all about tempo. That really is the only advantage they have over larger incumbent companies. They can move quicker. They have the momentum and can executive and make adjustments at a speed that would be impossible for a more established company. They thrive on shooting out of the blocks and hoping they can build up enough of an advantage before others can catch up. In two years of being a venture capital investor, if I had to pick just one attribute for a startup, it wouldn’t be a fantastic product or even an experienced team. It would simply be a team that can execute at speed.

Blitzscaling. Move fast and break things. A focus on moving quickly to capture market share. Prioritization of growth over profitability.

All signs of a tempo-focused mindset in startup land.

But there is a danger of being all-in on tempo. In Hearthstone, if you are playing a tempo-oriented deck and your opponent is playing a value-oriented deck, the only way that you can win is by trying to beat your opponent as quickly as possible. Similar to a startup trying to grab market share, if you move too slow and your opponent can hold on long enough to start playing cards like Tirion, your prospects are bleak.

If your deck is too heavily tempo-oriented, your cards may not make enough of an impact over the long-run. You will run out of steam and your opponent will be able to catch up. Even for tempo decks, value is important. As I said earlier, if you run out of value in your deck, you lose.

The story is similar for startups. Yes, tempo is of the utmost concern, but if you don’t have enough value, you are going to fall short of your goals. For startups, value takes the form of unit-economics and a product that customers absolutely love. Get either of these things wrong and you may be tempoing yourself headlong down a bridge to nowhere. Startups thrive based on tempo, but they survive through value. They need to have enough there there that when adversity comes their way the underlying fundamentals are strong enough to weather the storm. They need enough cash and unit economics that are strong enough to be able to sustain them when their tempo lead starts to thin. Value is your margin for error. It is why companies who have found product-market fit can afford to make mistakes. Because when customers are ripping the product out of your hand, you can afford to execute less than perfectly.

The startup life is the tempo life. It’s about moving fast and learning faster. It’s the true competitive differentiator and it is what defines the winners at the end of the day. But startups cannot forget about value. They can’t ignore underlying business quality. They need to be able to have enough value to carry them once their tempo advantage over competitors has run out or if an adverse economic environment strikes.

Tempo. Value.

Who ever said games couldn’t be educational?

The Pillars of Innovation

What is innovation?

It’s a word that gets bandied about a lot, especially in the world of venture capital, but what does it actually mean?

The dictionary defines “Innovation” as a new method, idea, product, etc. (snarky side comment: What the heck does “etc.” mean in this context. I am dying to know)

Here’s the way I see it.

There are two broad categories of innovations.

1. You can improve on something else that exists (Sustaining Innovations)

2. You can create something new (Disruptive Innovations)

That’s it.

Every new method, idea, product or etc. fits into one of those two buckets. Is one better than the other? What are the differences?

Better Mousetraps

Innovations on something that already exists are sometimes derided by tech thought leaders. They are thought of as inferior to disruptive innovations. Somehow less pure.

In the words of Peter Theil, “We wanted flying cars, instead, we got 140 characters.” (You could argue in some ways Twitter is more of a new innovation than flying cars, but the message is pretty clear here).

I definitely appreciate Theil’s perspective, but the reality is, that the vast majority of companies are building better mousetraps. There is a LOT of value to be unlocked by simply making things work better.

Less friction.

Quicker.

Slicker interface.

People pay big money for these things. And why not? At the end of the day, an increase in efficiency is really an increase in available time, the one resource we can’t get any more of.

Innovations improving on something else should not be derided. They create massive value in both venture capital and within the economy at large.

Superhuman. Zoom. Evernote. The list goes on.

There are plenty of fantastic companies that have been built by making people’s life easier. The downside is that when user experience is your selling point, you are setting the bar you need to meet extremely high.

You can’t just be a bit better than incumbents, you need to blow them out of the water.

My favorite opportunities for improvement innovations are in large, slow-moving incumbent industries that have been slow to adopt new technologies. It is absolutely unreal the amount of our economy that still runs on faxes/paper/on-site databases/etc. If you can get people to change their ways (not a trivial task), these types of markets provide the opportunity to unlock tremendous value since the status quo is so poor.

New and Shiny

Disruptive innovations are the creation of something out of nothing. These are the Zero to One type of products or services that provide you with a new experience that you have never had before. These are the products that make Mr. Theil happy as a clam (where the heck does that phrase come from? A quick Google search for those of you curious).

They are the truly great innovations that create massive step-function improvements over the ways things used to be done.

At their core, disruptive innovations provide someone with an experience they weren’t able to have before. The name of the game is access. Increasing access to a good or service that a user has never had before.

One of my favorite examples is Venmo.

Venmo isn’t a simple improvement on a cash-based society, it is an enabling force function on people’s ability to forgo cash on a daily basis. It provided access to something (P2P payments) that people hadn’t had before.

Disruptive innovations are often the platforms that sustaining innovations are built on top of.

Ok, disruptive innovations sound great right? Easier said than done, unfortunately.

Disruptive innovations by definition are harder to build. There is no frame of reference by which they can be compared. No well-worn path that they can walk. They need to be generated a priori.

And then somehow transformed from an idea into a tangible product.

This is no easy feat. Even for the biggest and most well-resourced companies in the world.

Recent innovations in the smartphone market are largely predicated on increased camera capabilities. Amazon hasn’t developed anything truly game-changing since AWS.

Disruptive innovations are, in a sense, purer. They are the creation of something from nothing. Order from chaos.

But boy, are they tough acts to follow. It is nearly impossible to successfully build and deploy one disruptive innovation, much less a string of them.

One Innovation, Two Innovation. Red Innovation, Blue Innovation.

Ok so sustaining innovations improve an existing experience and disruptive innovations provide access to something totally new.

The reason this framework is important to understand is that it defines how you look at every company or opportunity.

Sustaining innovations are, at their core, user experience plays. When evaluating a sustaining innovation business, you will want to really dig in to understand exactly how the product or service works to understand if it is a meaningful enough improvement in performance to motivate a buying decision or investment of time from a customer.

Disruptive innovations are centered around access. What access to a good or experience do they provide that people never would have been able to experience previously? I like thinking of questions of access through the Jobs to be done framework. What job does the product or service provide users? How did they achieve that job before? If the innovation isn’t an improvement on an existing good or service, what product (or products) is it replacing? Understanding the system within which the innovative product is connected will help you to determine whether it is worthwhile or not.

Ok.

I have a confession to make. This post is somewhat of a false dichotomy. I made it sound like you either had to be one innovation or the other. Sustaining or disruptive. Improving on something new or creating something from nothing.

The truth is not nearly so black or white.

The truth is that the best innovations, the most impressive, most valuable, most world-changing technologies…

They have a little bit of both pillars of innovation within them.

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Churches of Entrepreneurship

One of the most thought provoking books I have ever read is Zen and the Art of Motorcycle Maintenance by Robert M. Pirsig. Even many months after completing it I still find myself pondering several of the ideas explored.

One of the concepts I keep coming back to is the idea of the Church of Reason and how it relates to startups.

The Church of Reason

To explore the concept of the Church of Reason first we must discuss what exactly a church is. At its face, this seems an obvious question to answer. A church is a building in which people worship, predominately in the Christian faith. But what if the building is no longer used for this specific purpose, is the church still a church?

Pirsig gives the example of a roadside sports bar located in an old church. My wife and I for our last anniversary visited a vineyard located in an old church. Whatever example you use, the question remains, are either of those buildings really still churches?

