“If you want things to stay as they are, things will have to change.” — Giuseppe di Lamedosa, The Leopard
After founding a software company, I joined a venture capital fund in 1998 and two years later I co-Founded Birchmere Ventures. Over the last 16 years, we have had success raising 4 venture funds and a seed fund and I am proud that we returned a multiple of that capital to our investors despite investing through the Nasdaq crash, 9/11 and the financial crisis in 2007-8. Over that time period, the industry has changed significantly and for me to continue to practice the vocation I love despite our success, I needed to change.
Venture capital was a very different industry in 1998 as there were an estimated 1500 venture funds in the USA with a median size of about $200m. Fast forward to today, my guess is that there are less than 400 active funds with a median size of about $37m. In 1998, there was a typical progression for successful funds whereby you would start with a small fund and if successful, over the next few funds raise successively larger funds. Those days are long gone being replaced by the bifurcated industry of today with the super majority of capital managed by a handful of large firms on one end of the spectrum and a lot of micro funds fighting it out at the seed and early stages at the other end with most of the seed funds being run by recent successful entrepreneurs from brand name tech firms and a rich network of contacts. Additionally, the seed stage of the venture model is being disrupted further by the unbundling of early stage investing by accelerators, AngelList and Funder’s Club among others. In this new world, deal selection and deal access trump the old model of deal sourcing. All investment opportunities are public via demo days and start up databases. It is a brave new world.
In addition to the venture industry changing, the technology industry has also changed dramatically with at least two significant shifts. When I began my venture career, software was dominated by large enterprise vendors using a license software model. Start ups in that world required around $5m to build their first product and generally took 12-18 months to build a product. After the Nasdaq crashed in 2000, Web 2.0 companies emerged that took advantage of increasingly cheap storage and cloud computing which laid the foundation for today’s lean start up inspired cloud and subscription models where start ups can build prototypes over a weekend, test them, and go to market for as little as $50k on the app store. Also as part of this last wave, mobile became the dominant platform.
So with all of that said, I asked myself, how do I stay relevant to today’s entrepreneurs and investors? The answer quite simply was that I needed to reinvent myself. I had to drop some of the habits that made me successful to date but would surely mean future failure in the changing venture investing landscape. In military terms, I was prepared to fight the last war and not the next one.
“If the rule you followed brought you to this, of what use was the rule?” — Anton Churigh, No Country for Old Men
I was formally trained as an engineer and more specifically as an engineer for the Department of Defense, which is relevant because failure was not an option and cost was no object. In the late 1990's I transitioned from a world of 99.99% uptime (yes, they were serious about the 2nd decimal point) and non-existent mean time between failures to a world where a successful investor may be right 1 out of 12 times but the magnitude of the success is so large, it dwarfs every other investment in the portfolio. In my early years in venture, my investments were regionally focused and the goal was to get a good multiple on capital invested. To succeed today, I had to become more specialized from an industry perspective and filter for investments that if successful, had the potential to return the entire fund.
In order to figure out how to adapt to the changing landscape, I did a pre-mortem analysis. A pre-mortem is simply a strategy in which one imagines that an organization or project (or investment) has failed, and then works backward to determine what potentially could lead to the failure. Management can then analyze the magnitude and likelihood of each threat and take precautionary actions to prevent the project or organization from suffering an untimely failure. I came across this concept in Daniel Kahneman’s book, Thinking, Fast and Slow, which is a great book that describes how people really make decisions (hint: not always rational or consistent). For my purposes, I added to the pre-mortem imagining the scenario that an organization succeeds and worked backwards as to what caused the success (noting the risk of separating skill from luck in outcomes).
In doing the pre-mortem, it was clear that I would have to change my investment style, my communications style and develop a new personal brand that appealed to investors and entrepreneurs. In order to get started I did two things: 1) I immersed myself in learning as much as I could from successful practitioners and 2) I developed an iterative action plan to test my new plan, measure results and make course corrections. For the immersion part, I obsessively read books and blogs from thought leaders, I opened an office for our firm in the Bay Area and spent about 50% of my time there because it is ground zero for my industry and I could learn the most from the best the fastest. I also met with as many successful investors as I could. While I am in the midst of this reinvention, and time will tell how well it works, below are three strategies I found beneficial.
Create an Invisible Advisory Board.
I created an invisible advisory board of leaders throughout history that I respect and when I develop a new idea or find myself in a tough situation, I pretend that I have to present it to them. I defend my strategy as though they were my board of directors. I structured the board to include individuals whose perspectives would help in a variety of situations to include topics from business (Steve Jobs and Charlie Munger) to more general leadership and ethical issues (Abraham Lincoln) and spiritual (Thich Nhat Hanh and the Dali Lama). I have found the exercise of preparing for such a meeting including anticipating their questions and challenges to be indispensable. I also found it helps give me the resolve to ask the tough questions of myself and not just follow a path of least resistance.
