Why now? A key question for new ventures

Whenever a pitch deck comes across my desk I have a handful of key questions running through my mind. One of those is: Why now?  I am continually surprised by how many entrepreneurs don’t have an answer for this question or have not thought it through. Often, ideas have been tried in the past and have failed. Answering the question “Why now?” forces one to think about why things are different this time around. The YouTube story is instructive here and fortunately we have Botha’s investment memo so we can get to YouTube’s “Why now?” quickly.

In his investment memo, Botha highlights two key drivers of YouTube’s future growth:

  1. Digital video recording technology is for the first time cheap enough to mass produce an integrate into existing consumer products
  2. Broadband internet in the home has finally reached critical mass, making the internet a viable alternative delivery mechanism for video

Those two points answer the “Why now?” question clearly. Previous to those two trends hitting their stride, video was hard to capture (for consumers) and the internet was not a viable delivery mechanism (too slow). Folks still tried to distribute video online prior to YouTube, but they were sailing into a headwind. YouTube, on the other hand, had the wind at their backs.

When thinking about your company it is worth thinking through the “Why now?” question if only to help you understand potential headwinds and tailwinds. Also, savvy investors will be thinking about this question whether they bring it up directly or not.

The Golden Triangle: Three things to do every day

Growing up my dad always talked about the “Golden Triangle.” It was a concept that one of his mentors passed on to him and it was a concept that he wanted to make sure he lived himself and passed on to his children. Honestly, I am not sure why it is a triangle other than it has three parts, but the three parts, while simple, are extremely powerful if you do them each and every day. Here they are:

  1. Help someone else – The key here is to do this unselfishly and have genuine motives. Be a giver. Be genuine. If the latter isn’t there, this will fall flat.
  2. Learn something new – Can be anything. Doesn’t have to be about your career. Doesn’t have to be a big deal. Just know more when you go to bed than when you woke up.
  3. Make some money – It can be easy to forget this one, but it is a reality. You have to support your family. Ideally, you are making some money by helping others and while learning something new.

This set of rules known in my family at the Golden Triangle is something I try to live by and something that informs my approach to venture capital. I suggest giving it a try to see how it fits into your life. Would love to hear how it goes via email, twitter or in the comments section. Happy Friday!

Side note: My TECH cocktail co-founder Frank Gruber would probably also add a piece about showing gratitude, which would be a great add.

Skill vs. Luck: Why process matters when outcomes are based mostly on luck

The topic of luck has always fascinated me. In particular, I find it interesting that people don’t seem to want to explain outcomes as being influenced (heavily) by luck even though we all know that luck plays a big role in outcomes in business, investing, sports and other activities. In his 2012 Princeton commencement speech (topic: luck), Michael Lewis said:

People really don’t like to hear success explained away as luck — especially successful people. As they age, and succeed, people feel their success was somehow inevitable. They don’t want to acknowledge the role played by accident in their lives. There is a reason for this: the world does not want to acknowledge it either…

…  don’t be deceived by life’s outcomes. Life’s outcomes, while not entirely random, have a huge amount of luck baked into them.

Another of my favorite writers and thinkers, Nassim Taleb, has also tackled the role of luck and its implications in decision making, policy and the macroeconomy in his books the Black Swan, Fooled by Randomness and others (these are must read books in my opinion). However, I had yet to find someone who tackled the luck versus skill problem in a practical way until very recently when I came across a book called The Success Equation by Michael J. Mauboussin (this book was recommended in another of my favorite recent reads: The Second Machine Age).

In The Success Equation, Mauboussin lays out some basic frameworks that help to place activities on the Luck/Skill continuum. He then goes on to discuss ways to operate in activities that are more skill based (e.g. practice, practice, practice – 10,000 hours rule holds true) and those that are more luck based (e.g. use a consistent process).

I have a particular interest in how to operate within a luck based profession given that investing in general, and venture capital investing specifically, lean more toward luck on the luck/skill spectrum.

One thing I learned early on at Cambridge Associates, both in speaking with colleagues and seeing the data, was that sticking to a process and a focus area was important to achieving good returns in the venture capital business. Honestly, I didn’t spend much time thinking about it then, or since then, because it just made sense. The corollary, undisciplined investing, just didn’t sit well with my personal philosophy. Being a disciplined investor was something my father taught me early in my life and it was also reinforced in my internship role at Eaton Vance. I just took discipline and process as a given to achieving good investment returns.

But why is that the case? Why does being disciplined and focusing on a consistent process make sense in investing?

Mauboussin argues in The Success Equation that when activities are determined more on luck than on skill process is crucial. One reason for this is that we can more readily accept the outcomes of our decisions with equanimity if we stick to a good decision making process. I’ll admit, that is not a satisfying answer. Not to worry, Mauboussin expands on the idea by saying; “when a measure of luck is involved, a good process will have a good outcome but only over time.” When luck exerts more force than skill, cause and effect are linked in the short run, but only very loosely.

Therefore, if you stick to a process over a long period of time, statistically speaking you should run across some good luck. If your process is always changing, you are changing the probability that luck will find you over time and making a big bet that luck finds you in the extremely variable short run.

You can see this play out in blackjack, a game with a lot of luck involved but where a good process – “basic strategy” in this case – if employed yields better expected outcomes (relative to no strategy, poor strategy or an inconsistent strategy), but over a large sample size. It is easy to get wiped out in blackjack, even when employing basic strategy, if you only start with $100 (even if the hands are $5 each). You’ll have a much better chance of winning, or at least attaining the house odds, if you start with a larger sum and, thus, give yourself a larger sample size.

