A Dozen Things I’ve Learned From Yuri Milner

1. “If you want to get disproportionate returns, go against flow.  Otherwise returns will not be as high. If everybody thinks it’s a great idea, returns would be under pressure… It’s a positive indicator if you go against the flow–for not only investors but founders as well. You almost have to have it if you want to be disproportionately successful.” “…being criticized is a positive indicator that you are going to succeed.” That a person with Yuri Milner’s math skills would understand that you can’t beat the crowd by being the crowd shouldn’t surprise anyone.  To the extent that Milner falls in with any crowd, it is with other contrarian investors like Howard Marks – those who agree on the need to be occasionally contrarian and to be right on some of those occasions to be a successful investor. To outperform a market you must find mistakes made by other people. It is the search for mispricing that is the primary job of any rational investor. A great business that is overpriced is a poor investment.


2. “I only invest in companies that are run by founders. The overwhelming majority of successful founders are not motivated by money but by vision and a mission. It’s rare that a good founder cashes out in the early life of a company.”  Yuri Milner has adopted a “missionary founder CEO” rather than a “mercenary founder CEO” approach to investing in startups.   He and many others in the venture capital world believe that companies with missionaries rather than mercenaries as CEOs are more likely to be mispriced by the market since missionaries will work harder and stay the course longer. Missionary CEOs also know their business better than mercenaries, since they are so passionate about what they do.  In short, passion for a cause is more motivating and more likely to result in innovation than passion for cash.


3. “A founder installs his DNA with the first 10 or 15 people he hires. Then his DNA is transferred to more hires from those first few.” Hiring great people, particularly early in the life of a business, has benefits which compound in a nonlinear way as time passes. Nothing determines success in a digital business more than how the kernel that is the early core of a startup feeds back on itself. Great people attract other great people [repeat].


4. “All these business models are driven by one simple fact: that everybody is connected. So as time goes by, more and more people get connected, the screen size changes. It gets smaller. It becomes mobile. But fundamentally, it all drives only one parameter – the number of connected individuals and the frequency of usage.”  Yuri Milner is clearly a believer in Metcalfe’s law (the value of a communication network grows in a way that is nonlinear). My view is that the best estimate of Metcalfe’s law is that the value of a communication network of size n grows like n log (n). This rate is faster than linear growth but slower than the quadratic growth suggested by some people as the right estimate of Metcalfe’s s law (i.e., those people who believe the value grows with the square of n).

Metcalfe’s law is just a rule of thumb and not a real law at all, but it is a useful mental construct. It coveys the idea that connecting people together creates great value. What Yuri Milner is saying here is that he uses connectivity as the primary basis for his investing thesis.


5. “It’s not about revenues: The fundamental economics in digital business is scale and margins.” “Algorithms are constantly adjusting to better cater to our needs based on our feedback. And this virtual cycle continues at an ever increasing pace, making these companies even harder to catch up with.” Yuri Milner understands that supply-side and demand-side economies of scale in a digital business can produce positive feedback that can create vast barriers to entry for a business. When the creation of value through a digital process is self-reinforcing in a positive way, you have the makings of powerful barriers to entry (a moat). The nature of feedback means that the better the offering of a business gets, the better the offering gets [repeat]. This positive feedback tends to produce what Nassim Taleb calls “Extremistan” results.


6. “You’re hearing there’s no business model for social networks, or that Facebook isn’t making money. I’m seeing the opposite. That gives us the confidence to make this investment in Facebook.” This is perhaps the most fascinating quote of this Dozen Things for me. The way I read this is that Yuri Milner was highly confident that his Facebook investment was going to pay off, since he had already seen social networks monetized in Russia first. He had better information than other people about social network monetization and saw that Facebook was substantially undervalued by the market.  He bet big on Facebook on the basis of this information arbitrage and won.


7. “From a margin standpoint [user generated content] is very magical.”  A new media business that is able to get its users to create content will obviously have a far lower cost than a traditional media firm’s cost of attracting users. These radically reduced costs create high margins and scalability. Why is that magical? Because people underestimate the impact of nonlinear phenomena since they don’t encounter it very much in their daily life.  Most people think they understand the magnitude of a nonlinear phenomenon, but few people really do.


8. “There’s something called Zuckerberg’s law. Similar to Moore’s law. Every 12-18 months the amount of information being shared between people is doubling.” “Technology will shift from collecting data to analyzing data.” “This is the era of mathematicians.” “There is coming an era for people with a mathematical state of mind.” People like Yuri are proof that mathematical skills can produce an investing premium in a digital world. Even just the ability to understand nonlinear phenomenon better than the non-mathematically inclined is hugely valuable for an investor. Investors who can harness the power of machine learning to find mis-priced assets are able to reap a significant premium as investors. That machine learning will produce more winners in investing is an inevitable trend.


9. “Social is a better way to interact with the digital world. It is better than search.” One of the biggest core challenges in the world today is discoverability. There is more information than ever, but how do you find the information you need? And how do you get help making sense of that information? Yuri Milner is saying he believes in the Facebook model over the Google model. He isn’t saying it is the only model, but instead that is the better model.


10. “I must analyze, from what I do now, what will be the impact two or three or five years in the future.” Bill Gates said once that the mistakes that can most hurt a business most are ones that are made five years or so earlier. Yuri Milner appears to believe much the same thing. He is saying an investor should invest based on “where the puck is going in three to five years, and not where it is now” – to paraphrase a famous Wayne Gretzky saying.


11. “Intermediation is under pressure and there is a social cost…when improvements now happen this quickly the question is how fast people can adjust.” Yuri Milner understands that there are many jobs which will be eliminated as certain activities are “disintermediated” by technology, particularly in ecommerce. New jobs will inevitably be created as old jobs disappear, but the speed at which changes are happening may mean that the new jobs are not created fast enough to prevent social disruption. My own view is that a robust social safety net is essential when the world is changing this quickly. There is too much danger of negative feedback loops driving peoples’ lives into hard-to-escape poverty. A strong social safety net is a wise investment for society, especially in an age of nonlinear change.


12. “Fundamental science and the people who practice it are less and less appreciated in our world…. fundamental science, and fundamental physics in particular, is an important occupation in spite of not triggering any practical results right away.”  Basic research and development is what is known as a “public good.” These sorts of goods are call non-rival (you having it does not mean others can’t have it) and non-excludable (you can’t prevent others from having it without paying you). This is a problem since basic R&D produces what are called positive externalities (spillovers) for society.  Stated differently, from a societal standpoint markets will under-produce basic research and development since you can’t profit from it. This means there is an important role for government and philanthropy in supporting basic research and development. Applied research will be adequately funded, but it is basic research which enables applied research to flourish.



Forbes – Facebook Investor Yuri Milner: Investing Against The Grain Is Essential

Wired – How Russian Tycoon Yuri Milner Bought His Way Into Silicon Valley


Forbes – Interview: Yuri Milner On The Rise Of Xiaomi And Celebrity Scientists

BusinessWeek – Yuri Milner: Genius Investor or Gold Rush King?

VentureBeat – Zuckerberg and Milner, on Facebook’s latest funding — and social networking revenue 

A Dozen Things I’ve Learned from Josh Brown

1. “The problem is, as a retail broker, you don’t make commissions when you sit in cash. You put all your clients in cash, you are going to end up going to the soup kitchen.”  Josh Brown is talking about one of the many “incentive” problems which exist in investing. In this specific case, the broker has incentives to convince you to trade stocks, since that is the basis on which he or she gets paid (i.e., brokers who are paid on how much you trade are in the moving business not the storage business).  The broker’s incentive is to create reasons for you to trade since that generates a fee. The problem with this incentive is that nearly all of the time the best thing for the investor to do is nothing. Incentives are powerful and almost always underestimated.

Josh tells a great story about how Babe Ruth’s home run production dramatically rose when a bonus was put in his contract for each home run hit. What the investor wants is an incentive structure for the financial advisor that is aligned with the investor’s interests. You want your advisor to have “skin in the game,” but also not to have an incentive to “skin you” as part of their game.  Charlie Munger makes this same point with a story too: “I know a guy who sold fishing tackle. I asked him, ‘My God, they’re purple and green. Do fish really take these lures?’ And he said, ‘Mister, I don’t sell to fish.’ Investment managers are often in the position of the fishing tackle salesman. They’re like the guy who was selling salt to the guy who already had too much salt. And as long as the guy will buy salt, why, they’ll sell salt! But that isn’t what ordinarily works for the buyer of investment advice.”


2. “I kind of got taken under the wing of the wrong people (retail brokers) and then got way too good at selling – it was like a ten year layover in a really horrible airport. But then I caught a plane out of there, dropped my Series 7 and converted my best clients to fee-based – which is a great deal for them obviously, compared to paying 2.5% on every buy and sell.”  People can get really good at selling almost anything, especially if they get the right training. By using the scripts that Josh Brown details in his first book, stock brokers can become what Professor Robert Cialdini calls “compliance professionals” and do things like sell snow in the middle of winter in Alaska. Ideas can be sold just as easily as goods and services. I have a salesman friend who people have said could fire you and you would not realize it until you are home telling your spouse. There is nothing inherently wrong with sales. As I have said in other post in this series, sales is the lifeblood of any business. But as a consumer you want to make sure that the incentives of the salesperson are aligned with yours. It is also helpful to understand some of the basic sales techniques of compliance professional – on that subject, reading Cialdini’s book is a good start.


3. “People need to learn the difference between information that’s interesting and information that’s actionable.”  The financial media’s incentives are very different than an investor’s incentives.  Financial media wants to assemble viewers to sell to advertisers. Viewers consume media most often if: (1) there is a crisis (real or manufactured) or (2) if they think they can get rich quickly (better yet, both).  Research done by Phil Tetlock has found that as the number of interviews an expert does with the press rises, the worse his or her predictions tend to be. John Bogle once said that he watches financial television only for entertainment value.

Josh Brown pulls off a neat trick in that when he is on television he substitutes actual insight and humor for predictions. He also has a nice way of dealing with the people who are better viewed as entertainers than investors. He is naturally funny.  If CNBC actually wants to increase its ratings it should put Josh and people like him on the network more often. More Josh, less “analysts” whose credibility is less than zero. That assumes Josh would want to be on CNBC more. Maybe he should be on FX like Louis CK instead of financial television. The last time I was asked to be on financial television I declined since it would more than likely have increased the number of mistakes I make via hubris effects. But if I get asked to be on FX with Josh and Louis CK, I’m in.