Pirsig contends, and I agree, that the answer is no. The object of a church is defined by its purpose. If a church is not being used for worship, it is just a building. We may continue refer to the building as a church because of its familiar architecture or because that is how it has been known historically, but it no longer is a church. Not really. There is a deeper meaning to something being called a church. There is a required ‘spirit’ of the physical object. As that spirit leaves, the purpose and very essence of that object leaves with it. It becomes something else entirely. A simple building. A husk.

Pirsig draws a parallel from this line of reasoning to modern universities which he dubs “Churches of Reason.” Similar to religious churches, Pirsig argues that these Churches of Reason are intrinsically defined by their use or purpose. In the case of universities that purpose, that spirit, is to pursue truth through learning. To expand the boundaries of knowledge itself.

Just as with religious churches, these Churches of Reason become simple buildings as soon as the Spirit of the University leaves. As soon as the pursuit of truth and expansion of knowledge stop becoming the purpose for the endeavor, the buildings become nothing more than a mausoleum to their former holy endeavor. Husks.

Pirsig observed this loss of the Spirit of the University in the 60’s and 70’s when he was a professor himself writing Zen and the Art of Motorcycle Maintenance, his part auto-biography part philosophical treatise magnum opus. It saddens me to admit that this trend of the departure of the Spirit of the University not only continued, but has accelerated in the modern day.

But that is a discussion for another time. Next we will turn our attention to a different type of church.

Churches of Entrepreneurship.

The Church of Entrepreneurship

Startups are Churches of Entrepreneurship. They are the altars at which we worship the gods of technology and innovation while hoping that our sacrifices of blood, sweat, and tears change the world.

Just like other type of churches, the object is defined by its purpose. A fundamental part of any startup’s identity is the Spirit of Entrepreneurship that resides within it. The Spirit of Entrepreneurship is the driving passion to change the world through the creation of something new.

Really, the word “startup” is just a name for young companies in which the Spirit of Entrepreneurship resides. They are vehicles for the Spirit of Entrepreneurship to hopefully live and thrive. Just like with churches or universities, if you take the spirit out of the building, it is just a pile of bricks.

Startups are no different. Just because a company is young or small or technology-focused does not mean it is necessarily a startup. Without the driving passion to change the world through the creation of something new, they are just small, risky businesses. Bars within an old church. Husks.

This passion to exert one’s will on the world can come in many different shapes and sizes. There are mission driven founders. There are financially driven founders. There are rage driven founders (this was a new one for me that I heard about this week. Basically someone that is so infuriated by the status quo they say “screw it, I will change it myself”.) But while the prime motivating factor changes, the passionate drive of all strong founders is nearly identical.

This spirit of entrepreneurship can inhabit the halls of older incumbent companies as well, though it does so rarely and often in the places you would least expect. Be wary of large corporations touting their innovation groups and “startup culture.” The spirit of entrepreneurship does not reside somewhere simply because someone wishes it to. It can be born in a moment when a group of mavericks suddenly decides try to change the world against all odds. It can die just as quickly if not properly nourished.

Viewed through this lens, providing a nourishing environment that is ripe for the Spirit of Entrepreneurship to inhabit becomes of the utmost importance.

Doing so successfully is easier said than done. My favorite road map to doing so is laid out in Loonshots by Safhi Bahcall.

But even with help. It’s not easy.

And it shouldn’t be.

Things worth doing rarely are.

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The Score is 0-0

Reuters

I had the pleasure of watching the US women’s national team win the world cup today. It was an entertaining, if somewhat inevitable, match with the Dutch rarely looking threatening. The score was tied 0 - 0 at half-time before Team USA scored twice in the second half to defend their crown and walk away the victors.

Newspapers around the globe tomorrow will sing the team’s praises and tease out the insights and lessons from their performances over the past few weeks. For my part, the game reminded me of a recent quote and the powerful lesson it represents.

Petr Cech played goalkeeper for Arsenal for the past few years before retiring at the end of last season. A couple of months ago he did an AMA on the Arsenal subreddit and one of his responses has really stuck with me ever since.

When asked how he mentally resets after conceding a goal, Cech responded “In my head, every single second of the game the score is 0-0. I literally do the same process for 90 minutes all over again regardless of if we are winning or losing. I just concentrate on my job. That’s all I Do. Every. Single. Day.”

I love this attitude and think there is a lot to learn from it. People (myself included) too often let the cloud of recency bias hang over their actions. If the last time they tried something it was successful, they will think that this time they are invincible. If they were recently defeated, they will believe they’ll never even have a chance.

The much better approach is to think of the score as 0-0. No matter what has happened before. Play as if it’s all tied up.

The USWNT was the most talented team at this year’s world cup. By a mile. Their greatest challenge was not defeating their opponents. It was playing like the score was 0-0 despite the fact that they were defending world champions.

Adopting this mindset is harder than it sounds. Unconscious biases are just that, unconscious. The greatest tool in your toolkit to fight against the power of recency bias is process. Develop the right process and you will be able to train your sights on that process, no matter what the score is.

Every. Single. Day.

This lesson is especially important in the world of investing. Investors are humans too, and just like all other humans are susceptible to recency bias. A recent successful trade can breed feelings of invincibility on all future trades. A startup with a young founder that flamed out can lead you to believe that all startups led by young entrepreneurs are doomed to fail.

Investors need to practice the mindset of thinking and acting as if the score is 0-0. Try to maintain your mind’s neutrality during both the highs and the lows.

In venture capital, this can often be especially tricky. Given the nature of technology startups, companies often require multiple rounds of funding in order to be successful. This means that recency bias rears its ugly head, not with some uncorrelated trade, but with prior funding rounds of the very same company you are currently considering for investment.

It is almost impossible to avoid letting a company’s past performance, actions, and outlook color the way you think about another investment. Some investors even claim that this inside access gives them superior signals by which they are able to make their decisions. And there is likely some truth to that. But there is also the danger of allowing past occurrences to obfuscate current decisions.

When evaluating an investment in a company, it is absolutely essential that you act as if the score is 0-0. Do everything you can to determine whether the company’s current attributes and trajectory warrant an investment based upon their own merits, irrespective of past funding rounds in which you may or may not have participated.

As in life, the best way to do this is to develop a process. And then stick to it.

Every. Single. Day.

Oh.

AND GO TEAM USA BACK TO BACK WORLD CHAMPIONS BABY!!!!

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The Power of Reading Two Books: Truthspeakers and Toy Story

Photo by Mikhail Pavstyuk on Unsplash

I love to read. It is my true happy place. No matter where I am or what I am doing, I know zen is only as far away as my current book.

I am in the habit of always reading two books at any given time, one fiction and one non-fiction. I think to neglect either does you a huge disservice. I truly believe that your imagination is like a muscle and that reading fiction is one of the best ways to exercise that muscle. And maybe it is just my learning style, but I learn through stories and for me, a good non-fiction story is the absolute best way to consume and learn new information. I generally read my fiction book before bed every night and I listen to my non-fiction book throughout the day on runs, my commute, or while doing the dishes.

The act of reading, just in and of itself, is rewarding, relaxing, and helps me expand my intellectual world. The beauty of reading two books at once is that, every so often, they align in the most magical sort of ways.

The fiction series I am currently reading is the Wheel of Time and I can honestly say that it is among my favorite fantasy series ever. The world, the magic, and most of all, the characters. All serve to paint an incredibly rich and compelling world across the course of 14 books (just started book 10, The Crossroads of Twilight).

