I thought this was a great podcast so here are some notes and thoughts. As the CEO and Cofounder of Zenledger.io, I found a lot of insights here.
Thanks to Patrick O’Shaughnessy and Charlie Songhurst, the former head of strategy at Microsoft and a prolific investor, having personally invested in nearly 500 companies through his career.
Success is very hard to study. Breakout successes like Amazon or Facebook are very idiosyncratic. There aren’t a lot of lessons to be learned that you can apply to your startup or to your investments. Of course, you should try to invest in or start special companies. You should simply not expect to have a very high batting average if you are going for a $1T market cap.
The best you can do is try to look for investments and ideas that have a chance. Then look for the situations where those chances are better: location, information advantages, less competition, changing technology, changing customer profile, recruiting advantage, or expanding TAM.
You can however study failure and avoid it. What are all the common failure modes? Study how to get your startup past all the common early failures so you can move up the experience curve. Survive long enough to get good. Charlie Munger also advocates this approach. Successful founders who are now billionaires make things look easy- but from the outside you don’t see their years of failed initiatives, bad hires, or poor strategy decisions. You don’t see all the things they know not to do and know how to do now.
Who to Invest In? Founder Characteristics
- Prototypical founder. Punches everything on the list.
- Anti founder. Does everything not by the book but still succeeds.
- Copycat. Simply watches what is succeeding and copies but with better sales execution, beating the competition that way. Fast follower.
Success is idiosyncratic, so it is hard to tease out of “what to look for” in founder/idea fit.
Birds of a feather flock together.
Some investors like gritty, concrete companies. Tangible stuff.
Some investors like ethereal, abstract companies. Intangible stuff.
Make sure you are pitching the right types of investors. Don’t pitch AI to an industrials investor.
Interesting vs Complex Businesses
You want highly boring and highly complex businesses to invest in (Salesforce, Tableau, Workday, Data dog).
You also get less entrepreneurs entering, so less competition. You can differentiate and avoid commoditization.
If it’s interesting but simple- you get commoditization. Flood of competition like moths to a flame.
If it’s interesting and complex- you get tons of smart people who want to tackle it. Space Tech, AI, Biotech. The space is filled with geniuses who love their work. High competition.
If it’s simple but boring, you have difficulty attracting and keeping top talent (Twitter, Lime, Blue Bottle).
Your basic problem in 1990 was that you had a lack of information.
The problem you have in 2020 is the filtering of information. You can find a second stage filter. Have friends and colleagues that are great filters of information and analysis for you.
Hang out with smarter, hard working, morally better than yourself- you are dragged higher. They will also create unique lenses on the world that create unique opportunities. Geographically disparate networks and travel help you gain insight. Avoid defaulting to a US perspective on everything.
If you are interested in other people, you will eventually become interesting. Get out there and mix it up.
It’s hard to be smarter than everyone else. It’s easier and better to have a unique insight because you inhabit a unique position (like seeing Xero become big where almost no one watched NZ based SaaS accounting listed in Australia). Less competition and more runway to grow and hire well.
If you have a diverse set of friends, colleagues, and reading- you are likely to have different insights than those who are more narrowly focused. Sometimes narrow focus wins, sometimes broad focus does.
Talented people have more options than ever. To increase your chances of hiring well, the best thing you can do is compete on variables you will win. If you are trying to hire people who can go work for Stripe, you are going to lose. Hire talented people who are going to choose between your startup and working at a stodgy industrial company. Beat up lesser competition rather than trying to win against their fiercest competition.
Songhurst lays out 3 things on how to win a hire:
- Make hires where you have the advantage and competition is not too high.
- Fit. Paint a vision where they want to spend their time and energy in. Understand what motivates them.
- They want to be in a gang that will succeed and be a fun adventure with great rewards and impact.
Songhurst notes that if you make a poor hire, the speed with which you part ways is a great indicator for the quality of the startup.
Also, early hires have a gigantic influence on the future of the company and so they hiring must be very purposeful. If you are hiring an executive and they are going to do more hiring, the impact is even greater. You should be willing to spend 100 hours to find the right person that will add 10% or 100% to the firm value while also reducing the risk of failure. These people should be exception individuals who are also synergistic with the team. They have to fit well into where you are now and/or where you where to go.
Don’t panic hire. Startups should not hire so quickly right after each capital raise. They should take their time. Or start recruiting before the raise.