4. “It’s not different this time, it’s different EVERY time.” History never repeats itself precisely. Trying to predict the future by extrapolating the past is folly. Despite this fact, humans are pattern seeking creatures and like to ascribe predictive value to patterns they feel they have discovered.  People tend to seek meaning from events even if they are random. Humans love to tell stories to themselves and others about past successes being the result of skill rather than luck, which makes the “forecasting folly” problem worse.


5. “The next time you hear someone say we’re overdue for a correction, ask them for a copy of the schedule. Unfortunately, markets are biological rather than mechanical in nature and, as such, precision in timing is nowhere to be found.” A market is more like a cat than a machine. This is what Josh is referring to when he says markets are “biological.” In more technical terms, a market is a “complex adaptive system” and for that reason trying to make short term predictions about the future is folly.  If you want to be an “active” investor I suggest a value investing approach: the occurrence of certain types of events over the long term (change in a stock price) within your circle of competence can occasionally be predicted in a way that gives you odds that are substantially better than even – but that happens rarely. When it does happen, bet big. The rest of the time, don’t bet. Accept this fact of life sooner rather than later, and you will be wealthier and happier.


6. “I’m waiting for someone to let me know when things are ‘certain.’” The reality is that very few things in real life involve risk, defined as “future states of the world known, probabilities of those states known.” Risk is actually far less common than people imagine. Almost everything in life involves (1)  “unknown probabilities about known potential future states of the world” (uncertainty) or (2) “ignorance of potential future states of the world, probability not calculable.” Uncertainty is everywhere and is actually the friend of the investor since it can result in mispriced assets within his or her circle of competence. The best time to invest is when uncertainty is high. If uncertainty is high and you know what you are doing you can have an edge over other investors.  Avoid situations in which you do not know what you are doing. What could be more simple?


7. “Panic buying is what happens when you run money for a living and you feel like you’re missing a huge upside move.  To make up for lost performance, your purchases get more aggressive than usual.” Panic buying was never more in evidence in my lifetime than it was during the Internet bubble. Panic buying happens because, as Warren Buffett points out, it is envy and not fear or greed that makes the world go around. The drive for evolutionary fitness makes people want what others have and that drive is very strong. Envy is much more adaptive in an environment of extreme scarcity. In a modern world, envy has become counterproductive. Charlie Munger believes that envy is the most useless emotion, since it produces nothing but unhappiness. The more you suppress envy, the better your investing result will be and the happier you will be.


8. “The way to defeat high frequency traders is to be a low frequency trader, plain and simple.” The people who run markets and/or are close to markets as professionals are always going to have the ability to game the game (the only question is how much). The situation is worse when markets are non-transparent (for example, Dark pools? What could possibly go wrong?). For the ordinary investor, the less you trade the less likely you are to be the sucker at the poker table. All of this obviously increases the attractiveness of an investing style like value investing where you need to engage in very few transactions.


9. “Controlling emotions is the thing that advisors can help the most with when they’re at their best.” “A fantastic portfolio that our clients can’t stick to is worthless, we may as well be throwing darts at ETFs.” “The real challenge is keeping our clients from acting on their worst instincts. It’s keeping the Recency Bias in check, the performance-chasing impulse restrained and the grass-is-greener wolf away from the door. Easy in theory, hard in the real world.” The “behavior gap” caused by investors “chasing performance” is a huge problem. The more you chase performance the more you may benefit from an advisor. If an advisor can help you with controlling emotions at a reasonable price relative to your actual performance gap, you are ahead of the game. The best advisors add other value in areas like tax planning, estate/retirement planning and saving for college tuitions.


10. “Sometimes it’s a lot more about not screwing up than doing something wonderful.” The best way to be smart is to not be stupid. This is straight up consistent with the ideas of Charlie Munger (e.g., when faced with a problem: Invert!). Avoid situations in which you don’t know what you are doing. What could be more simple? To improve on that result, if someone is going to pee on an electric fence, it is best if it is not you. That seem obvious, but people don’t follow that advice all the time. If someone does pee on that electric fence it is best to pay attention since that is a highly teachable moment, even if we are teaching ourselves.


11. “The model of making 500 phone calls a day and getting 50 people to pick up the phone and getting five of them to be maybes and one to say yes is almost impossible in the age of cell phones and e-mail. People just don’t pick up the phone anymore.”… [It is] hard to con someone over the phone you can’t get in touch with.” The boiler rooms of the world have morphed in form and mostly found their way to the Internet as a result of the death of the land line telephone system and the telephone book. Unfortunately, the sorts of people who are attracted to get rich quick scams will always find new outlets.


12. “The type of investor who is easily impressed by short-term performance is also really easily disappointed when a strategy struggles. It’s a personality thing. It’s what drives the behavior gap that Carl Richards talks about – getting into the next hot thing at a top and then getting out at a bottom for the hot thing after that, ‘repeat until broke.’” Most people will panic when trouble arises, even if they think they have prepared themselves for the sort of events that cause panic. You can be a better investor:


[If you] can keep your head when all about you

Are losing theirs and blaming it on you,

[If you] can trust yourself when all men doubt you,

But make allowance for their doubting too;

[If you can] wait and not be tired by waiting,

Or being lied about, don’t deal in lies,

Or being hated, don’t give way to hating,

And yet don’t look too good, nor talk too wise.

“If-”  by Rudyard Kipling



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A Dozen Things I’ve Learned From Bill Campbell

1. “Growth is the goal and growth comes through having innovation. Innovation comes through having great engineers, not great product-marketing guys.” “Empowered engineers are the single most important thing that you can have in a company.”  “[An innovative culture is] where the crazy guys have stature, where engineers really are important…The Campbell School is that engineers need to have clout.” I’ve seen businesses dominated by a single discipline many times. Sometimes it is sales, sometimes it is engineering, sometimes it is scientists, sometimes it is finance, sometimes it is operations and sometimes it is marketing. The background of the CEO obviously makes a huge difference in what discipline dominates. It is clear which discipline Bill Campbell thinks should dominate.

One of the most interesting things about Bill Campbell is how many business executives have turned to him for coaching on operations. Steve Jobs, Jeff Bezos, Eric Schmidt, Larry Page, Ben Horowitz and Marc Andreessen have all been coached by Bill Campbell at one point. I suspect that Campbell’s success is an example of positive feedback- the more CEOs worked with him as a coach, found success, and discovered how effective and loyal he was, the more executives wanted to work with him. Effective, insightful, hardworking, humble, trusted and loyal are five important magic words. They are not the only five magic words, but they sure are important.

Benchmark Capital’s Bill Gurley points out: “When you have Bill coaching the entrepreneurs, it’s like having extra wildcards in a game of five-card draw.” Marc Andreessen adds: “This view that engineering should dominate was extremely unusual in Silicon Valley in the 90’s and early-mid 2000’s when it really mattered for the companies Bill worked with (Apple and Google in particular). And particularly extremely unusual for people with sales and marketing backgrounds like Bill himself has. It’s become much more common in Silicon Valley today, but I can’t tell you how unusual it was for Bill to have that view all along.”


2. “I first came out here, everybody wanted to hire the IBM sales guys to be their CEO. Blue suit, white shirt, red tie. Unfortunately, these guys were all sales guys. I mean, that’s all they did. And those guys all failed miserably because they didn’t know the product, they didn’t understand the technology; all they could do was sell.”  It is no longer enough to look good in a suit, have great hair and teeth, and be a fantastic salesperson to succeed as a CEO. If you don’t understand your own products and services, the competition will eat you alive. Great CEOs today have a big bag of many skills and are learning machines. In an interview Campbell said: “I was very devoted to learning the businesses…. I never felt I was behind technology wise. I could learn just like everybody else. I have a reasonable bias for technical stuff and it’s not been that hard to learn.” Marc Andreessen has pointed out that while Bill Campbell is respectful of engineers, he is not threatened by them. Campbell has cracked the code about to have a productive partnership with tech visionaries.

Marc Andreessen also makes the important point that “Bill himself came up in sales & marketing (at Kodak and then at Apple). 99.99% of guys with his background never reach the conclusions he has even after years in the Valley.”


3. “I am a big bully about the sales process where you’re the CEO and I want you to buy something, so I take you … for drinks or buy your wife a gold chain. People think these guys, they’re killers, they’re machines, they know how to do this stuff. They make sales this mysterious process. The jet pilot swoops in, bombs everybody up and down, and then everyone else is ready to go and clean up. I don’t believe it. I want to come in there with a quantitative process and say, ‘Let me tell you what our stuff does and let me tell you based on our work what this can do for you in terms of your productivity.'” The sales profession has evolved significantly over the years, and it is certainly much harder now to be a salesperson and not understand the product or service. Bill Campbell believes that sales is an essential profession. What he is saying is that sales is a different game now than during the days when people were effectively selling IBM typewriters based on old-school sales processes.

There isn’t enough slack in the system to make the “schmooze the CEO, buy a gold chain” sales process effective any more. People who  sell effectively today know that much of the sales process is about providing a solution and helping customers with the internal processes related to the approving the sale.  Marc Andreessen agrees: “Great salespeople in the modern era are consultants to the customer to help the customer first justify the purchase of, and then succeed with, the product.”


4. “We have to be careful about the customer. I learned this from Steve Jobs years ago. When I came to Apple, I brought my Kodak research mentality, and Steve’s view was, ‘Stuff your research. Nobody’s ever going to give you feedback on something that they can’t conceive of.’ And so we would argue those points. And I [would] joke with him and say, ‘A marketing person would never have conceived of a Macintosh. But a marketing person could have made it better.’”  There are certain people who are savants about new products and services. They just seem to know instinctively what the customer wants.  In my own life, the best product savant I have seen is Craig McCaw.  He has an amazing way of putting himself in the shoes of the customer. Watching him with a new product in his hands is fascinating. Having people who have brilliant product or service insight is a rare thing for a business, so processes like Lean Startup have been created to produce something similar.  A core Lean Startup principle is that the process of product or service discovery can be systemized. Businesses have learned that “predicting the future” is vastly inferior to discovering what customers really want, using experiments with real customers that are based on the scientific method.

Getting valuable products and services to market is far too easy for offerings which are not driven by genuine customer need. The traditional process, where product managers collect data from focus groups and then a process kicks in that results in products or services arriving months or years later, is walking dead. The Bill Campbell quote immediately above is from a McKinsey interview and it is highly probable that Steve Jobs did not use the word “stuff”, given his tendency to use colorful language. Bill Campbell may have changed it to “stuff” to be polite to Steve and/or to McKinsey. But Bill Campbell himself is no a slouch in the salty language department and maybe McKinsey made the edit with Bill’s permission.