What starts as a seemingly generic fantasy trope (a group of teenagers from a small village has greatness thrust upon them by a mysterious woman and embark on an epic quest where the fate of the world hangs in the balance) turns into so much more across the various twists and turns of the series. One such surprise is the Seanchan, who are the returning descendants of an army sent to a far off land thousands of years ago. They are as culturally unique as they are powerful and they have many interesting customs.

One custom that I found especially compelling was the role of the Soe’feia or Truthspeaker in the Seanchan’s imperial order. A Truthspeaker is a servant who is the trusted adviser of the Empress and the Imperial family. Despite their role as a servant, their purpose is to speak truth to their masters, no matter how harsh or unwelcome. Multiple times throughout the story characters are shocked by the brutal honesty displayed by these Truthspeakers to the most powerful of Seanchan royalty.

We all need Truthspeakers in our lives.

People who can hold a mirror up to ourselves. Even the ugly parts that we don’t like admitting we have.

I am lucky to have Truthspeakers in my life through friends and family, which is important because I need to be called on my own bullshit. A LOT. (my wife is seriously a saint I have no idea how she puts up with me).

Just as important to having Truthspeakers in our personal lives is to have someone who can tell it to you like it really is in our professional lives. This can be a boss, co-worker, or mentor, but it is vitally important to have someone that can help you see around the corners of your own bias and emotion.

How do you do this on a company level?

Enter book two.

The non-fiction book I am currently reading is Creativity, Inc. by Ed Catmull, the president of Pixar and Disney Animation. Creativity, Inc takes readers insides the halls of Pixar throughout its, at equal times, tumultuous and triumphant history. The book’s focus is not simply on presenting the facts that occurred over that time but exploring what sets Pixar apart as an organization and how other companies can break down similar barriers to creativity and success.

One such secret to success for Pixar has been the Pixar Braintrust, the company’s ace team of directors, operators, and creatives that are brought in to fix problems when they inevitably arise as part of the production for each movie. The only membership requirements for the Braintrust are a knack for storytelling and a willingness to be candid with one another. Ed view’s his primary role, not as a leader of this group, but as more of a facilitator whose focus is on maintaining the integrity and honesty of its process. Some of the absolute key changes made to the movies we have come to know and love over the years like Woody being a lovable cowboy to WALL-E being saved by EVE were hatched during braintrust meetings.

I love this concept and found the parallels between Pixar’s Braintrust and the Seanchan’s Truthspeakers simply too delightful to not write a post on them.

In the world of startups and venture capital, being an entrepreneur can feel isolating. I believe it is absolutely essential to any company’s success to develop a culture where the CEO has Truthspeakers around them that they can be relied upon to tell it like it really is. As a venture capitalist, I see my role as doing just that.

I haven’t run a company before.

I haven’t developed a world-changing technology.

But if I can do just one thing to add value to a company, I hope it is that I can speak with truth and candor when an entrepreneur needs it most.

Sports, Startups, and the Competition Trap

It has been an interesting week from a sporting perspective. A week that has made me reflect on my relationship with sport and with sport’s relationship with life.

Now I am a big sports fan in general, but my one true sports love has, and will always be, Arsenal FC. My dad was an Arsenal fan ever since he was a kid and I had little say in the matter with some of my earliest ever memories involving watching Arsenal games with my dad. To anyone who knows soccer, you will know what a long, strange journey being an Arsenal fan so often is. This week has been no exception.

It started last Sunday with a painful tie at home against Brighton. This was a horrible result which sealed our fate to finish 5th in the table and miss out on a coveted top-4 spot and automatic entrance into next year’s Champions League.

But not all hope was lost! On Thursday we played Valencia in the second leg of the Europa League semi-final, winning 4-2 and booking our ticket to the Europa League final at the end of the month. Besides being Arsenal’s opportunity to win our first European trophy in 25 years, the game also represents another chance to get into next year’s Champions League, with the Europa League victor always being granted automatic access.

Today, we won out 3-1 away to Burnley in a game that contained little significance other than helping our star striker, Pierre-Emerick Aubameyang, get the goals necessary to win this year’s Golden Boot trophy (awarded to the league’s top goalscorer).

The rollercoaster week did not end there. This is just covering Arsenal’s exploits on the field! If you are any sort of sports fan at all you will have likely heard of Liverpool and Tottenham’s exploits in the Champions League this past week. Both teams came from huge holes to win their respective semi-finals in spectacular fashion. Their fans and the sports world at large were jubilant. I was crushed. You see Liverpool and Tottenham are two of Arsenal’s fiercest rivals. Especially Tottenham.

And I just could not stand to see them win and their fans happy. It ate me up inside.

Now I am not overly proud of this negative mindset, but rooting against your rivals is a fundamental part of sports. It underlines a certain masochism that comes along with being a sports fan.

You are really only happy when your team wins and, by definition, most teams won’t win trophies each year. So you are setting yourself up for failure right off the bat. Even if you look at the teams who win all the time, expectations are so incredibly high that fans are still miserable when Real Madrid only wins one trophy in a year!

Now I love sports and that isn’t going to change. But being miserable at other people’s happiness was somewhat of a wake up call for me. That is just not how I want to go through life. I think there is a way to be a sports fan without the negativity. Focus on enjoying your team’s journey. The highs and the lows. Try not to focus too much on what everyone else is doing.

And remember, the most beautiful part of sports is that there is always next year.

This competition trap is not unique to sports. It is all too common in everyday life and business. We are so focused on what other people have we don’t appreciate what we have. We look at the 10% of peoples’ lives that they share on Instagram, we assume they live like that all the time, and then we compare it to the 100% of our lives that we are familiar with and can’t help but to feel like we don’t measure up.

Comparison is the death to joy.

Focusing on what other people have will only ever bring you negativity. Either you will be envious of what others have or you will look down on them for not having as much as you.

I think this phenomenon exists in businesses too.

All too often I think businesses get so wrapped up in competition with one another that they forget about the things that made them great in the first place.

Startups are especially susceptible to this. Too often entrepreneurs get overly wrapped up in their competition when that is really an issue for another day. Your competition is not going to matter if you are unable to create a product that solves a fundamental need for your customers. Entrepreneurs, leave competition until you find yourself in a more mature competitive market. No business was ever successful by focusing on what everyone else was doing.

Comparison is natural, but you will lose your way if you give your competitors too much of your attention.

Instead, focus on being the best that you can be. In life and in business.

Focus on the journey, not the destination.

And remember.

There is always next season.

Why Brushing your Teeth is the Secret to Success in Life and Startups

Brushing your teeth is the secret to being successful in life and entrepreneurship. In this post, I am going to tell you why.

Brushing your teeth is not difficult. It is something we all do. But how many people do it the right way? It’s recommended that you brush your teeth twice a day, every day. There is proper form and improper form. I am sure some kinds of toothpaste are better than others, but admittedly, it can be difficult distinguishing which toothpastes are the best given that each and every one is recommended by 9 out of 10 dentists (I hope I never come across the 10th dentist. Must be a terribly negative person).

The key to dental health is consistency. You need to put in consistent effort day in and day out. Brushing your teeth for an hour at a time will not allow you to skip brushing your teeth for the next month.

Now, as much as I appreciate the importance of dental hygiene, this isn’t really a post about brushing your teeth. This is a post about life and business, two areas where we all too often brush for an hour once a month.