For the business aspect of my reinvention, the board member I use the most is Steve Jobs because he is a master of communications and presentations in a way that I am not and he had some spectacular failures from which he reinvented himself. While there may be some survivor bias in his success in reinventing himself, I found his core concepts of focus and simplicity particularly applicable to my situation. Also, due to Jobs’ success and popularity, there is a rich set of resources, whether they be videos, quotes, books or other information as to how he worked and thought that makes him especially approachable for an advisory role. I try to consult my advisory board on a regular basis to force the discipline of their thinking and best practices into my new initiatives.
On investing, George Soros said, “that it is not how often that you win or lose that matters, but how much you make when you win and how much you lose when you lose” which is one way to say outcomes are driven by power laws. Early stage investing is not a typical business where successes are incremental or even linear. The investing side of the industry follows the product side of the industry where successes are driven by power laws so I had to train my brain to think non linearly regarding investment opportunities. Where I was trained to assess the probability a company would succeed and perform some weighted analysis of various scenarios, now I ask, if the company succeeds, how large can it become? I spend more time trying to be accurate and am less concerned with precision, which often fosters a false sense of accuracy. Successes in power law return industries become path dependent such that some success begets more success and the outcome becomes a self-fulfilling prophecy. I am working on strategies to take advantage of power laws while trying to differentiate my investment strategy.
Also, I used to take risks that were too symmetrical in that I invested too much money upfront given the high risk of failures in start ups (remember: you can’t change the statistical base rate). Now I invest smaller sums in more companies and I am more disciplined in investing follow on capital into the companies with the most potential. While this strategy is essential in terms of venture investing, it is also true in many areas of life. One would do well to only take asymmetric risks where the downside is minimal and the potential upside very large. For more on this topic, read Nassim Nicholas Taleb’s works.
For me, exiting my comfort zone took two primary directions: 1) Reinventing how I present to investors and 2) developing a social resume. In terms of reinventing how I present, there are a lot of resources online so I will focus on two that were particularly helpful. I believe Steve Jobs is one of the best presenters to have lived so I watched every product launch he did; all of them can be found on YouTube. I found him to be amazing at simplifying the message, making the pitch emotional, and developing catchy phrases that captured the essence of the technology’s benefits rather than it specs (e.g. “a thousand songs in your pocket” for the first iPod). He was a master of several techniques, which are well covered in the book, Presentation Secrets of Steve Jobs, by Carmine Gallo. I have moved from bullet-heavy presentations to very visual presentations and use Job’s framework and techniques of using three ideas to frame concepts. I also utilize video presentations to work on body language, props, and transitions to ensure they are seamless. While the feedback on my new presentation style has been very positive, it requires much more practice and rehearsing.
In terms of developing a social resume, I have focused on creating this blog and becoming more active on Twitter. I avoided blogging for a long time because I did not think I would have enough relevant content on a regular basis and I was concerned about having the discipline to post regularly. I launched this blog at the beginning of the year and in preparation for it, I treated it as a writer would a TV season. About a month ago, I developed an arc or theme for my first set of topics, built a detailed outline with notes so I would have some backlog of ideas, and perhaps most importantly, blocked off one hour a day every morning to work on it while my mind was fresh. So far, feedback on the blog has been positive and engaging with several people reaching to me suggesting additional topics as well as retweeting and favorite-ing my content for all of which I am grateful. I also enjoy writing more than I expected.
On a more general note, it is very easy to settle into routines and habits that generated career success, get very comfortable and not learn new things whether they be skills, technologies, or people. I like to think I have 16 years of experience in venture capital and not one year of experience 16 times. Large companies are particularly adept at developing golden handcuffs to make employees increasingly comfortable and thus fragile. I am working to avoid that trap and am optimistic that I can continue to work in venture capital; however, if for some reason it does not, I am better positioned mentally to adapt and learn something new if needed.
Much of what happens in life is random and it is very difficult to separate luck from skill, especially from small data sets. When things work, we often think we were smart and hard working and when things do not work, it is easy to conveniently blame it on bad luck. This concept is well explained by Michael Mauboussin in, The Success Equation, where he goes further to discuss the paradox of skill. In short, the more we all share the best practices and skills and subsequently incorporate them, the more luck will play a role in future outcomes.
I have also become a big fan of Roman Stoics such as Epictetus, Seneca and Marcus Aurelius. For peace of mind, I found it helpful to only focus on what is within your control and then accept whatever happens. I do my best to divorce the process from the outcome and have found life to be much more peaceful.
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