5. “Brilliance can’t be taught, but the operational stuff can be. Do you have operational instincts? Who cares? If you work with me for six months, I can give you enough prowess and process to be able to go run something, and really do something with it.” “That operating shit — believe me, I fucked it up so many times. I’m an old guy; I’ve made many mistakes.” It is encouraging to hear that operational excellence can be taught, but I would argue that some people are more suited for it than others. For example, managers like John Stanton, Sheryl Sandberg and Jim Barksdale seem like natural operators who also received the right coaching and mentoring early in life. That is not to say that Bill Campbell isn’t right that most everyone can get better at being an operator. Regarding Bill Campbell’s point on making mistakes and learning, being a good at most anything is furthered by experience, and experience often comes from making bad decisions. The difference between great and not-great executives is that the former learn from mistakes and make more new ones than old ones. Executives who don’t pay attention to their mistakes and learn, don’t last as long as they once did.


6. “People like Mark Zuckerberg, they see an application of science that hasn’t been done before, and they run with it. They’re founders. They’re product creators.” “I don’t really take the company unless the founder is passionate and really wants to create something durable.” There’s a reason why so many great companies are formed in cities near great research universities. Breakthrough applied science means products and services that are far more likely to be 10X or more better than what is being offered today – or even something that is fundamentally new. Just a little bit or even somewhat better than what came before is rarely enough to achieve success in a way that a venture capital-backed startup needs. Breakthroughs are best if they create barriers to entry, which allows a business to be durable.


7. “You need a leader. You have to go out and recruit the best person you can who knows how to create an innovation culture. He or she doesn’t need to be personally the most innovative person, but he or she needs to know how to foster innovation. Then give that person license to hire. Go get yourself some teams. Recruit people who have the ‘DNA’ that you want.”  An often repeated theme of this Dozen Things blog series is how much effort leaders must put into recruiting the right people. Everyone pitches in to help recruiting in a well-run business. Great people attract great people, and if you get the recruiting process right the benefits grow in a nonlinear way. Campbell talks about how the right team, people, and the right systems can create “multiplier” effects to help scale a company and drive greater profits.


8. “If you don’t have the right product and you don’t time it right… you are going to fail.” “Great product and great people is the whole answer.” “It is all about people. If you have the right people you will end up with the right culture.” “I’ve fired more people for attitude and behavior than I ever have for performance.” The number of people focused on creating a company without a product is, well, a surprisingly large number. Even if these people do somehow manage to create a valuable product, without great people, the result will be a disaster.  The other point Bill Campbell makes is that being too early in a market is indistinguishable from being wrong.


9. “When I work with startups, the last thing I work with them on is marketing. I don’t want to overestimate marketing. Apple’s marketing is having great products.” Too many marketers believe advertising (e.g., television commercials) create brands. Michael Mauboussin astutely points out: “Brands do not confer competitive advantage in and of themselves. Customers hire them to do a specific job.  Brands that do those jobs reliably and cost effectively thrive.” Trying to create a brand via marketing without great products is like trying to make an ice cream sundae with just a glass bowl and no ice cream.


10. “I can’t do HTML, come on.  I’m just coaching them on how to run their company better.” “[I’m] a third-party Jiminy Cricket. There is nothing transformative that I do. I don’t have the vision of a Marc Andreessen. I am an operating guy, so I help them think about what their company should look like, how they should organize it, how to think about data center management.” “I believe in management. If you give people the things you want them to do. Judge them on what they accomplish. Make sure that you are really bottom line about everything. They recognize that you’ve got a heart. And that you’re trying to help them by giving them all of that rigor. Then they are going to call you a leader.” There is a lot of modesty in the way Bill Campbell presets himself.  Humility is a lost art. Bill Campbell proves that you don’t need to be a great engineer to be an enabler of managers and engineers.  Having that, it is clear that Bill Campbell is a person who works hard to understand technology. Ben Horowitz has written about the methodology Campbell has developed for measuring executives in a balanced way.


11.“…the big brand names–Kleiner Perkins, Sequoia, Benchmark, plus Accel, Andreessen Horowitz now–the companies have partners that care about growing the company, that’s the most important. They can call the right people and ask them to help get things done. It’s not about the exit. I sit in board meetings and fend off the antibodies–board members who only care about the exit, or the ‘sales pipeline.’”  There’s a reason why the same firms persistently deliver the lion’s share of venture capital industry financial returns. They have the best network of people who can help a startup and a brand – which can help attract talent, money, distribution, and customers – which all feedback on themselves in a mutually beneficial manner. Most of the time the startup process fails to produce a massive winner, but when it succeeds it is a marvel to behold.  The key to success is the ability of a group to establish positive feedback loops. Creating both the kernel from which positive feedback loops grows to massive scale and the supporting systems that enable that to happen is a rare but incredibly valuable thing. Only approximately 15 startups accomplish this it at significant scale each year.


12. “My dad was a tough bastard. We had one car when I was a kid, and my mom used to drive us down to the mill to pick him up. He had worked the midnight-to-8 shift, and would come out in a jacket and tie, and we would drive him to school, where he would teach all day. He would go home after teaching and sleep for a few hours and then go back to the mill.” “I had a nice time for a long time being under the radar. Instead of being an anonymous guy who wandered around in the Valley, I became someone people focused on.” Some of the best coaches don’t need to be in the spotlight. Some of the best coaches also know that a great way to get things done is to let other people take the credit. I’m am not saying all coaches are this way or even most, but there are great ones like Campbell who do this. Unlike when he was at Columbia, Campbell is not coaching college age students. His “students” are successful executives who need help, often in new domains. Being humble makes Bill Campbell a better coach. Not being threatened by technology and technology visionaries makes him a great manager. When I asked someone I know who knows Bill Campbell well, he said: “Make sure you talk about his loyalty. Don’t leave that out.” When you look at all the good things he has done for his home town of Homestead, Pennsylvania or Columbia University, you definitely see the loyalty.

“People have asked me in Silicon Valley, ‘Why are you in high-tech?’ I ask them, ‘Have you seen my football record?’ ” The crowd laughs. Then he says that football taught him about teamwork and supporting others. But most of all, he says, he learned that he had a responsibility to “give something back.”

Here’s a closing story from Marc Andreessen about how humble and giving Bill Campbell can be: “When he worked with us at Opsware, he refused to take stock options (or any other form of compensation). I got upset about it because he was helping us so much and I felt like it was wrong that he wasn’t getting compensated. I went to talk to him about it and he shot me down as he had before, told me he didn’t want any stock options. So I threatened him: “I’m going to find out which political party you belong to and I’m going to donate the stock options to the other one.” That finally did the trick. (And I never found out what political party he belongs to.)”



USA Today – Silicon Valley’s Secret CEO Whisperer 

Forbes – Tech Startup Secrets of Bill Campbell, Coach of Silicon Valley 


Fortune – After 17 years, Bill Campbell steps down from Apple’s board

 VentureBeat – In a rare interview, Bill Campbell shares his coaching tips (video)


Columbia – Football Coach to the Coach of Silicon Valley 

Youtube – Coach of Silicon Valley  


The Coach of Silicon Valley https://www.youtube.com/watch?v=GSO-deGYhkA

We are biased toward People Who Never Give up. http://www.gsb.stanford.edu/news/headlines/marc-andreessen-we-are-biased-toward-people-who-never-give-up

A Dozen Things I’ve Learned From John Doerr

1. “Swing for the fences when your time is right.” What John Doerr is talking about is the so-called Babe Ruth Effect. Michael Mauboussin writes: “a lesson inherent in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters.” When you find an obvious bet with a big upside and a relatively small downside (i.e., positive optionality), bet big! That won’t happen very often, but when it does, you must be ready to act aggressively.  The wise investor is patient, but aggressive when the time is right. Venture capital, like all forms of investing, is an activity in which a knowledge of probability and statistics is essential. Charlie Munger said once: “If you don’t get elementary probability into your repertoire you go through life a one-legged man in an ass-kicking contest.”


2. “We believe that ideas are easy, execution is everything.” A good idea or invention is necessary, but it is far from sufficient to achieve success in business. For a good primer on the importance of execution in a business see my post on Jim Barksdale. It takes an entrepreneur to take an idea or innovation and turn into genuinely scalable business. That means a “roll up your sleeves” and a “make the trains run on time” effort from a team of people. Bill Gates said once: “Being a visionary is trivial.  Being a CEO is hard.  All you have to do to be a visionary is to give the old ‘MIPS to the moon’ speech — everything will be everywhere, everything will be converged.  Everybody knows that.  Which is different from being the CEO of a company and seeing where the profits are.”


3. “Believe me, selling is honorable work — particularly in a startup, where it’s the difference between life and death.” How could someone describe the importance of sales to a startup more starkly?  Poor sales results means inevitable death for a startup.  When it comes to sales success I have seen just about everything from great to nonexistent. At one end of the spectrum I have seen startups composed of all engineers in which no one who knew how to sell. The result in a situation like that is not pretty. I have also seen sales teams that were able to sell products and services at seemingly superhuman levels given competition and the nature of the offerings. Spending what it takes to drive sales success is essential. As an example, take a look at any software-as-a-service company to see how much is being spent on sales and marketing by industry leaders. More than 50% and in some cases more than 100% of revenue is being devoted to sales and marketing by some companies. I’m not saying that these levels are always rational, but if your competitor is doing this you need to pay attention and respond. Sales skills are not just required for selling goods and services to customers.  As part of building a startup into a real business you are selling different things all the time to a range of people, including investors, employees, distributors, suppliers and customers.


4. “The best entrepreneurs …don’t know what they don’t know, so they attempt to do the impossible. They often succeed.” Optionality is often found in what seems impossible. If a new business does not seem a little impossible there would inevitably be many people already pursuing the opportunity already.  Many entrepreneurs fail as they attempt the impossible and are forgotten by history as survivor bias kicks in. Failure is an essential part of human progress.


5. “The best entrepreneurs don’t focus on success. They focus on building a company that can be a leader in the global economy. They know success will follow. If you focus on success, you won’t get there. If you focus on contribution and customer value, then you can win.” “Mercenaries are driven by paranoia; missionaries are driven by passion. Mercenaries think opportunistically; missionaries think strategically. Mercenaries go for the sprint; missionaries go for the marathon. Mercenaries focus on their competitors and financial statements; missionaries focus on their customers and value statements. Mercenaries are bosses of wolf packs; missionaries are mentors or coaches of teams. Mercenaries worry about entitlements; missionaries are obsessed with making a contribution. Mercenaries are motivated by the lust for making money; missionaries, while recognizing the importance of money, are fundamentally driven by the desire to make meaning.” John Doerr clearly prefers the missionary approach to starting a business, but recognizes that mercenaries can sometimes succeed. My posts on other venture capitalists reveal that they often have a similar view. Missionaries tend to hang in there longer since they are pursuing a cause and not just wealth. Some fail and some succeed. Missionaries who win are remembered and the one that lose are forgotten (survivor bias).