The key to success in life is consistent application of effort. This is true for everything from relationships and startups, to exercise and reading. Very rarely will you find yourself in situations where a single herculean effort is all that stands between success and failure. Much more often, slow and steady really does win the race.

When I was working at Carlyle the head of my team had a favorite phrase, “Do your day job.” It means taking care of the fundamentals of your role and making sure that you excel on the little things. Because if you don’t, it tends to be a slippery slope.

I am a big Broncos fan and our newest coach, Vic Fangio, put it well in his introductory press conference. When asked to explain his famous “death by inches” mantra he said:

“If you're running a meeting, whether it be a team meeting, offense or defense meeting, a position coach meeting and a player walks in, say 30 seconds late, 45 seconds late -- that act in it of itself really has no impact on whether you're going to win or lose that week.

"But if you let it slide, the next day there's two or three guys late or it went from 30 seconds to two minutes. It causes an avalanche of problems. That's 'death by inches.'”

The little things matter. Showing up consistently and putting in the effort is what makes the difference between success and failure.

No place is this truer than with startups.

On the startup battlefield, wars are not won in a decisive moment. Startup successes are a culmination of years of executing on the little things and consistently making progress. In tech, that steady progress tends to grow exponentially. This fact is sometimes hard to see among twitter hype threads and Techcrunch headlines, but the saying “an overnight success, 10 years in the making” really does ring true.

Execution is so, so key. A VC I really respect once told me that he would take a team that can execute in a small market over a team that can’t in a big market every single day of the week. Execution really is what sets apart A+ teams from the rest, and in venture you need those A+ teams to get the outcomes that justify the whole model.

You can bet that this hyper-focus on execution is something that VCs pay attention to.

A great example of this is due diligence. Due diligence is a necessary, but slow, and sometimes painful, process for everyone involved. A secret of venture capital that not many may know is that how an entrepreneur conducts themselves during due diligence, is just as big of a signal about whether the startup will be successful as anything else. An entrepreneur that is organized, prompt, respectful, and who has a masterful understanding of the ins and outs of their business during due diligence will likely exhibit that same attention-to-detail and execution mastery when it comes to running their business. Entrepreneurs who are difficult to deal with and get easily frustrated or are dodgy about direct questions about the business are unknowingly flying a pretty big red flag for all investors involved.

So now that we have agreed that consistent effort is the key to success, what is the best way to go about applying that effort?

In the immortal words of Joel Embidd:

“Trust the process”

The best way that you can ensure that you are properly applying just the right amount of force and using the proper technique when brushing your way through life is to build a process and stick to it. Our culture is far too outcome oriented. We operate on a last-in-first-out basis and optimize based on the outcomes we see, even when those outcomes are often nothing more than luck. If you flip a coin 4 times and get tails every time, you would not conclude that a coin will always land on tails. And yet, far too often our personal and professional actions are the equivalent of flipping a coin once, and assuming that every other time we ever flip a coin we will get the same result.

I have had a big focus on process ever since reading the book Chop Wood, Carry Water by Joshua Medcalf. I can honestly say this book has had a bigger impact on my life than any other. The subtitle says it all, “How to fall in love with the process of becoming great.” I highly recommend this book to any looking to lead a more process-oriented life.

My advice for you:

Focus on doing the little things right.

Fall in love with the process of becoming great. If you are able to truly do this, the outcomes will take care of themselves.

Maintain consistent effort instead of bursts of hyperactivity.

Take care of things like your health, your body, your relationships, your spirituality, and your mindset that only need a little bit of time each day to maintain and yet, are all too often neglected. These are things that are vitally important to your success in life, and yet not one of these things can be maintained by brushing for an hour once a month.

And speaking of.

Brush daily with consistent application of effort.

You’ll be surprised where you end up.

Due Diligence: How Much is Too Much?

A big part of my job is due diligence. This is a fancy bit of jargon that gets thrown around a lot in finance. All it really means is doing research to back up whether things that someone has claimed about their company are true. My boss is fond of reminding us that in our job we need to “trust, but verify.” Due diligence is that verification.

Spend a little bit of time in venture capital and you quickly discover that the rigor of different firms’ due diligence processes vary greatly. Some firms spend an incredible amount of time and resources digging into every small detail of a company. Others run light processes that can be completed quickly. At Rev1, we have what I believe to be a relatively robust process compared to other investors at our stage.

This spectrum makes sense.

Firms with more specific sector-focuses are likely subject matter experts on the spaces they invest, cutting down on time necessary to get themselves up to speed.

Firms that invest across a series of stages will likely have leaner due diligence processes for their earliest investments and more in-depth processes for their later investments. The idea here being that the effort per dollar of investment remains relatively constant. More dollars. More effort.

There is no right answer on what is the perfect amount of due diligence.

But there are wrong answers.

Conducting no due diligence can’t be correct. But doing too much diligence makes your life miserable (and the entrepreneur’s life you are working with even more so).

When I was at Carlyle, one of our founders was fond of saying “you should never focus on conducting the most complete, perfect due diligence. By the time you will have completed it, the investment round will no longer be open and it won’t even matter because you will have talked yourself out of doing the deal anyways.”

I think there is a good amount of truth in this. Venture capital is a risky game. You will never be able to conduct such a thorough due diligence process that you are able to remove ALL the risk from a deal. If you were able to, they wouldn’t exactly be able to call it risk capital investing now would they?

So the correct amount of due diligence lies somewhere between 0 and 100. But where?

I have been thinking about this question a lot recently. The answer (as with most things in business) is that it depends. It depends on the characteristics of your firm and the demands of your stakeholders.

My views on the optimal amount of due diligence have recently been informed by my reading of Fooled By Randomness by Nassim Nicholas Taleb. This is an excellent book which I highly recommend. The author is a veteran options trader and a foremost expert on probability and randomness.

Two concepts from his book have especially informed my views on due diligence.

The first is the idea of satisficing.

Satisficing is a decision making strategy where someone analyzes different alternatives until they find one that reaches a minimum acceptable threshold. And then they stop. I believe this concept should also be applied to investment due diligence.

Your goal should be to reach the minimum required confidence threshold necessary for you to make an investment while expending the least amount of effort and resources necessary to get there. Any additional due diligence past that point is a waste of your, and the entrepreneur’s, time.

This minimum required confidence threshold will change from person to person and firm to firm, but I do think there is value in understanding the idea of satisficing to help avoid using unnecessary time and effort. As with many things in life, due diligence follows the law of diminishing marginal return. Each additional level of comfort you can reach in an investment requires exponentially more and more effort. This is why it is so important to reach your required confidence threshold and to go no further. Even pushing on just a little bit can require a colossal amount of energy.

Not only is too much due diligence a waste of time, money, and energy, but it could actually lead to some pretty large cognitive blind spots.

The second concept from the book that applies to due diligence are the negative side-effects of conducting too thorough of an analysis.

Too thorough of an analysis?

Yes, that is right. Taleb points out that one of the major cognitive biases exhibited by people is that their confidence in the likelihood of a given outcome increases linearly with the amount of effort they expend analyzing the chances of its outcome. It’s the effort people put in to an analysis more so than the analysis itself that tends to influence people’s expectations around an event.

People trick themselves into thinking that more analysis = more certainty, when nothing could be further from the truth. The wrong kind of analysis will be a red herring that increases your confidence in, without actually increasing the accuracy of your predictions.