As startups raise more capital, they accelerate their hiring speed and naturally decrease the quality and fit of those they hire. You can ruin your company by hiring too fast and too poorly. You can see 100 person companies that are much less productive than they were as a 10 person startup.
Songhurst recommends you go 100% remote if you are going to do it. If you are a mix of headquarters and remote then your culture will become highly politicized with headquarters people getting the promotions.
Headquarters. Consider founding your company in a city or country that is not as competitive in terms of talent. Boise vs San Francisco. Romania vs USA.
Where to invest or found your company?
Geopolitical conflict is what absolutely wipes out investments. It is the number 1 destroyer of capital throughout history. Even markets that seem stable with a great business environment, a robust court system, and plentiful talent can suddenly change (e.g., Hong Kong).
In Europe- you have an absence of conflict. France and Germany will not fight each other due to the scars of two World Wars and decades of defense underinvestment. Songhurst thinks that stability is underpriced.
Songhurst sees many startups that are based in Eastern Europe, hiring locally, organized as a Delaware C-corp, addressing global markets. The US has a high trust legal system. Soviet era math/logic education was high quality in Eastern Europe. The cost of labor is low there.
COVID impacts on business strategy
- Tech acceleration of everything. Ecommerce, video conference, games. Permanent one off shift. Some people will shift back to 2019 norms but not everyone will.
- Commonality of investing in geography seems to not make as much sense as investing in an industry. AI companies around the world have more in common than different industry companies all headquartered in the same city or country. Remote companies mean massively higher output because you can hire the best from anywhere. So, this will drive movement of talent out of cities as they work remotely.
Evaluating Business Strategy
Quantitative analysis is great at evaluating unit economics and seeing if the firm can be profitable. Highly quantitative analysis will always miss the expansion of a market and disruption. Quantitative analysis of the iPhone would say the market size is all phones rather than phone, communication, mobile computing, games, streaming, etc. You’ll miss the boat.
Qualitative analysis can overestimate the size of the market. Most companies never, ever achieve the network effects or multi-sided market they needed to make their business work. Most data is worthless or easily substitutable and offers no real edge. It may be that the last 5 credit card purchases and the last 5 likes and the last 5 queries all have the same predictive power and so you just need some set of data and not “your” set of data. “The Value is in the Data” is the last gasp of many failing startups whose unit economics do not work.
What is the Most Misvalued Asset?
Songhurst thinks that investing in entrepreneurs in markets that are not obvious is a source of alpha (an investing edge). People who are addressing global problems in secondary cities in Romania have a cost and talent advantage.
Something strange about finance is that it is demarcated by nation state borders when it’s a pure electronic good. It’s just numbers in the sky. It should be globally scalable and it’s being hindered from being so.
Globalization of finance companies seems like a big opportunity. Will finance see a brain drain, losing talent to other fields and entrepreneurship?
US and China are exclusively the holders of the Top 20 market cap globally. Will this persist?
Startups are temporal in their abilities
The necessary precursor tech to big cities is sewers. It’s fundamental. The base technology to our economy is double entry accounting and clean water.
The difference in being too early and being a huge success is perhaps 1 or 2 years. Did GPS and mobile tech make something like Uber inevitable? Someone would have had the business idea eventually. It wasn’t born of great insight but the accumulation of all the necessary components “in the world”.
Is Angel investing purely stacked on top of AWS because it lowered the capital requirements for startups from buying servers to buying something cheap and scalable?
What if all AI is driven by Invida chips? Intel chips and modem speeds did not capture the value in the 1990’s, 2000’s.
What are the digital equivalents where you’ll have great economic capture because they are economically repellent?
Crypto before 2017 would be that. Too abstract and too silly.
Crypto is non-analogous to anything previous to it. Bitcoin and Ethereum- shilling points at investor personality type and economic case. No competition between them.
How is Wealth Preserved
If you study history, it’s interesting to ask yourself how you would invest through incredibly tumultuous times. How would you invest in any 50 year period in the Roman empire?
Forestry actually preserves wealth well. It is so boring that no one bothers to seize it during a revolution. If you get invaded or there is a civil war- forestry is left alone- unlike financial assets, art, farms, or factories.
The cash flow characteristics of forestry are 50 years long- they are terrible. So there is very low competition. You are left alone.