6. “The best entrepreneurs are the ones who really go the distance with their companies, who are always learning…”“Great leaders are great communicators. They have incredible integrity: they’re usually the first to recognize problems. They’re ruthlessly, absolutely intellectually honest. They are great recruiters: They’re always building their network of talented people. And they’re great sales executives: They’re always selling the value proposition of the enterprise.” Great leaders and entrepreneurs have a big bag of skills. Having just one skill, or even a few, is not enough. The best way to create a big bag of skills is to be a learning machine.  A corollary to this point is that a diverse team in the broadest possible sense is a stronger team. Great founders and CEOs hire people who complement their skills and are multipliers of what the CEO can do on their own.


7. “In anything worth doing, it takes a team to win.” “In the world today, there’s plenty of technology, plenty of entrepreneurs, plenty of money, plenty of venture capital. What’s in short supply is great teams. Your biggest challenge will be building a great team.” Recruiting is such a huge part of the success of a startups it is hardly possible to emphasize it enough. Great people attract other great people [repeat].  As Bill Gates wrote recently: “there’s an essential human factor in every business endeavor. It doesn’t matter if you have a perfect product, production plan, and marketing pitch; you’ll still need the right people to lead and implement those plans.”


8. “If you can’t invent the future, the next best thing is to fund it.” Some venture capitalists are honest enough to admit that they would make a lousy entrepreneur or that they don’t currently want to go through the intense start up process at this point in their lives. John Doerr is saying funding innovation and economic growth is a noble profession.


9. “No conflict, no interest.” This quotation may be apocryphal since no one seems to be able to cite a source.  Whether John Doerr said this or not, it is certainly true that in private markets investors can look for a proprietary edge that would not exist in public markets since there is no Regulation FD.


10. “The old economy was about people acquiring a single skill for life; the new economy is about life-long learning.” “Choose your first job based on the experience, not how much money you will make. Carry a bag (sell something), launch a product, manage a dozen people, learn from great companies. You will be judged on your ability to listen and think critically. Confront problems, not people. Learn. You’ll get extra points for a sense of humor. Always network. That means learn about people and what they do. Also, develop a couple of mentors.” See my post on Reid Hoffman for views on the ever-increasing value of networks of all kinds. People with access to better networks have better information which they can turn into achievement [repeat]. Success feeds back on itself which is why we are seeing more winner-take-all outcomes (Extremistan).


11. “Everyone who is a practitioner of the venture business knows most of the returns accrue to a small group of firms. And I don’t think that’s ever going to change.” I repeat this point about the power law distribution of financial returns in venture capital nearly every time I do a post on venture capitalists since it is so fundamental. Returns in the venture capital business are not spread evenly like peanut butter, but rather reflect a power law distribution. People have a hard time with this fact since they tend to assume that activities, phenomena and outcomes reflect Gaussian distributions.  Zero limited partners use an industry average in making a decision to invest in a new fund started by a top ten venture capital firm.

12. “[Stanford is] the germplasm for innovation. I can’t imagine Silicon Valley without Stanford University.” When I talk about economic development, I like to tell the story about how the spoils were politically distributed when the Washington Territory joined the United States as a state in 1889. Tacoma was the terminus for the railroad before it ever reached Seattle. Olympia was awarded the state capital, Walla Walla received the penitentiary and Port Townsend, which had a thriving port closest to San Francisco, received a customs house.  All Seattle received in the political process that resulted in statehood was more funding and support for the University of Washington which had been founded in 1861. In terms of economic development having the university in Seattle made all the difference.   Great cities get built around great universities.  Seattle without the University of Washington would not be Seattle. John Doerr is saying Silicon Valley without Stanford wouldn’t be Silicon Valley.


FastCompany – John Doerr’s Startup Manual 


Stanford Business Interview (2007) – VC John Doerr


Stanford Business Intreview (2009) – VC John Doerr :


TechCrunch – John Doerr: The Next Big Thing


WSJ – Doerr and Moritz


The New Yorker – Get Rich U


A Dozen Things I’ve Learned from Paul Graham

1. “Y Combinator is a minor league farm club. We send people on up to VCs.” Paul Graham successfully found a role for Y Combinator in the startup ecosystem which has allowed it to thrive. He is saying that Y Combinator is dependent on other investors to provide growth capital to its graduates and that it will continue to specialize in what it does best. Roelof Botha of Sequoia puts it this way:  “Since the distribution of startup investment outcomes follows a power law, you cannot simply expect to make money by simply cutting checks. That is, you cannot simply offer a commodity. You have to be able to help portfolio companies in a differentiated way, such as leveraging your network on their behalf or advising them well.”  Y Combinator found its differentiation in the startup ecosystem and financial success followed.


2. “[One of] the two most important things to understand about startup investing, as a business [is] that effectively all the returns are concentrated in a few big winners… I knew [this] intellectually, but didn’t really grasp till it happened to us. The total value of the companies we’ve funded is around 10 billion, give or take a few. But just two companies, Dropbox and Airbnb, account for about three quarters of it.” “What investors are looking for when they invest in a startup is the possibility that it could become a giant. It may be a small possibility, but it has to be non-zero. They’re not interested in funding companies that will top out at a certain point.”  

“A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of  ‘exit.’ The only essential thing is growth. Everything else we associate with startups follows from growth.… To grow rapidly, you need to make something you can sell to a big market.”

Y Combinator has invested in more than 700 startups to date. “Two-thirds of [the fund's] valuation is in two companies — Dropbox and Airbnb. [Down from 3/4 cited above] Stripe, a third graduate of Y Combinator, has been valued at $1.5 billion. It has been reported that “three companies accounted for almost 90 percent of the $16.5 billion jump in YC company valuations since last June.”

If (1) two to three startups in an Angel investor’s portfolio must generate 2/3-4/5 of financial returns; (2)  the expectation is that the fund will generate financial returns that are at least 5% greater than public equity markets and (3) $120,000 is invested for a 7% stake (Pre-Series A) in each startup on average, the mathematics dictate (1) the market must be big and (2) the startup must designed to grow fast. Since most companies backed by Angel investors produce little return of capital or return on capital, the math dictates that the ones that do financially succeed must be huge successes. There is no other way for a pre-series A $120,000 investment, for 7% of the equity, to generate the necessary financial returns.

One of the points made above by Paul Graham about the definition of a startup is really a point of taxonomy.  Most entrepreneurs will not raise venture capital. These entrepreneurs will grow their business from savings, internally generated cash flow, bank loans or equity capital supplied by investors seeking financial returns which do not reflect the skewed distribution that exists in venture capital. The number of new restaurants in the US alone is 10X the number of new startups that seek venture funding each year. There will be less failure overall among new businesses that are not what Paul Graham calls “startups”, but fewer of those firms will have the gigantic financial returns produced by a venture capitalist harvesting optionality.  Someone may argue: if these other small businesses are not startups, then what are they? They certainly are businesses. But they are not startups under Paul Graham’s taxonomy.


3. “If you want to start a startup, you’re probably going to have to think of something fairly novel. A startup has to make something it can deliver to a large market, and ideas of that type are so valuable that all the obvious ones are already taken…. Usually, successful startups happen because the founders are sufficiently different from other people – ideas few others can see seem obvious to them.”  Finding a business which competition has not fully discovered and developed, one that is capable of huge financial returns, is unlikely to happen with traditional approaches.  By seeking novelty, a startup can sometimes find hidden optionality. Optionality is everywhere if you know where to look, but it is most likely to be found in places where there is a lot of uncertainty. Financial bets on a startup business that operates in areas where there is not a lot of uncertainty are unlikely to be mispriced.


4. “The very best ideas usually seem like bad ideas at first. Google seemed like a bad idea. There were already several other search engines, some of which were operated by public companies. Who needed another? And Facebook? When I first heard about Facebook, it was for college students, who don’t have any money. And what do they do there? Waste time looking at one another’s profiles. That seemed like the stupidest company ever. I’m glad no one gave me an opportunity to turn it down.”  A venture capitalist cannot outperform the equity market by 5%  if he or she follows the crowd. It is simply not mathematically possible to beat the crowd if you are the crowd. Outperformance requires at least one correct contrarian bet. Since only about one in ten bets results in a “tape measure financial home run,” making just one contrarian bet is not a workable approach for a venture capitalist. Buffett describes how venture capitalists deal with uncertainty by making multiple bets: “If significant risk exists in a single transaction, overall risk  should be reduced by making that purchase one of many mutually-independent commitments.  Thus, you may consciously purchase a risky investment – one that indeed has a significant possibility of  causing loss or injury – if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but  unrelated opportunities.”

5. “We thought Airbnb was a bad idea. We funded it because we really liked the founders. They seemed so determined and so imaginative. Focusing on them saved us from our own stupidity.” Great venture capitalists put a large emphasis on a great team, since that alone gives the investor additional optionality.  Great teams can not only adapt better to change, but know when to adapt. Great people also attract other great people which also attracts money, partners, distribution and customers in a lollapalooza fashion.


6. “For [a product or service] to surprise me, it must be satisfying expectations I didn’t know I had. No focus group is going to discover those. Only a great designer can.” Focus groups can be gamed by a team who thinks that they can predict the future rather than discover it. It is easy for someone to formulate the question presented to the focus group to get the answers they want. In contrast, a startup that launches a minimum viable product with real customers will genuinely find out early whether “the dogs are eating the dog food.” For a startup, that early feedback can literally be the difference between life and death. Waiting many months or even years for a big bang product or service launch that is the result of a focus group-driven process may leave the business with insufficient resources to survive a mistake since feedback comes so late in the process.


7. “I never say, ‘These guys are going to be great.’ All I ever say is, ‘These guys are doing great so far,’ because some percentage of the time, it turns out there’s some explosion around the corner. Not just founder disputes, there’s all kinds of explosions. Startups are very, very uncertain.” Since startups and the markets they target are a nest of complex adaptive systems, changes can be nonlinear in both a positive and negative way. It is “never over until it is over.” Some successful startups will almost fail and some failures will almost succeed.