Venture capital due diligence is an environment ripe for this sort of error. In early stage VC, the risks are so incredibly high for every company. Conducting an excessive amount of due diligence doesn’t change this fact. But it does make us feel better about the investment. This dislocation between the actual risks of an investment and someone’s perceived risks can lead to incorrect decision making and overconfidence in those decisions.

The true danger is not in the risks itself, but in conducting so much analysis that we convince ourselves that the risks no longer apply.

With the ideas of satisficing and the dangers of over-analysis in mind, I believe the best way to conduct due diligence is to seek the no. “Seeking the No” is a cool sounding phrase that I just made up on the spot. The concept is to figure out the few things that would immediately make you say no to an investment and try to validate whether they are true or not. Work backwards from biggest things that would immediately make you cut bait with the company. If you find out any of these hot button issues are true, you can pack up shop right then and there. No more analysis necessary.

Assuming you can attain some comfort that the company does not breach any of your “DO NOT INVEST” red flags, then you can proceed with seeing if they fit what you actually want to see in an investment. What exactly those attributes are that you should be looking for is a topic for another post, but following this strategy of seeking the no should help you focus your efforts on only the investments that truly warrant your time.

Venture capital due diligence is a tale of modern day Sisyphus. You will never be able to truly understand all the risks inherent in a business. Trying to do so wastes precious resources, while giving yourself a false sense of security. Conduct the minimum amount of due diligence necessary to reach either a no or a yes. You will thank yourself for it. And so will your entrepreneurs.

Pink Dragons, Serendipity Vehicles, and Mentos

When I was a kid one of my all time favorite things to do on friday nights was to have a movie night (who am I kidding, that is still one of my favorite things to do). My mom and I would go to Blockbuster to pick out a movie or two and then we would skip next store to Papa Murphy’s to pick up some pizza (I will contend till my dying breath Papa Murphy’s is by far the most underrated pizza on the planet. So good). One of the movies I distinctly remember watching during multiple movie nights was Serendipity The Pink Dragon. Serendipity was a pink sea dragon who lived on a magical island with all of her friends learning life lessons about friendship. I have no idea why we ever picked this particular movie out, but I do remember watching it more than once (to this day, my go to nickname for a Lapras in any Pokemon game is Serendipity).

I was reminded of Serendipity the pink dragon while listening to this interview from Sara Dietschy with Nik Sharma and David Perell. This episode is definitely worth listening to. They cover a lot of ground from influencer marketing to direct-to-consumer brands to their own stories and how they got where they are today. As part of this last part, they spoke about the role that serendipity had in each of their lives. They drew a line in the sand between serendipity and luck. Luck is something good that just happens to you. Serendipity is something good that happens to you because your hard work and patience put you in a position where it could happen to you. I love this distinction.

If you talk to anyone with a modicum of success in life, the vast majority can point to a handful of “lucky” events where they caught a break or were given a chance to take on a project they were woefully underqualified for. Rare, however, is the successful person who had this happen to them while watching Netflix and eating cheetos on a Thursday afternoon.

Luck is a factor in everyone’s story. What differs is how prepared people are to take advantage of the situation when the dice start rolling their way.

That is where Serendipity Vehicles come in.

Serendipity Vehicles are a concept coined by David Perell in this post. He talks about purposefully building structures that increase the likelihood of both serendipitous things happening to you as well as increasing the chances that you are able to take advantage of them when they occur. Serendipity vehicles can range from simple structures like attending a dinner party to more much more complex things like writing books.

This blog is one of my serendipity vehicles. Twitter is another. Both require relatively minimal, but consistent, effort to maintain. Both have lead to significant outsized opportunities far and above what I would’ve ever expected.

Now all of this talk of lifestyle design may sound complicated, but I think the most important thing is simply the way you approach it. I think the best way to think about designing your serendipity vehicles is to make yourself into a Mentos. Mentos are a type of spherical candy that are sold all across the world. To be perfectly honest, I think they are pretty average. What is not average are the explosive effects they have when combined with any sort of carbonated beverage (but especially Diet Coke). There is a whole lot of science behind why this happens, but the short of it is that even though Mentos looks like smooth spheres, on a microscopic level their surfaces are very rough. This increased surface area acts environments where bubbles can form, launching soda up into the air. The key is the surface area.

You can make your life resemble Mentos by increasing your surface area so you have a lot of different places where serendipity bubbles can form.

Say yes to thing even if they are outside your comfort zone.

Cultivate curiosity in a broad range of subjects and areas.

Go out of your way to go to new places and meet new people.

Jump at opportunities even if the timing is not always ideal.

Create excuses to talk with interesting people.

Provide value to people instead of just asks.

At the end of the day, your goal should be to have as many areas in your life where serendipity can form as possible The challenge is to recognize serendipity and then make sure you are able to take advantage of it.

This advice is equally true for both individuals and startups.

Well designed startups are a lot like giant serendipity vehicles. A lot of work goes into designing them so that they are in a position to shoot for the stars as soon as a serendipitous customer connection or technological development breaks their way. As a founder you need to balance the need to stay focused on what you are building with providing yourself as much surface area as possible in order to take advantage of connections with investors, talent, customers, etc.

I can’t tell you what the right balance for that is. You will need to figure that out for yourself. But I can tell you what the wrong balances are. There are two.

1) Ignoring any thought of the outside world to focus solely on your business.

2) Ignoring your business to focus solely on hoping something happens in the outside world.

Everything in between is fair game.

No matter where you land on the spectrum between focusing your time and energy on building your business and increasing your surface area to optimize for serendipity, there is one lever that you can pull to maximize your chances for success.

Burning responsibly.

Responsibly managing your burn rate as a startup is one of the most important things you do as a founder. Burn too fast and you won’t get enough at bats to have something serendipitous happen for your business, no matter how much you optimize for it.

As an individual and as a business, design your life so that you can take advantage of serendipity when it comes knocking at your door.

That is how you and your company achieve success.

Board to Death

Photo by Drew Beamer on Unsplash

The world of Venture Capital is very different than it appears from the outside. I have been surprised by many things since becoming an investor, but none more so, than the difficulties surrounding boards. From the outside looking in, boards appear simple. Incentives are aligned. Everyone wants what is best for the company. Experience and expertise are leveraged to make the company the best it can be.

If only it were that simple.

Properly managing boards as an entrepreneur is a dance. Defer to them too much and you will lose the magic that made board members want to support you in the first place. Don’t heed them enough and you will make avoidable mistakes and miss out on opportunities.

The biggest mistake I see entrepreneurs make in respect towards their boards is that they think about their boards with the wrong mindset. The second you grow mistrustful of your board and start thinking of them as antagonists trying to put up hurdles in the way of your company, the chances your company is going to become successful with you at the helm plummets to almost zero.

Alright, Erik chill out. Classic Berg exaggeration.

No I am serious. A toxic board relationship is THAT deadly. It may not happen that day. Or that month. But eventually allowing the relationship between you and the board to fester will come back to bite either you or the company. Or both.

I believe the best metaphor for a well run board is to think of the board as your boss. Because that is exactly what they are. The keys to a healthy relationship with a board are the same as with a healthy relationship with your boss.