Nassim Taleb gets at this idea from a different angle but ends up at the same endpoint – stick to a process for the long run. Taleb suggests that in the realm of black swans – and venture capital investing is very much in that realm – investors “should seek payoffs that are roughly equivalent to buying options, even though they have a small but steady cost and you don’t know when or if you will get a big payoff. [See graph below - x axis is time - y is outcome/payoff]

Antifragile Options Graph

Source: “Antifragility, Robustness, and Fragility Inside the “Black Swan” Domain.
SSRN working paper, February 2011
Author: Nassim Nicholas Taleb

Hopefully this post provides some insight into why following a consistent process is important in venture investing. I also hope that this post provides some helpful insight to entrepreneurs into how VCs think.

Additional notes: Venture investing takes place in a complex system and one where positive (and negative) feedback loops can take hold (i.e. you make a good investment and that yields more great entrepreneurs seeking you out as an investing parter, which tilts luck more in your favor, and so on). I’ll leave that for a future post and I look forward to receiving feedback on this post via email, twitter and in the comments section.

Does operational experience make for a great venture investor?

Sarah Lacy put out a piece over the 4th of July holiday on PandoDaily that asked the question: Is everything we know about what makes a good VC just wrong? In particular, Lacy is wondering if operating experience is central to being a great venture investor. This theory has seemingly permeated Silicon Valley and the rest of the world and is now considered fact by many entrepreneurs and VCs alike.

As Lacy points out, there are many outstanding VCs that are former operators (i.e. Reid Hoffman and Marc Andreessen), but there are just as many, if not more, that aren’t (i.e. John Doerr, Mike Moritz, Fred Wilson, Mike Maples, Kirsten Green, David Sze, Bill Gurley, and Bijan Sabet). In addition, Lacy makes the astute point that Andreessen and Hoffman are good investors not necessarily because of their operating backgrounds. Rather, they are thoughtful, questioning and patient mentors.

However, I believe the most important point in Lacy’s article is illuminated by a comment from Fred Wilson from last year’s Pando sit down. Wilson stated that while he lacked a lot of first hand experience of what entrepreneurs go through, he also never had the illusion that he could do their job. That is a key insight into VC and one that has effected me personally.

I was fresh off the success of FeedBurner when I began my first tour of duty in the venture business. I had some operating chops and was excited to apply them in my new role. However, you quickly find you need to turn off some of those operator instincts when evaluating new investments.

I recall a conversation that Matt McCall (my boss and mentor at the time) and I had after one of my first pitch meetings. I was psyched up suggesting a bunch of things the company could do to grow and then Matt stopped me and said: “Did you hear the company say any of that?” I replied that I hadn’t and he then reminded me that he and I weren’t going to run this company. What we needed to do was evaluate the team and their strategy on its merits. That seemingly simple realization hit me a like a ton of bricks. Matt was right. We were on a different side of the table and needed to focus on different things.

The same discipline needed pre-investment is needed post-investment. At Origin I think we handle post-investment engagement well and, funny enough, our operating backgrounds led us to our solution. Bottom line: We make sure our CEOs and company leaders know our strengths as a team and we council them to proactively engage us. This helps to eliminate suggestions that are well meaning from us but may send the company on a wild goose chase (we have all been there – request from investor comes in that you know is a waste of time but how do you say no… so we try our best to avoid that at Origin).

Recent examples of this strategy in-action include one of our companies engaging us to help interview sales candidates and another engaging us to help think through an M&A opportunity. When we get the call, we snap into action and that is when our operator skill sets are best used to give our portfolio companies an advantage.

The reality is that great venture investors come from all kinds of backgrounds. The difference maker to entrepreneurs is in how these VCs manage themselves and help their companies without getting in the way.

Strong Opinions, Loosely Held

It has been a while, dear blogosphere. Is that even still a term people use? I haven’t heard that term in a while so I’ll assume it is passé and immediately discontinue using it until I hear otherwise. In any case, it feels good to have an outlet again. My plan is to focus this blog on my thoughts on the venture capital business with an occasional dash of economics, philosophy and sports nerdery thrown in for good measure because, well, it’ll get boring if I only write about venture capital.

To start, I thought I should explain the tagline of this blog – strong opinions, loosely held.

I first heard this phrase when I was running an iOS development team at McMaster-Carr (we built this app in case you were wondering: http://bit.ly/1lFPEgf). I believe I heard it from the head of the ecommerce dev team. At first, I don’t think I fully appreciated the phrase or the way of thinking that comes with it, but as time has moved forward, I have come to appreciate it much, much more.

Turns out, no one is quite sure where the phrase originated. According to the internet, Bob Sutton (professor at Stanford GSB) claims the phrase originated Paul Saffro, Director of Palo Alto’s Institute for the Future. In order to deal with an uncertain future and still move forward, the Institute began advising people to “have strong opinions, which are weakly held.” *

This mindset is helpful in many areas of work and of life. In particular, I think this mindset applies to venture capital. If there was ever a profession where one needed to move forward into a very uncertain future each and every day it would be venture capital. Even the greatest VCs are wrong more than they are right and ultimately a lot comes down to luck given the large number of unknowns, both known and unknown that VCs – and entrepreneurs – face (more in my next post). Hence, the tagline for this blog.

I look forward to another strong string of writing on this site and I hope all of you readers out there (currently zero of you, but I am optimistic that the number will grow) will engage in the conversation to help all of us generate the strong opinions that we will hold loosely.

* There’s a debate as to whether this was the first use of the phrase and, given the number of people that inhabit this earth, I am sure it wasn’t, but it is the story I’ll stick with for now.