8. “You need three things to create a successful startup: to start with good people, to make something customers actually want, and to spend as little money as possible.” The importance of a good team has already been discussed, as has the need to make dog food that dogs like to eat more than other dog food. The new point being made here by Paul Graham is that acquiring customers while spending as little money as possible is essential.  Customer acquisition cost (CAC) and cost of goods sold (COGS) can be stone cold killers of any startup.


9. “The reason startups do better when they turn down acquisition offers is not necessarily that all such offers undervalue startups. More likely the reason is that the kind of founders who have the balls to turn down a big offer also tend to be very successful. That spirit is exactly what you want in a startup.” Founders who go “all in” because the startup is more about the mission than the money will be more likely to generate tape measure home runs. Some of these missionary founders will fail due to an overreach, but that will be obscured by survivor bias. Mercenary founders succeed less often, and even when they do succeed, they do so in less spectacular ways.


10. “The exciting thing about market economies is that stupidity equals opportunity.” To earn above market financial returns, assets must be mispriced and they are most often mispriced when people are being “stupid.” This happens when people participating in a market become overly optimistic or pessimistic. The swing between these two states (greed and fear) is what another fellow named Graham (Ben) described as a “Mr. Market” phenomenon. By being greedy when others are fearful and fearful when others are greedy, good things can happen since an investor can buy at a bargain and sell at a premium. Warren Buffett writes: “the true investor welcomes volatility.  Ben Graham explained why in Chapter 8 of The Intelligent Investor. In that classic book on investing he introduced ‘Mr. Market,’ an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish.  The more manic-depressive this chap is, the greater the opportunities available to the investor.  That’s true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”

11.  “It’s better to make a few people really happy than to make a lot of people semi-happy.” “Another corollary to the power law is that it’s OK to be lame in a lot of ways, so long as you’re not lame in some really important ways.” Focus matters in a startup, as does greatness, in at least some aspects of what a company does. No company is perfect and every company has problems below the decks. Sometimes the ticket to success is just being marginally better than the competition and then Matthew effects (the rich get richer) kicks in. Paul Graham once said: “You could even say that the whole world is increasingly taking power law shape.” Even if someone is just a little bit better, that may make a massive difference in financial returns since we increasingly live in in what Nassim Taleb calls Extremistan.


12. “It’s hard to do a really good job on anything you don’t think about in the shower.” Studies indicate that people taking showers often get distracted and when that happens the probability that they will incubate an important idea rises. “Aimless engagement in an activity is a great catalyst for free association.”  But people who are distracted don’t think about things that they are not interested in or passionate about.  And passion is a key element is start up success.  So if you combine a shower with passion, your ideas are likely to be something that you can do really well.  I would write more on this, but I need to take a shower.


Paul Graham – Black Swan Farming

Blake Masters – Peter Thiel’s CS183 Startup Class Notes

Paul Graham – Startup = Growth

Inc – How Paul Graham Became Successful

The Information – YC’s Paul Graham, The Complete Interview

A Dozen Things I’ve Learned From Heidi Roizen


1. “Even though the numbers [in the entrepreneur’s business model] will likely be wrong, your thinking behind how you arrived at those numbers is critically important. Think of each assumption as a dial.  Which ones connect to things that matter, and what impact would they have on your ultimate outcome if they turn out to be only half as effective – or then again twice as effective? Of the ones with the biggest impact, what underlying factors determine their outcome?  Which ones can kill your business?”   It is amazing how much credibility some people give to numbers once they are in a spreadsheet. The numbers in a spreadsheet are just numbers. Too often they are often someone’s wild guess or goalseek plug in. The reality is that a spreadsheet is all about the assumptions – which are usually hidden, unless you go looking for them. If garbage goes in to a spreadsheet, garbage comes out.

What Heidi Roizen is saying is that it is the relationship between the numbers (and in particular their sensitivity to each other in a financial model) which can provide the greatest insight. For example if it costs a lot to acquire a customer, you can learn from the sensitivity of lifetime value to that number (CAC) that customer churn is very harmful and that investing in customer retention is a very good idea. Similarly, if you are spending >50% of revenue on sales and marketing you need to have low COGs and watch cash flow carefully.


2. “One of the biggest mistakes entrepreneurs made in the last couple of years is; ‘Hey, I own a company and I sold 50% of it for $5 million and the day that $5 million gets in my bank, I’ve got $2.5 million.’ No, you don’t. You have $5 million of debt and usually at three or four liquidity preferences and participation that you got to pay back before you ever see a dime. That money is very dear and very precious, and that’s why I would caution everyone that terms are more important than valuation …. many of our investments will be lost and we won’t ever see that money again. But if there’s any value in the company that gets created as a result of your sweat and our money, it’s our money that’s first.”  Inexperienced entrepreneurs pay too little attention to deal terms. Terms that govern issues like ratchet clauses and liquidation preferences are important to understand in a deep way. Money can be much more expensive than many people imagine, especially if all they pay attention to is the cash received up front and not the terms of the financing. Dilution is painful and yet some people think that the best use for money raised is a fancy office with a spectacular view.


3. “When you’re the CEO, you have the least freedom, because you can’t just quit.” “I raised that money. I hired every one of these people. I gave those venture capitalists my commitment that I was going to bring it home for them. I’m not just going to walk out the door. I remember walking into my company every day. We had about 100 employees. And I would count the cars in the parking lot, and I would think about the car payments and the mortgage payments..”  You don’t need to be the CEO to feel responsible for fellow employees when involved in a startup. I thought a lot about employees not making their mortgage payments or having to go home to their families without a job as the third employee of a startup. Responsibility is a tremendous motivator, if you are a responsible person. Some people in life were not distributed responsibility or empathy at birth. Recognizing that absence in a person is a very valuable thing. Some people will be there for you in a crisis or when things turn out badly, and others won’t.


4. “Entrepreneurship is a team sport with very many lonely moments.” “I was once an entrepreneur, and I did not live a balanced life. I think we live our lives in a serial fashion — there are periods where you won’t have time to do everything you want. If you’re really excited about something, you can run on that for a while.” I spent five years of my life flying 500,000 (mostly international) air miles a year in the 1990’s, almost always by myself doing business development. My life was not balanced. I felt there were three things I could do: work, family and personal life. I decided to focus on the first two during that period. To say you will make no tradeoffs in building a business is in my view unrealistic. You can say that you will try to balance things out later, but sometimes, or even all too often, that balancing out does not happen. Starting a business is an extreme sport.


5. “If you want to be the smartest person in the room, you’re going to build a crummy team. Do you really want a VP of sales who knows less about sales than you? Do you want a CFO who knows less about accounting? No of course not. You have to take risks to find the right people and then trust in those relationships. Your job becomes to empower those people and make sure they get along. My goal is always to be the dumbest person in the room because I want to be surrounded by really bright, really amazing people. That’s when exciting, world-changing things get done.” The best and most talented people want to work with the best and most talented people. The key to the success of a business is generating positive feedback loops and hiring the very best people is arguably the most important positive feedback loop of all.


6. “The most important thing you have is time because you can’t make more of it.” Time is almost always your scarcest resource. Spend it wisely. Find ways to cut off people and activities that are a time sink. As Peter Drucker once said: “There is nothing so useless as doing efficiently that which should not be done at all.”  On a personal level, I plan to take a course on time management just as soon as I can fit it into my schedule.


7. “[Not] every deal should have VCs.”  There are lot of businesses which can produce an attractive financial return that are not candidates for venture capital. These businesses can be boot-strapped or built based on sources of capital like bank loans. Lots of people living financially rewarding lives built their business without a penny of venture capital. For another view on this in a recent Harvard Business Review article see here.


8. “When you fail, and we all fail all the time, get over it.  Own up to it, make amends, make sure you don’t let it happen again and move on.” Mistakes are a useful part of the process as long as you are making new mistakes. You can’t make an omelet without breaking eggs, but you can also break a lot of eggs without ever making a decent omelet.


9.  “Things outside of your control will happen. You need to lean into this fact.” So much in life is determined by luck. If you haven’t been reading the work of people like Mauboussin and Khaneman on luck you should. Daniel Khaneman points out:  “Our mind is an instrument for making sense of the world. We make sense of the world by telling causal stories — and causal stories are always going to have heroes in them. The things that could have happened and would have changed events do not come to mind.”


10. “The 20-40-60 rule: In our 20s, we worry about what other people say about us.  At 40, we realize it’s not important to worry about what people say and at 60, we acknowledge that no one was thinking about us.”  “Your boss is not thinking about you. Your peers are not thinking about you. You need to think about you.”  Often when people feel embarrassed about some failure they are the only one who actually noticed what happened. And just as often when you think someone is looking after you, no one is. So take care of you.


11. “Networking is a negative term that means climbing the monkey bars.  It’s about building relationships and connecting with people you find interesting.” “[Be] relationship-oriented as opposed to transaction-oriented” “Building your network also means starting with what you can give.” “There is this book called Drive, by Daniel Pink, where he talks about the rule of reciprocity—which means if you do someone a favor, they will feel more obligated to do something for you.”  I’ve written a book about this actually – The Global Negotiator. It is free to download. The book’s overall message is simple: build relationships rather than doing deals. It is mostly a bunch of stories about things that happened to me and my co-author while we lived and worked in Asia. We wrote the book before Robert Cialdini’s wonderful book Influence was published, and so we do not refer to important principles like reciprocity using the same terminology.  Cialdini describes the reciprocity principle simply: “People will help if they owe you for something you did in the past to advance their goals. That’s the rule of reciprocity.” The reverse is also true: when you do someone a disfavor, you will often find that disfavor is reciprocated.


12. “Negotiation is “the process of finding the maximal intersection of mutual need.” To create a durable relationship, it is best to focus on the intersection of mutual need rather than trying to create a clever legal agreement. The pace of change means anticipating fully how the world will change in an agreement is simply not possible. The chapter in The Global Negotiator on this important point about negotiation (“keep the relationship mutually beneficial”) is here.


Heidi Roizen – It’s Different For Girls

Heidi Roizen – Why I Care So Much About Your Plan 

NCWIT – Interview with Heidi Roizen 

Pursuing Adventures – Heidi Roizen at Forum for Women Entrepreneurs and Executives 

Forbes – Heidi Roizen on Venture Capital and Friction Free Channels 

The Muse – A Q/A With Silicon Valley’s Greatest Connector, Heidi Roizen 

Heidi Roizen – The Magic Question That Turns Transactions Into Relationships 

Business Insider – Life Lessons From Investor Heidi Roizen

A Dozen Things I’ve Learned from Ann Winblad

1. “We don’t fund inventions. We like inventions.” “We don’t fund products. We only fund software companies.”  Two important points are being made here by Ann Winblad.  The first is that she decided early in her career as a venture capitalist to only invest in software companies. She was ahead of her time in understanding the value of software and the value of specialization.  Mark Suster writes: “The VC structure is changing and there appears to be a bifurcation into small & large VCs with an impact on ‘traditionally sized’ VCs.” In a world that is more and more falling into what Nassim Taleb calls Extremistan, it should not be surprising that there are Matthew Effects (the rich get richer) in venture capital.