Communication

As with most relationships in life, the most important thing when managing a board is communication. Regularly update your board (even, and especially, outside of official board meetings) on your successes, failures, and any ways that they can help. I maintain that investor updates are one of the highest leverage activities any entrepreneur can do. Keep your board in the loop with what is going on with your company and they will be able to leverage their experience to help you make the best possible decisions. Note that I am not saying to do whatever your board tells you to. If they knew what was best for your business in every possible scenario, they would’ve started your company themselves. Rely on your intuition. It got you this far. But your board has many lifetime’s worth of additional experience than you do. Use it. Take it into account and leverage it to make the best possible decisions. To do otherwise is simply foolish.

Coaching

Just like all good bosses, boards have a responsibility to develop the CEO. Most startup entrepreneurs have not built a business before. Those that have, in all likelihood, have done so in a different sector or space. The board has a responsibility to coach and mentor the CEO to be the best that they can be. This means giving your CEO the tools they require to be successful. Equip them with resources and connect them with mentors who have been successful in this space before. A board’s fundamental job is to protect the interests of a company and its employees. The best way to do this is by making sure that the CEO performs at their absolute peak. If you as a board member believe your duty is to provide oversight without nourishment, advice without mentorship, you are neglecting your responsibilities to the company.

Accountability

Communication is a two way street. Yes, the impetus lies squarely at the feet of the entrepreneur, but at the end of the day, they will only feel empowered to bring everything to the attention of the board if the board knows how to give appropriate levels of feedback. Successful boards design structures where they can hold their CEOs accountable in a constructive way. I think Fred Wilson has the best approach for ensuring that feedback loops are tight and honest. Entrepreneurs, don’t get defensive when the board gives you feedback. Every single one of their incentives is aligned with the success of the company. So are yours. Remember that they trying to help you make the company the best that it can possibly be.

From the outside looking in, no one will know how healthy your company is. You can survive with a bad board relationship for a little while. But, if you are consistently neglecting your relationship with your board, eventually it will blow up in your face. The key is to leverage their experience and remember that they are on your side.

Podcast of the Week: The Twenty Minute VC with Fred Destin

The first podcast I started listening to regularly when I really started to dive headlong into the VC world was The Twenty Minute VC with Harry Stebbings. His bite-sized episodes were a great place to get started in learning more about the ecosystem. Harry’s story was a great inspiration to me as well. His advice to get out there and start creating content was a big part of the reason I decided to get this blog started. Harry has been a huge help to me and is an excellent example of how hard work and determination can really take you places.

I have listened to A LOT of 20VC, but this episode is up there with my favorite ever. Fred Destin is Harry’s partner at Stride.VC. and I can honestly say that this is the first time I have ever finished a podcast and then immediately started it over from the beginning. After listening, you may want to do the same! I can honestly say that Harry has found himself one hell of a partner and I for one could not be more excited to follow their new fund closely!

How often should you update your investors?

Regular investor updates are one of the highest leverage activities entrepreneurs can do to make their company successful. They provide tangible value to companies and a positive signal to investors. And they don’t have to be hard.

If you follow me on twitter, you will have noticed that investor updates have been a topic on my mind a lot recently. There is some debate in the industry about how vital they are and what form they should take. Hopefully this post can codify my thoughts and be a resource to any entrepreneurs.

Help me, Help you

Should investor updates even be done? The answer is an overwhelming YES. Not to be confused with an emphatic YES or a confident YES. An overwhelming YES. Updating your investors is important for a few reasons.

First, investors cannot help you if they don’t know what you need. Investor updates are an opportunity to ask for help/guidance/connections. It may seem intimidating to open your company’s komono to some of the less than glamorous aspects of the business, but by the time investors find out about issues on their own, it will often be too late for them to help. This of course all operates under the assumption that your investors are able and willing to help you. If they are, great! Update them. If they aren’t, why are they your investors in the first place (a topic for another post perhaps)?

I am going to let you in on a little secret. Investors want to be helpful! There are better ways to make money in finance than being a VC. For the most part, VCs have an itch to help build the next great thing and providing help to portfolio companies allows them to scratch this itch. I know that is the case for me. Anyday I can make a fruitful introduction or help clean up a model for a portfolio company is a good day in my book. I think any other good investor would agree.

Brent Beshore describes entrepreneurship as a “daily knife fight”. It is not easy. Founders are faced with new issues and obstacles every day. Mobilizing your investors can help solve a lot of those problems. Why turn down a resource that is not only willing, but excited to help you succeed?

Timing is Everything

As with many things in life, the key to investor updates is consistency. Developing a regular cadence with your updates will take a lot of the punch out of anything that is less than perfect. An email received after not hearing from a founder for 6 months saying that a company missed one of their revenue milestones and need help hiring a VP of engineering seems like a catastrophe. An explanation of why a milestone target was missed and a request for help hiring a VP of engineering received as part of a regular investor update is a Tuesday.

There is some debate in the industry on how often companies should be updating their investors. Some investors believe quarterly updates are sufficient. This may work for later stage companies, but for early stage companies, I believe that monthly investor updates are always the way to go. Monthly updates allow you to keep your updates brief and to the point. In-depth strategic discussions can be left for quarterly board meetings.

How Much is too Much

Entrepreneurs have enough on their hands, so investor updates absolutely must be designed to keep the burden to a minimum. With a monthly cadence, your update can be brief. I suggest that entrepreneurs don’t spend more than 15-30 minutes putting together their update. Items noted should be whatever is top of mind. You don’t need to write a novel, just give your investors a sense of the momentum of the company and make any asks you need help with. Here is a template:

Hello Investors,

XYZ month was a productive one for ABCify! This month we accomplished A, B, and C. We are excited about Initiative X and are thrilled about new hire Y. We continue to execute on plan Z.

Thank you for your continued support,

Founder

Company

Wins:

• Win 1

• Win 2

• Win 3

Challenges:

• Challenge 1, brief explanation

• Challenge 2, brief explanation

• Challenge 3, brief explanation

KPIs:

• Metric 1

• Metric 2

Asks:

• Ask 1

• Ask 2

That’s it. Seriously. If you fill in the blank with the above template your investors will LOVE you. This is a good thing. Happy investors make for happy fundraises. More than that, consistent updates are a very positive signal for investors. It shows that the entrepreneur is on top of things and is being thoughtful about their company.

And it shows that the founder is smart.

Because spending 15 minutes keeping your investors happy and leveraging their expertise to help you overcome obstacles is one of the most high-leverage activities you can do as an entrepreneur.

Podcast of the Week: Invest Like the Best, EP. 112 - Building Pick and Shovels, with Hunter Walk

I know, I know. I just did an episode from Invest Like the Best. I really wanted to do something from another show this week to maintain some semblance of variety, but this episode was simply too good to pass up. In it, Patrick interviews Hunter Walk about his early stage investment firm, Homebrew, his past experiences working at Google, as Head of Product at Youtube, and on the videogame, Second Life. This episode is chalked full of fascinating stories and actionable insights. I especially loved hearing about how Hunter helped solve copyright issues at Youtube and Hunter’s questions he asks every entrepreneur. Don’t miss this great episode!

Squirrel hunting is a lot like building a startup

A little bit of a stretch, I know, but stay with me here.

Thanksgiving is a BIG deal for my wife’s family. For the past 27 years, they have hosted 30+ people for Thanksgiving dinner (lunch) in their 200+ year old house. We fill the living room with tables and chairs and everyone squats down wherever they can. The menu is pretty outrageous in order to accomodate so many people. This is a far cry from the Thanksgivings I was used to growing up where it would just be the 5 of us in my family up at our cabin in the mountains reading, relaxing, and watching football.

