I’m in the process of closing a new investment right now and getting to know this CEO has been a particular joy. There is a long road ahead, but it’s a great sign when we can start off just being honest with each other.
As an entrepreneur I got terrible advice on how to relate to investors from fellow founders. One CEO described his “attachment method” of overly communicating to create the sense of ownership that would make a VC keep giving them money. Then another would tell me to never give the slightest detail of the business because it just gave them the ammo to think they can control you. The problem with these approaches is that they assume there is some formula for how to win at managing an investor.
A CEOs relationship with an investor is exactly that, a relationship. And just like there is no “paint by numbers” template on how to interact in a marriage there is not a single right way for the CEO - VC relationship.
Aileen Lee wrote a very interesting piece on Techcrunch where she lays bare some of the analysis she has done on “Unicorns” - or startups that have entered the $1b club.
It’s a rarified club, to be sure. In fact, it’s enough of a rarified club that I would call into question any conclusions one would assume by Aileen’s analysis. The long version of why this is not a good idea was the subject of my last post, but the short version is this: 39.
The starting data set is 39 companies, and perhaps it’s a bit more than that as people expand the list, but it’s a pretty small number no matter what. A number that small is just hard to reach any definitive conclusions with.
Anyone who has done a controlled study has seen many situations where the first 10 results you get point in the exact opposite direction of the later conclusion. For instance, right now the conclusion is that nearly half of the co-founders in “Unicorn” companies have worked together in school. But, if the four unicorns from this year happen to have met after college, then that number could drop to 40%.
Most early stage Venture Capitalists use very little data when investing. It is largely a world of intuition, relying on mutual relationships, and in some cases sector knowledge or thesis development.
But that tide is shifting. Today there was an article on how Steve Blank now thinks accelerators should go the “Moneyball” route. As “big data” gets more popular, the idea of using a quantitative approach to help make better early stage investment decisions is becoming more frequent. As Rob Go recently wrote, there is a strong rise in the number of VCs employing data scientists, and a couple have even made a firm-wide bet on being entirely data driven.
Unfortunately most of the press coverage of this trend generally falls into a very surface level narrative about “quantitative vs qualitative” investing. That is, early stage investing is about gut belief and vision, and you better not try to rely on numbers to make a decision. This is a false conflict, and blinds us to the fact that data, properly applied, doesn’t deter our intuitive senses it informs them.
"Quants vs the Scouts"
I think the best illustration of how the “qualitative vs quantitative” argument is false is to examine how Moneyball in baseball actually worked. The story depicted in the book was, partly for dramatic purposes, presented as a “quants vs intuition” situation. But that’s really an oversimplification.
I got into a debate this afternoon about human behavior. A friend was trying to explain why the phenomena of “stickers” — which are a huge feature of Asian messaging networks like Line, would never catch on in Western countries.
Honestly, I could care less about the specifics of stickers. But the perspective is one I disagree with. It felt like the same conversation I was having about emoji a few years ago, or about western social networks like MySpace before that, or about free-to-play MMOs a few years before that.
In each case the conventional wisdom was that these were regional cultural phenomena that will not translate across the globe. In each case that view was wrong.
Now I’m sure there are examples of things that are purely localized culture, but these things are becoming fewer and fewer. We should keep in mind that as products hit scale they are more likely to be touching on basic human needs and desires.
Toys are not really as innocent as they look. Toys and games are preludes to serious ideas — Charles Eames
My friend Ivan wrote a post today on how companies mismanage 10x employees, and more broadly on how people should be judged on the output of their work not the hours they put in.My thinking on judging employees solely on output moved 180 degrees after actually trying to act on it.
This is one of those ideas that sounds great in the individual case, but often causes a very negative chain of events. Let me at through what I’ve seen happen, and then the one exception to the rule.
My first experience with 10x employees was a CTO at a high growth startup in the late 90s called internetsoccer.com. The CTO could have a huge impact even in short spurts, the kind of person that could spend an hour and make breakthroughs that would last weeks.
He also had some personal issues he was working through, so he wasn’t around the office all that much. His conversations with his team, and with the rest of us as executives, was that he was having equal or more positive impact in his 20 hours a week than other people were in their 60 hours. And at first we all agreed, it felt like the meritocratic thing to do.