As Andy Rachleff writes: “these days the breadth of the Internet has made it possible to generate returns that were never before imagined. Companies like Airbnb, Dropbox, eBay, Google, Facebook, Twitter and Uber return more than 1,000 times a VC’s investment. That leads to amazing fund returns.” The big venture capital firms with existing track records are getting bigger and more successful and “the middle” of the industry is feeling the pain of this shift. In today’s venture capital industry, differentiation and specialization is the best way forward for many VC firms.  a16z’s Scott Kupor has argued that more specialized venture capital firms will play a bigger role going forward as the number of “traditionally sized” firms shrinks.

The second point Ann Winblad makes in the quotations above is regarding the difference between an invention and a profitable business. Many people mistakenly think that an idea or invention is what makes for a successful startup. What makes a successful startup is a lollapalooza of positive feedback loops that build from the kernel that is an invention or innovation. Success happening in many dimensions feeds back on itself, creating this self-reinforcing network of positive feedback loops. Talent, customer traction, partners, press, money, all attract more of each other and with the right conditions can scale in nonlinear ways to become one of the ~15 businesses a year that drive VC industry returns. The venture capitalist’s job is to be an important hub in the social network that makes this lollapalooza, which is what makes a successful “unicorn” business happen.


2. “We look closely at the products and technology to see if what you’re going to deliver to market can at least for the foreseeable future deliver a sustainable competitive advantage.” If a company does not have a sustainable competitive advantage (a “moat”) competition will inevitably cause the return on investment for that business to drop to opportunity cost, and there will be no economic profit for the producer.  In other words, if what you do can easily be copied or imitated, or if substitute goods and services exist, the business will never see a profit that exceeds its cost of capital.  This is such a simple idea. But frequently it is poorly understood. Having a great product or service is not enough to achieve significant profitability. Sometimes the only people who benefit financially from a good or service that a company provides in a market are the customers.


3. “We invest in markets. If the opportunity is not large, then the business, independent of the people or the technology, will fail. Because of this issue of intense competition and capital efficiency, opportunities always get smaller as soon as you fund the company.”  Even if a business has sustainable competitive advantage (moat) and significant market share, if the relevant market is small the venture capitalist will never earn the financial returns that it takes to make their business model work (at least S&P 500 return plus 5%). Each VC can only have so many startups in his or her portfolio, given that time is their scarcest asset, and that means putting significant funds (e.g., $10 million) to work in each startup. Only large opportunities justify that sort of investment.


4. “Warren Buffet’s quote: ‘The market bats last’ means ‘Have you figured out: are there customers out there?'” “Do the dogs have their head in the dish? Are the customers buying?” The customer development process during which a startup finds a “minimum viable product” is an essential step a business must take before moving on to scaling the business. If the “dogs don’t eat the startup’s dog food” the only alternative (that is not shutting down the startup) is to pivot back to begin the customer discovery process again.


5. “If you start a company, in order to get your engineering team staffed, to hire your other executives, you’ve got to get people to leave other jobs. So we look at your ability to attract excellence.” The ability to attract great employees is critically important since it is a key element of the lollapalooza which creates the positive feedback loops that drive business success. And the early hires are the most important hires, which is why venture capitalists often personally get involved in hiring – particularly at the earliest stages of the business.


6. “The role of venture capitalists is to be great opportunists.  So, the visionaries are the entrepreneurs. I gave up my visionary hat when I moved to California and became a venture capitalist in the late 80s.” What drives venture capital finance returns is optionality. Optionality is all about discovery rather than precise prediction. Great venture capitalists know how to successfully buy long-dated, deeply-out-of-the-money call options on the prospects of a startup. Half of these call options will be worth nothing at all in the future, and only two or three will determine the venture capitalist’s financial success.


7.  “Start-up building is hard.  There is no manual for it.” “You’re always going to be short of people, you’re always going to be short of money…. So you have to find leverage points, versus working your way up through tiny little rungs and seeing if you get there. Think like a big dog and find leverage to get there.” Finding innovative ways to scale different aspects of a startup is a mission-critical activity. In other words, innovations are needed not only in the product or service but in the ways (1) the company is created, (2) the product or service is developed and brought to market.


8. “What does separate some entrepreneurs from other entrepreneurs is they’re not handwringers. They don’t worry about the unknown. They don’t really worry about the risk points ahead. As you get older and you get more experience, you train yourself to think ahead about the risk points versus just to take the next hill. But non-risk-takers and non-entrepreneurs would really have big headaches about this. They would need some level of comfort and safety. That’s something that we look for in entrepreneurs—that they have the courage to do the job. That they’ll have the ability to judge the business situation. They’ll have the ability to lead people. They’ll have the ability to interact with the marketplace and to really build confidence into strategy.” Uncertainty is fundamentally the friend of the rational investor. Founders instinctively know that uncertainty is what creates the greatest opportunities, since it causes others to fail to see the opportunity (i.e., misprice optionality).  In contrast, risk, defined as not knowing what you are doing, is not the investor’s friend.


9. “All we are is good pattern matchers, but we do look for a few indicators. One: do they seem like they need control over everything, that’s not scalable. Two: are they going to have a trusting relationship with all of their stakeholders, their employees, their partners, their customers, as well as their investors. Can we all grow together? And three: do they have the intellectual and physical stamina to go the distance in building a company? It is very hard to build a company from scratch.”  “The majority of companies fail by self-inflicted wounds by the leadership team.” Great founders and teams need a mix of skills, and for this reason a diverse team is a stronger team. As the comic strip character Pogo famously once said: “We have met the enemy and he is us.” Having people on a team who are diverse lowers that risk.


10. “Whenever we pass on an idea, we wonder…. We consider it errors of omission. They are to me as stupid as sins of selection.” Often the biggest mistakes in life are what you don’t do. The companies a venture capitalist does not invest in and the people they don’t recruit can be the biggest mistakes of all. As an analogy, Warren Buffet has said that the biggest mistake he made was not investing in Wal-Mart and that this mistake of omission probably cost Berkshire $10 billion.


11. “Being goal oriented and focused is a glass half full. You have to look at the positive and optimistic side,” “Women in particular should hold this glass in front of them all the time,” she said and to focus on the positives by thinking about what is going right — not just what isn’t. “Otherwise, you’ll never march forward.”  “We went out to raise our first fund, we had 132 meetings before we got our first commitment…. Most people would have given up. But John and I were pretty competitive. The more ‘nos” we got, the more motivated we were. John neglected to tell me when we went out to raise the first fund that no new venture fund had been created for several years. I always pick bad economic times to start things.”  These quotes remind me of a story about a boy and some horse manure.  Worried that their young son was too optimistic, his parents sent him to see a psychiatrist. The psychiatrist had seen this same condition in patients before. He took the child to a special room containing nothing but a huge pile of horse manure. The young boy immediately began digging into the pile of manure with his hands.  The little boy gleefully cried out for everyone to hear “With all this manure, there must be a pony in here somewhere” which confirmed the diagnosis.

The best venture capitalists I know are optimists.  Great venture capitalists power through bad news like that young boy pushed through manure in that pile. They are also tireless when doing things like helping recruit the right employees for their portfolio companies, connecting with potential limited partners and receiving rejection after rejection.  Ann Winblad’s experience is also another story of people finding success in doing things at what otherwise seems to be the worst possible time.


12. “Mary [Gates] was an amazing person. She clearly was a great mother because she has three great children [including Bill Gates] ; a great wife; she had a great and loving husband. Mary herself was active in the schools, on the board of the University of Washington, on multiple other boards. Whenever you would meet Mary, you got a handwritten thank-you note. And she always looked put together, she never looked tired, she always was present in the moment. I said to her, thirty years ago, ‘Mary, how do you find time for all this?’ At this point in time, I am a relatively young venture capitalist, I’m not on that many boards, I haven’t yet joined my university board, I haven’t joined a nonprofit board yet. She said, ‘You know Ann, it’s amazing how much time you really have, and how much time you waste, and how much time you can find for others, how much time you can find to sit down quietly and thank others, how much time you can find for kindness, let alone how much time you can find for contributing your own intellectual capital as well as your financial capital. As you get older you’ll find that you actually get even better at that.”’ And that was a real inspiration to me, to say, hey, it’s not about how fast you pedal, it’s about how clearly you focus.” Other than my own family, Mary Gates and her husband Bill have had more to do with who I am as a person than any two people anywhere. She was a dynamo and far ahead of her time.  Mary was whip smart and was liked by everyone she met.  She was on many boards before it was common for women to do so.  She helped many people. For example, she was the person who convinced me to work in the mobile industry in the 1980s. She knew about the opportunity because she was on the board of one of the very first “cellular” companies. Her friendship with my mom went back to the time they were in college together. They both had breast cancer at the exact same time. Mary Gates wrote a beautiful hand written note to my mom about their fight with cancer. My mom is still alive, but tragically Mary Gates did not win her battle. People like Ann Winblad still carry on this tradition of being role models for women everywhere.


TheTech – An Interview with Ann Winblad

Business Insider – VC Legend Ann Winblad

Innovation America – 8 Questions for Ann Winblad

NCWIT – Interview with Ann Winblad 

Wired – Ann Winblad, Adventure Capitalist 

Berkeley Digital Assets – Interview with Ann Winblad


A Dozen Things I’ve Learned from Jim Breyer

1. “I’ve learned that when the pessimism is high, dial up the investment pace. When the optimism is high, take a breather.” This is a version of Warren Buffett’s admonition that investors “should try to be fearful when others are greedy and greedy when others are fearful.” This is easy to say but hard to do, especially since the desire to run with the crowd can be so strong in humans. Most investment mistakes are based on emotional and psychological errors but so are most investment opportunities since it is when others make mistakes that mispriced assets become available.  In short, being contrarian based on the bi-polar actions of the mob can generate market beating investment returns.  To Jim Breyer’s credit, he was very cautionary prior to the pop of the Internet bubble, and took a lot of heat as a result. He was wrong in his prediction until he was eventually right.  Jim Breyer recalls that in:  “March [2000] — which actually was the precise market top — Whoopi Goldberg was a dinner speaker. And the fact that Whoopi was coming up and talking about how wealthy these Silicon Valley entrepreneurs and venture capitalists were and what a great life it was (and she had some ideas as well) – that to me was a sure sign the end was pretty darn close. But she was a great speaker, by the way..”