Something else that is different with my wife’s family is Black Friday. I never used to do anything special for Black Friday, but my wife’s family has a very specific set of traditions. Every Black Friday, Caitlyn and her mom will go on and all day shopping spree while the guys of the family go hunting. Now I did not grow up around guns or hunting so the experience of tagging along is all very new to me. This year as we were going squirrel hunting, I was struck by some of the similarities between hunting and starting a successful technology startup. Here are a few things that are comparable.

Squirrel Dog (Market Validation Research)

As with any start up, hunting is a team sport. One of the keys to successfully squirrel hunting is have an aptly named Squirrel Dog. A Squirrel Dog is a dog that is trained to, you guessed it, go find the squirrels. They will go off on their own as you hike around and find the squirrels before “treeing” them by running around the base of any tree with a squirrel barking which both signals they have found something, and keeps the squirrel from running away. I found this behavior very similar to the market validation research that successful companies undertake before even building out a prototype or wireframe. The number one reason why startups fail is due to a lack of market demand for their product or service. By going out of you way you can ascertain exactly where the market opportunity (squirrel) is and devise an appropriate plan of attack.

Gun Choice (Product Market Fit)

Once your dog has treed a squirrel, you need to make sure you are equipped with the right gun for the task. Now I know next to nothing about firearms, but I do know enough to understand that you don’t go squirrel hunting with a .50 caliber rifle. Similarly, it doesn’t matter how perfectly poised for disruption a market is if you don’t have a product that truly addresses the problem people are facing. Now finding product market fit can often be a lot more difficult then picking the right gun for the job, but in either situation picking the wrong tool for the opportunity will leave you unsuccessful.

Taking The Shot (Execution)

Getting the squirrel in your sights with the proper gun is really just the start. If you aren’t able to execute the shot to perfection, it nothing else will matter. In venture, there is a debate on whether a market or a team is really what drives success. There are strong arguments for both, but as a seed-stage investor, I cannot help but believe that the right team is crucial. Even with the more ripe market and the perfectly formulated product, the startup could still be unsuccessful if the team is unable to execute.

Retriever (Business Model)

Assuming you are skilled enough to hit your target, there remains the question of how to extract your prize from the underbrush. You could hike through and get the remains yourself, but this would be a very manual process. Instead, most hunters will use a dog to retrieve for them. For startups, a scalable business model is absolutely essential for any type of meteoric growth. Many processes can be accomplished manually, but without some sort of business model to provide leverage, the company will be hamstrung as they struggle to meet the needs of their customers. Finding product market fit is the first priority for any entrepreneur, but developing a scalable business model is a close second.

Hunting Seasons (Market timing)

Even with the perfect market, an excellent product, a great team, and a scalable business model, you might fail simply because the market is not ready for your solution. Market timing is one of the hardest things for any startup to plan for because it is out of their control and requires founders to adjust opportunistically. You can find example after example of great ideas that failed because the supporting technology was just not there yet. Uber could never have existed before the proliferation of smartphones and GPS technology gave them the ability to put a dispatcher in anyone’s pocket. Other times changes in regulatory requirements can kill a business just as it is taking off. Just ask Juul. Timing is similarly important in hunting. To maintain a sustainable number of animals, hunting is only allowed in very specific seasons. You could face serious repercussions if you are found hunting the wrong animal at the wrong time.

Told you I could (mostly) make it work.

What I have learned about negotiation

Han could use some lessons on modern negotiation.

Full disclosure: not much. But I have picked up a few things here and there that I thought were worth sharing.

Put the gun in the other person's hand

I heard this principle on a podcast. I think it is a Mungerism but it could also be a Buffetism. The concept is to let the other person drive your negotiation. Put them in a position of power and just ask them to do what they think is fair. Two reasons for this. One, this can often lead to better outcomes as the person you are negotiating with tries to live up to the trust you have put in them. Two, if they take advantage of the situation to screw you, you now have a crystal clear window into their character and can reevaluate your relationship moving forward. you now have someone you trust to work fairly with you in the future or you have someone who you know is only in it for them selves. Either way you're better off.

Negotiate from the ground up

I take this from a wonderfully simple post from Max Niederhofer on what he has learned about negotiation. I loved this post so much I hung it up on my wall! The strategy is commonly sited in negotiation how-to's, but bear's repeating. The key takeaways are to treat people on the other side of the table like the humans they are and that the more you prepare, the more likely you will get a good outcome. Start by knowing exactly how much you want to buy/sell something for. Then start 35% higher/lower in the applicable direction. Move 20% closer. Then 10% closer. Then 5%. Finally throw in something non-monetary that you have identified earlier that could be seen as a "win" for the other party. The decreasing intervals of this framework will signal you are getting closer to your break point. The kicker at the end will make the other party feel as if they have walked away winners. I very much align with Max’s view that negotiation is not winner take all. The key is to act emphatically and come to a scenario everyone around the table can feel comfortable with.

Make them blink

The most audacious and least widely applicable of the three strategies in this post. I take this from the podcast I highlighted earlier this week with Nick Kokonos. Nick describes his most recent book negotiation. He got together a bunch of publishers on the call (they had all agreed to this before hand so weren't completely blind sided.). He then starts off at a LUDICROUS number and slowly starts counting down. Eventually someone blinked at a point 2-3x what they were willing to offer one on one. This high pressure situations ramps up the fomo (fear of missing out for my non-millennial friends) faster than a Friday night in high school. Eventually someone will blink and offer you a good price because they are worried that someone knows something they don't since the price is so much higher than they were willing to offer initially. This strategy only works when you  a) are bargaining from an existing position of strength b) are able to get several similar buyers together in an auction setting and c) the negotiation is more transnational in nature and less about building a lasting relationship. 

One important caveat. This should all be taken with a healthy dose of salt grains. I am early in my career and haven't exactly been negotiating international joint developments protocols in my free time. The most high stakes negotiation I face on a regular basis is figuring out where to go to dinner with my wife (we are one of those couples where the negotiation centers more around wanting the other person to decide than actually feeling strongly about somewhere in particular.)

That being said, each of these strategies really resonated with me and when I am negotiating the name for Mars colony 3, these will be the paradigms I lean on.

Would you rather get rich or change the world?

As part of my entrepreneurship concentration in college I took a few classes on entrepreneurship and venture capital with a professor that had been both a successful entrepreneur and venture capitalist. I thoroughly enjoyed his brusque and brutally honest style (he was known to carry around a yellow football penalty flag that he called his “Bullshit Flag” and was he did not hesitate to throw it whenever people got a little too fresh with the truth). One of the common questions he would ask us to ponder is would you rather invest in an entrepreneur interested in getting rich or changing the world. Invariably whenever he asked this he would then have us raise our hands depending on our answer.

I was always in the minority (or sometimes the only one) that said they would rather invest in an entrepreneur that was trying to change the world.

His argument is that the world of venture capital is tough and that only the fittest companies survive. If an entrepreneur isn’t dead set on getting rich, they won’t prioritize growth the way that you, as an investor, need them too. A focus on changing the world to stop short of the best financial outcome when it is just over the horizon. My response was always that there are a ton of ways to accrue wealth in this life and that only entrepreneurs that are truly passionate about solving a problem in the world will succeed. I believed that the wealth would come from the offshoot of that success, just not as its primary driver.

Of all the things I learned in this class, it was this conversation that always stuck with me the most (though I doubt I will ever forget his bullshit flag either!).

Would you rather get rich or change the world?