2. “Investing is very psychological, whether you’re Warren Buffett, whether you’re early-stage technology venture capitalists, psychology plays such a central role.” All successful investing styles and systems share certain common fundamental elements (buy at a bargain, discover value rather than predict it, be contrarian to beat the market, etc.).  But the most common element of all is that the hardest part about investing is keeping control of your emotions and other psychological factors. As Warren Buffett has said: “Investing is simple, but not easy.”  Jim Breyer is saying that what is not “easy” is investor psychology.


3. “There’s a pattern recognition and real-time knowledge that comes with investing and building companies from the earliest stages over a long period of time.” Becoming a successful venture capitalist takes time, since pattern recognition comes from making a range of mistakes that help one acquire good judgment. One key to this process is avoiding certain mistakes that fall into what Daniel Kahneman calls “System 1.” Michael Mauboussin describes the two types of thinking as follows: “System 1 is your experiential system. It’s fast. It’s quick. It’s automatic and really difficult to control. System 2 is your analytical system: slow, purposeful, deliberate, but malleable.”  Mauboussin provides the right cautionary note: “for System 1 to work effectively, you need to deal with situations that are linear and consistent. If you’re dealing with decisions in a realm where the outcomes are nonlinear or the statistical properties change over time, intuition will fail because your System 1 doesn’t know what’s going on.”

Investing decisions are best made as System 2 decisions since the complex adaptive systems involved are nonlinear. When you use System 2 in the right way, the power of counter-intuition can be a big source of investing opportunities. Using System 2 properly requires training so that investors have the right “muscle memory” when a decision needs to be made.


4. “We like to think that we will make a mistake only once and learn from it. We also are humbled every day by a new mistake.” If you are making the same mistakes more than once something in your investment process is broken. For example, as I noted above, one important set of problems arises due to unthoughtful reliance on System 1 thinking. By becoming more aware of the investment decision making process one can work to shift thinking from System 1 to System 2 when it is appropriate. To acquire the right decision-making muscle memory it is important to rub your nose in mistakes when you make them or shortly thereafter. The natural human tendency is to gloss mistakes over with psychological denial. By celebrating rather than burying mistakes, you learn faster.


5. “The investment and venture capital cycle is continuously changing, and one of the most fascinating internal discussions is often around where we are in the cycle.” “We will have many booms and busts forever in Silicon Valley.” All markets are cyclical. Venture capital is more cyclical than other markets, not less. One of the most talked about tells for a change coming in the business cycle is when people start to talk about there being no cycle. People don’t make decisions independently, and when one person moves people tend to follow other people until they unpredictably don’t. The idea that the sequence of behaviors that make up a business cycle is precisely predictable, given that a nest of complex adaptive systems is involved, is folly.  One can at best hope to make general forecasts about the probability of a shift in the business cycle, which can help with investing.


6. “The dangers of over-capitalization are, in many cases, even higher and more grave than under-capitalization.” “We’ve always said was that risk reduction is all about, in the first 12 months, take out the technical risk; in year two, take out sales and marketing risk; in year three, build for working capital and international distribution; year four, take the company public. That’s a classic venture model in terms of how we stage investment. But, in fact, [during the Internet bubble] there was no staging. There was no risk reduction that was occurring, because the capital was so free, the companies could raise it all at once, and were simultaneously trying to address all these issues.” Biggie Smalls put it best: “Mo Money Mo Problems.”  Too much money at a startup can cause a range of problems including a lack of focus and a failure to innovate.  Too much money can also wreck a capitalization table, make later financing rounds hard to achieve and a down round inevitable.


7. “We  look for a business plan that demonstrates differential insight.” If you are not searching for ways to be contrarian and right about that contrarian view, you are not going to outperform markets as a investor. This applies at many levels and domains in investing, including the process of defining a target market for a start up. Startups that chase the tail pipes of other startups and companies are less likely to be a success.


8. “Most of the best businesses in Silicon Valley started with a very simple concept and extended into adjacent market segments as well as into global markets.” Focus matters, especially in the early months of a startup. It is also helpful for a startup to be in a market in which there is not a lot of competition, until the business generates a strong base from which to build into adjacent markets.


9. “We are always looking for fit between people, opportunity, ideas.” “The balance between optimism, candidness, intellectual honesty, and integrity results in a virtuous set of characteristics that are shared by all exceptional entrepreneurs.” Michael Porter is a big advocate of including fit as an objective in creating a company strategy and in assembling a moat for a business: “Fit drives both competitive advantage and sustainability: when activities mutually reinforce each other, competitors can’t easily imitate them. Fit is leveraging what is different to be more different.” This brings to mind the Charlie Munger idea of a lollapalooza. Munger has pointed out that that the impact of a lollapalooza involves vastly more than simple addition of the components which are interacting.


10. “The history of technology businesses, as well as many others, suggests that it’s very often the case that the second or third mover ends up winning … Sometimes it really pays to let someone else create a market and be the second or third entrant. That’s true in the spreadsheet business with Lotus. That was true in the personal computing business with Dell; true in the router business with Cisco; true in the operating system business with Microsoft.”  Markets “tip” later than many people imagine, and sustainable competitive advantage (moats) can also end up being far more brittle than people imagine.  My friend Craig McCaw has said to me many times that “sometimes pioneers get an arrow in the back for their efforts.” I also recently quoted Peter Thiel on this topic:  “More important than being the first mover is the last mover.”


11. “In every deal I can think of, there’s a dark day when board members sit around the table and simply wonder how we can dig ourselves out of the hole we’re in.” Many very successful startups nearly expire in the early months and years of building the business. Successful venture capitalists know this and don’t easily give up.  Knowing when it is really over for a startup vs. when it is time to fight on is a skill acquired with time and experience (and the right sort of System 2 analysis).


12. “Some people get real lucky….But that’s no way over a long period of time to operate a venture capital firm or an investment business. It sure helps to get lucky, but you can’t count on it.” To count on luck bringing you success or to discount the role of luck in your success is just plain dumb. If you are not thankful for your luck, and not more humble as you grow older, you have not been paying attention. As always, Michael Mauboussin is preeminent on this topic of luck vs. skill in a recent interview.


Notes on Breyer:

PBS – Jim Breyer Frontline Interview

Harvard Business School – Jim Breyer Interview

Forbes Midas List – Jim Breyer


Mauboussin quotes: 

Morningstar  and Martin Kronicle interview

A Dozen Things I’ve Learned from Andy Rachleff

1. “When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” “If you address a market that really wants your product, if the dogs are eating the dog food, you can screw up everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.” A great product in a great market can make an executive look great, regardless of skill. Similarly, when a talented executive tries to achieve success with an offering that is lousy or the market is lousy, the result is inevitably lousy. Warren Buffet has expressed a similar thought: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Andy wants great management and a great market when he invests. One big difference between Andy Rachleff and Warren Buffett is that as a venture capitalist and entrepreneur, Andy builds new moats.  Warren Buffett and Charlie Munger make it clear that they only buy existing moats. Building new moats and buying existing moats are very different objectives, involving very different skills and talents.


2. “A disruptive product addresses a market that previously couldn’t be served — a new-market disruption — or it offers a simpler, cheaper or more convenient alternative to an existing product – a low-end disruption. …Silicon Valley was built on a culture of designing products that are “better, cheaper, faster,” but that does not mean they are disruptive.” Wealthfront, which Andy founded,  is an example of a company providing people with services which could not have been offered before the software-based innovations that are robo-advising. In other words, small accounts served by Wealthfront could not previously have been served by traditional advisors without higher fees, loads and costs.  The lower fees are enabled by technology and new sales channels. One thing I love about Andy making this set of statements about disruption, is that he said publicly that he did not really understand disruption fully until he founded Wealthfront. That sort of intellectual honesty is what makes people succeed in life. Charlie Munger likes to say that if he does not destroy one of his most cherished ideas every year, it is a wasted year.


3. “Instead of starting with the market and then finding the product, the really big winners start with a product and find a market.” Finding a product or service that delivers a 10-2,000X financial return happen much more often when the entrepreneur is harvesting something that is nonlinear, and that comes from a technology rather than something that is just marginally cheaper.  Discovering really big new markets can be especially profitable.  Andy’s friend  Bill Gurley has a masterful essay on total addressable market definition here.  


4. “It’s very difficult to manufacture innovation.” “Great entrepreneurs are far more missionaries than mercenaries. The missionaries are true to their insight, and the money is secondary to it. Mercenaries, whose primary goal is money, fall somewhere on the middle of the entrepreneur bell curve. They seldom have the desire to change the world that is required for a really big outcome, or the patience to see their idea through. I don’t begrudge them their early payouts. They’re just not the best entrepreneurs.” Since only ~15 tape measure home runs a year are what drive venture capital returns, the odds that the same person will get lighting in a bottle at that level multiple times are small. A given person hitting more than one of those home runs is possible, but that ~15 number is a top down constraint on the total number of people who succeed at that level. People who flip the business early or midstream usually don’t last long enough to do this. Experience has shown that it is very likely to be genuine passion and domain knowledge, and not what Andy called “manufacturing innovation,” which produces those ~15 tape measure home runs.

5. “We never meet with companies that aren’t referred or where we don’t know the entrepreneurs.” “It’s sort of a test, if you can’t get an introduction [to the venture capitalist] you are unlikely to succeed in selling the other constituencies.” Being an entrepreneur requires effective selling in the broadest sense of the word. The entrepreneur must sell ideas, prospective employees on jobs, products and services, partners, investors, the media, etc.


6. “[Venture capital is] a very cyclical business. So there was a cycle from 1980-1983 that looked a lot like 1996-1999. Only an order of magnitude smaller on every dimension.”  “I don’t think a bubble is an environment where things are valued highly, I think it’s an environment where crappy companies are valued highly.”  Andy Rachleff, Bill Gurley and many other investors are fans of Howard Marks like I am.  Howard is fond of pointing out that business cycles will always exist and the best approach is to expect their inevitable and unpredictable changes.  All markets are cyclical and always will be.  Venture capital is no exception, and is in fact more cyclical that many other markets.  The timing of business cycles in different industries and sectors is often not synchronized.  As Bill Gurley has pointed out,“venture capital has long been a trailing indicator to the NASDAQ.”


7. “All our advice on Silicon Valley careers is based on a simple idea: that your choice of company trumps everything else. It’s more important than your job title, your pay or your responsibilities.” Feedback is what’s driving returns today in markets, and as Reid Hoffman has said, what company you work for and who you learn from matters more than ever. Networking “early and often” is an excellent approach to business and life especially in a digital world.


8. “Human beings want returns, but they don’t like risk.” Most people talk a good game about risk and uncertainty but will typically back off when it comes time to actually do anything.  Some of these people are your really smart classmates who have never gone anywhere financially in life. People who are comfortable with risk earn a premium as a result of the risk aversion of other people. Ironically, people who are oblivious to risk sometimes also get lucky and earn that same premium (even a blind squirrel finds a nut once in a while).


9. “It doesn’t matter how many losers you have, all that matters is how big your winners are.” “You can only lose 1X your money [as a venture capitalist]. “[As a venture capitalist] you make bets and you have to be willing to be wrong a lot…. It’s one of the few industries I know of where you can be wrong 70% of the time and be brilliant.” If you have been reading this series you recognize that Andy is talking about what I have called “harvesting optionality.”  A tape measure home run hitter can strike out a lot and still be great. It is magnitude of success and not frequency of success that matters most for an investor.


10. “When it comes to investing in venture capital I would follow the old Groucho Marx dictum about ‘never joining a club that would have you as a member.'” The very best venture capital firms and startups don’t need your money. This fact is a byproduct of cumulative advantage and is reflected in the power laws that drive venture capital returns. Andy Rachleff writes: “only about 20 firms – or about 3 percent of the universe of venture capital firms – generate 95 percent of the industry’s returns, and the composition of the top 3 percent doesn’t change very much over time.”


11. “Investment can be explained with a 2×2 matrix. On one axis you can be right or wrong. And on the other axis you can be consensus or non-consensus. … Now obviously if you’re wrong you don’t make money. What most people don’t realize is if you’re right and consensus you don’t make money. The returns get arbitraged away. The only way as an investor and as an entrepreneur to make outsized returns is by being right and non-consensus.”  All the investors in this series on my blog understand that you cannot outperform a crowd unless you are sometimes contrarian, and right enough times when you decide to be a contrarian. Many people first heard this idea from Howard Marks, but if you trace the idea back even further it leads to Ben Graham  and before him John Maynard Keynes.


12. “Other than my wife, Bruce Dunlevie is the most influential person in my life. His advice was to always put the gun in the other person’s hand. In other words, if you are in negotiations with someone, you tell them to tell you what they think is fair, and then you do it. It’s a much better way to live to give trust first, rather than to make someone prove he is trustworthy.” Bruce Dunlevie is someone I have learned a lot from, especially about being a thoughtful, well-rounded and trustworthy human being. Having a colleague who has these qualities is a fine thing to have in life.  As a bonus, when you develop a network of high quality people who you can trust, you have what Charlie Munger calls a “seamless web of deserved trust” – which enables efficiency and better financial returns. But that should not distract anyone from the fact that being a good person is its own reward.


Notes: PandoDaily – What makes for a great entrepreneur?  

TechCrunch – The Truth About Disruption

This WeekIn Startups – Andy Rachleff, CEO Wealthfront

Stanford Graduate School of Business – Andy Rachleff: How To Meet VCs

Wealthfront blog – Demystifying Venture Capital Economics

SiliconMBA – Deep Thoughts From Andy Rachleff

A Dozen Things I’ve Learned from Peter Thiel


1. “Great companies do three things. First, they create value. Second, they are lasting or permanent in a meaningful way. Finally, they capture at least some of the value they create.”   “More important than being the first mover is the last mover. You have to be durable.”  “The most critical thing for every startup is to be doing one thing uniquely well, better than anybody else in the world.” This set of statements in my view is about what Michael Porter calls “sustainable competitive advantage” (AKA, moats). Yes, you must create new value to be a great company. But unless you capture some of that value as producer surplus in a sustainable way, the only beneficiary is the customer. One of the best explanations of this value capture point is in Charlie Munger’s fantastic Worldly Wisdom essay:  “there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.


2. “Maybe we focus so much on going from 1 to n because that’s easier to do. There’s little doubt that going from 0 to 1 is qualitatively different, and almost always harder, than copying something n times. And even trying to achieve vertical, 0 to 1 progress presents the challenge of exceptionalism; any founder or inventor doing something new must wonder: am I sane? Or am I crazy?” Doing something that has never been done before is genuinely hard enough that many people consciously or subconsciously would rather chase the tailpipes of others than genuinely innovate “from 0 to 1.” Failing conventionally, rather than succeeding unconventionally, is unfortunately the path chosen by many people.


3. “We see the power of compounding when companies grow virally. Successful businesses tend to have an exponential arc to them. Maybe they grow at 50% a year and it compounds for a number of years. It could be more or less dramatic than that. But that model—some substantial period of exponential growth—is the core of any successful tech company. And during that exponential period, valuations tend to go up exponentially.” It is nonlinear phenomena which drive the 10-2,000X tape measure home runs a venture capitalist needs to be successful. Straying too far from a nonlinear phenomenon like Moore’s Law can be harmful to a venture capitalist’s financial health. For a some great data on the sort of growth one needs in a venture capital backed startup, I suggest you try this video of a Jules Maltz talk from the recent PreMoney conference.


4. “You’re going to start a business you might as well try to start one where, if it works, it will be really successful, rather than one where you’re competing like crazy with thousands of people who are doing something just like you all the time.” That most people misprice the value the value of optionality is the core driver of the venture capitalist trade. Without mispricing, there is no alpha. And the prime territory for optionality is not where thousands of people are looking.

5. “Consider a 2 x 2 matrix. On one axis you have good, high trust people and then you have low trust people. On the other axis you have low alignment structure with poorly set rules, and then a high alignment structure where the rules are well set.  Good, high trust people with low alignment structure is basically anarchy. The closest to this that succeeded is Google from 2000 to maybe 2007. Talented people could work on all sorts of different projects and generally operate without a whole lot of constraints. Sometimes the opposite combination—low trust people and lots of rules—can work too. This is basically totalitarianism. Foxconn might be a representative example. Lots of people work there. People are sort of slaves. The company even installs suicide nets to catch workers when they jump off the buildings. But it’s a very productive place, and it sort of works.”  The low trust, low alignment model is a dog-eat-dog sort of world argues Thiel. It’s best to avoid this combination. The ideal combination in his view is high-trust people with a structure that provides a high degree of alignment since people are rowing in the same direction, and not by accident. Equity incentives, properly structured, are an important way to think about alignment in startups.

 Peter Thiel's Matrix 

6. “Angel investors may have no clue how to do valuations. Convertible notes allow you to postpone the valuation question for Series A investors to tackle. Other benefits include mathematically eliminating the possibility of having a down round. This can be a problem where angels systemically overvalue companies…. If you must have a down round, it’s probably best that it be a really catastrophic one. That way a lot of the mad people will be completely wiped out and thus won’t show up to cause more problems while you start the hard task of rebuilding. But to repeat, you should never have a down round. If you found a company and every round you raise is an up round, you’ll make at least some money. But if you have a single down round, you probably won’t.”  Valuation is hard. There are (according to one count) 135 micro VCs and thousands of individual angels out there, able to mess up a capitalization table via a poorly chosen valuation.

7. “A robust company culture is one in which people have something in common that distinguishes them quite sharply from rest of the world. If everybody likes ice cream, that probably doesn’t matter….you also need to strike the right balance between athletes (competitive people) and nerds (creators) no matter what.” Peter Thiel is describing some of the core elements of a winning culture: a shared unique mission and the right mix of passionate people.  Great leaders know how to create that mix. Great investors can spot the right mix of people via pattern recognition and good judgment.  As Will Rogers once said:  “Good judgment comes from experience, and a lot of that comes from bad judgment.”


8. “VCs …rely on very discreet networks of people that they’ve become affiliated with. That is, they have access to a unique network of entrepreneurs; the network is the core value proposition…” This statement tracks with my post on Reid Hoffman and I won’t repeat this discussion here other than to say that personal networks of all kinds matter more than ever as the world: (1) becomes more and more digital and (2) moves more and more towards Extremistan .


9. “The founders or one or two key senior people at any multimillion-dollar company should probably spend between 25 percent and 33 percent of their time identifying and attracting talent.” Hiring the right people will first and foremost drive the success of a business. The people who do this well have great pattern recognition skills, which is again a part of good judgment. A top venture capitalist said to me once: “When I see the right team I feel like I have seen the pattern before. The people and chemistry will not be exactly the same as other successful teams, but there is nevertheless a pattern. Not the same and yet still familiar.”


10. “Hubris is an issue at every one of these Silicon Valley companies that are successful.” It can be hard to know a lot about some things or even many things and yet still be modest enough that you know you don’t know everything. Finance writer Morgan Housel absolutely nails it when he writes: “there’s a strong correlation between knowledge and humility.” Charlie Munger has said that he seeks “intellectual humility” and has pointed out that “acknowledging what you don’t know is the dawning of wisdom.”  


11. “As an investor-entrepreneur, I’ve always tried to be contrarian, to go against the crowd, to identify opportunities in places where people are not looking.” I moved this point to near the bottom of my list for this post since it has been consistently on top in other posts in my series on successful venture capitalists. But I include it nevertheless because it is such a vital point to understand. You can’t do better than average by being average. If you can’t be courageously contrarian, you are guaranteed not to beat the market as an investor.  


12. “Actual [venture capital] returns are incredibly skewed. The more a VC understands this skew pattern, the better the VC. Bad VCs tend to think the dashed line is flat, i.e. that all companies are created equal, and some just fail, spin wheels, or grow. In reality you get a power law distribution.” Every top venture capitalist understands this point on power laws in venture capital since it is obvious from the performance of their portfolios. To use a baseball analogy, you can’t play “small ball” in venture capital and succeed financially. Venture capital and value investing are both systems designed around discovery rather than forecasting. A value investor buys mispriced assets at a bargain and waits. A venture capitalist buys mispriced optionality at a bargain and waits. While a value investor waits, they read and think a lot. While the venture capitalist waits, they work hard to help portfolio firms with hiring, sales and distribution etc. – knowing 50% of bets will be a total loss.


PandoDaily – Sarah Lacy’s Fireside Chat with Peter Thiel

Blake Masters Essays – Peter Thiel’s CS183: Startup – Stanford, Spring 2012