This is a question that I have been pondering and discussing a lot recently as I have had the opportunity to work with founders that clearly come from both camps. There are a lot of strong arguments people make for supporting the team trying to get rich. They will act in alignment with our goals as investors. They won’t settle for a less than excellent outcome. They won’t get pulled in different directions by their altruistic goals.

And at the end of the day, I have to admit I agree with a lot of the get rich argument. It makes sense from the perspective as an investor with a fiduciary responsibility to their LPs. And anyone who knows me will tell you that I am as much of a free-market capitalism loving libertarian as the next guy.

But I can’t help believing that the best investments are made in founding teams that truly believe that it is up to them to change the world. Teams that have experienced the problem they are fixing personally and who genuinely think that if they don’t solve this issue, no one else will.

I want to invest in the next Elon Musk, who thinks that it is his personal responsibility to make mankind an interplanetary species, rather than the next Jeff Bezos, who saw the online trend before anyone else and took advantage of it to build one of the world’s most dominant businesses. Now obviously investing in either the next Musk or Bezos would be an incredible investment, but the choice is clear to me.

I want to invest in the dreamers that have a mission and a purpose permeating everything they do. I want to invest in the builders that believe that tomorrow will be better than yesterday and that no problem is insurmountable. I want to invest in the founders that will never give up because they can’t stand the thought of letting the problem they are trying to solve effect one more person.

I want to invest in people trying to change the world.

If they win, we all win.

Venture Capital and the Red Queen

This past week I came across a fascinating concept in evolutionary biology called the Red Queen Hypothesis. The Red Queen Hypothesis proposes that organisms must maintain a perpetual state of adaptation and evolution, not only to gain a reproductive advantage against rivals from within their own species, but merely to survive in an ever-changing world filled with other constantly evolving organisms. The Red Queen Hypothesis paints evolution not as an inevitable outcome of generation after generation of survival of the fittest, but as a species-level arms race of life or death.

Evolutionary Biologist Leigh Van Valen developed the Red Queen Hypothesis as a potential explanation for why a species’ extinction rate is relatively flat over time. Under the core tenets of the theory of evolution, one would expect that as species evolve over time, the chance of them going extinct would diminish, but empirical evidence has shown this to not be the case. Van Valen named his hypothesis after the Red Queen from Lewis Carrol’s 1871 novel Through The Looking Glass (sequel to Alice’s Adventures in Wonderland). At one point in the book, the antagonistic Red Queen tells Alice that:

“Now, here, you see, it takes all the running you can do, to keep in the same place.”

Exhibit 1. The wily and cunning fox. Notice the hallmarks of an evolutionary predator. Pointed ears, sharp claws and a stylish three piece suit with occasion appropriate accessories.

Exhibit 2. The swift hare. Large ears have developed to be able to sense the slightest sounds. Evolutionary biologists maintain that the true reason behind the hare’s insistence on wearing gloves and proclivity to ask “whaddup, doc?” were lost a millenia ago.

This idea of running just to stay where you are is an apt metaphor for the necessity of an organism to constantly evolve just to maintain its current place in the evolutionary order. The most obvious example of this in nature also involves running. Imagine the perpetual evolutionary dance between the wily fox and the swift hare. The hare constantly evolves to become faster as the slowest hares are removed from the gene pool by the hungry fox. The inverse happens to the fox, with their slowest numbers dying out from not being able to get enough food to eat. This plays out as a balancing act of co-evolution where both foxes and hares will get faster and faster over time. If either species stops keeping pace in this evolutionary arms race, it will either die out or be forced to adapt in other ways. As long as both the fox and the hare keep at roughly the same pace, their relationship will remain locked in place.

The world of technology startups and venture capital has many of the hallmarks of the Red Queen Hypothesis. Incumbents and disruptors are often locked in a battle of the hare and the fox. As soon as either starts slowing down, their demise is relatively swift. Companies need to constantly be reinventing themselves to stay on top. This is easier said than done. If you look at the tech titans of 20 years ago, only Microsoft has been able to maintain its status as one of the leaders in the space (and even then it is no longer as dominant as it once was). It will be interesting to look back in 20 more years and see whether the Amazons and Apples of the world are able to maintain the current status they enjoy. Some might point to the incredible power that today’s incumbent companies have, but at one point it was similarly hard to imagine that seemingly invincible tech titans like AOL and Xerox would ever fall from grace.

Startups have a biological imperative to constantly be growing and innovating. If they don’t, they will die just as surely as hares would if foxes suddenly evolved to be born with jetpacks. The other day I saw a well-regarded venture capitalist compare startups who take venture funding to sharks. Sharks are only able to “breathe” by constantly swimming so that water passes through their gills and can be absorbed. Constant innovation is similarly the only thing that keeps startups flush with oxygen. You may argue about whether this is the way that things should be, but it is hard to argue with the fact that once a company gets on the venture train, it is exceedingly difficult to get off at the next station. As a founder, you should understand that an ability to evolve and adapt is table stakes. It is not enough to build one great product. You need to constantly and consistently be improving and building better and better products.

How can this be done? Are all companies doomed to fail at the slightest slip up? What can a company do to keep on innovating?

Luckily our world is in a constant state of change which means that there will always be new opportunities for companies that truly build themselves to constantly innovate. The path to constant innovation is surprisingly straightforward, but only an extremely small number of companies ever execute on it over the long term.

The first step is to create a diverse and high quality talent pipeline that will continuously refresh your company with new ideas and perspectives. A focus on diversity must start on Day 1, because if you, as a founder, don’t start focusing on diversity within your first 10 hires, it will be extremely difficult to start doing so after our first 100 hires.

The second step is to keep your eye on the horizon. Reinvest in yourself to stay on the bleeding edge of innovation. Don’t rest on your laurels and expect that what worked yesterday will work tomorrow. Always be on the look out for new opportunities recently enabled by social or technological change. If companies only tried to build upon what made them initially successful, Amazon would be the world’s best place to shop online for books (but nothing else) and Netflix would be the first place we would all go to rent our favorite DVDs through the mail.

The third step is to think for the long-term, without losing the ability to block and tackle over the short term. Apple is the master of this. They never fail to deliver on their quarterly objectives, even as they maintain a long-range focus on the next quarter century. Their obsessive focus on long-term planning has allowed them to build products that people will love to use today, even as they incorporate the building blocks of what their future products will be 10 years down the road. When Apple first built the fingerprint scanners into iPhones, they were preparing us for a day when our face would be the key to our most valuable data. If you pay attention, Apple has slowly but surely been incorporating more and more health and AR focused capabilities into their products. Don’t be surprised when new products with each of those categories at the forefront are released in the coming years.

The fourth step is to think based on first principles about the way things should be done, not the ways that they are done today. The insurance industry has been notoriously slow to embrace new technology and innovation. There are some structural advantages insurance companies have that make it a great sector to be a part of, but these same structural advantages allow them to sometimes forego evolution. In Columbus, we have seen the birth of next-generation insurance companies like Root Insurance and Beam Dental that underwrite risk based on measured activity, instead of age and demographic characteristics. Constantly ask yourself why things are being done a certain way and how should they work based on your understanding of people and available technology.

And that’s all it takes. Not so hard right? The difficulty comes in execution… and the fact that everyone else out there is going to be the fox nipping at your heels. Success is possible, but it won’t ever be easy.

Run fast.

Run hard.

Run hungry.

And you might just stand a chance.

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