My last post was about my performance over the past 11 years. Read about it here. This time I’m writing about how I do what I do.
I’m a bit of a misfit and always have been. When I was a kid, I was making art when everyone else was playing with swords. In my teens, I read classical literature instead of playing video games. In college, I didn’t move into student housing until my senior year (then moved out as fast as I could). I didn’t work the required 2-3 years between undergrad and business school, I jumped right in. Early in my career, I didn’t job hop to optimize salary and position, I stayed put, worked hard and (relatively quickly) moved up. I’m “different” and over the years I’ve learned to “own” it because it’s worked for me.
Similarly, when it comes to venture investing, my approach is different from many investors. Most early-stage investors go for:
- Large Portfolio Size: Many people believe you need a massive (think 500 Startups), diversified portfolio to get hits. I believe that’s a strategy but not the only strategy. I have shown you can get outsized returns with a tight portfolio (11x in 11 years) — which takes selectivity, restraint, focus and sometimes intensive founder support. I go for selectivity and support over portfolio size.
- Major Startup Hubs: Many people believe you need to live in one of the major markets. I live in Miami, not Menlo Park although I do spend a lot of time in NY and SF. I do deals where I find them…Seattle, Edmonton, Miami and of course the major markets. I don’t screen out companies based on their location as others do. Valley VCs didn’t want to do OfferUp’s seed because the company was in Seattle. I go wherever I find a great company (within reason).
- Hot deals: Many people believe you have to be in the hottest, highest-profile categories chasing incendiary deals where every firm is fighting for allocation and those with the inside track win. I’m sure it works for some but it’s not the only way to win. It may be essential at the Series A and beyond stages but not so much at the Seed stage. Some of the greatest unicorns lost the “hot or not” match up at the seed stage. Just talk to those founders and they’ll tell you how hard it was to raise their first round. I don’t jump on noisy bandwagons. Sorry for the mixed metaphors. Even though I was the CEO of Second Life and learned a lot about virtual reality and virtual currency (both Second Life and the Linden Dollar were the largest virtual worlds and virtual currencies at that time), I haven’t done a VR or Cyber Currency deal although I’ve had good deal flow. I think we’re still at an early stage of development in both areas. When the right company comes at the right time I’ll jump in. Nor do I shop hot “trends” like AI. Yes, I like AI applied to a very specific business problem but I don’t get hung up on the fact that it’s AI solving that problem. I didn’t invest in Blackbird because it used AI to power amazing visual search results (their side-by-side comparisons were breathtaking.)…I liked the tremendous business benefit that the company could provide to its customers. I don’t look for hot deals, I look for great companies.
- Major Market Visibility: I’m not above, or even in the crowd. I don’t hang with the cool kids south of Market. I didn’t work at Facebook or Google or graduate from Stanford. I’m not on a hit TV show. I don’t party with celebs. I’m not a prolific blogger, Tweeter or Quora contributor (although I am a HUGE consumer). Sure, I’d like to be famous but chasing that isn’t my thing. I avoid the accelerators and I don’t enjoy conferences (except TED — yea, yea I know it’s not a conference). But I do cultivate my network — which I’ve built assiduously over decades — so I’m blessed with great (and sometimes overwhelming) deal flow. And I prospect actively. When I see something I like, I call on the founder (e.g., Twitter, HomeLight and TheRealReal).
- Proprietary Deal Flow: Some investors believe you have to have proprietary deal flow to drive returns. What does that mean when everything is on Angel List or comes through an accelerator? At one time it was about proprietary flow…but now – more than ever – I believe it’s about selectivity. I believe selectivity is THE super power at the seed stage. And that is a truly contrarian belief today. More on that in a bit…
If I had to categorize myself, I’d say that I aspire to be the “Good to Great” VC. I’m a huge fan of Jim Collins and I aspire to be humble, generous in spirit and focused on excelling at the basics.
As for my super power, I think its Selectivity. It’s not because I think I’m some kind of savant. Not at all. No, it’s Malcolm Gladwell’s 10,000-Hour Rule at play. Except I’ve studied companies for 70,000+ hours. How the hell is that possible? Well, here’s how: I was a management consultant for 12 years, working 60+ hours a week. That’s 36,000 hours in which I evaluated industries and markets to find those most attractive, assessed companies to find their strengths and weaknesses, evaluated organizations to find gaps, dug into operations to find shortcomings to fix and core competencies to exploit, rolled up my sleeves to help companies build new businesses, optimize operations and employ technology to win in the market. It was an amazing learning experience. Then I ran a big digital agency for 8 years, helping companies leverage the internet to build new businesses, reach new markets and get and keep customers. That’s 24,000 more hours. On top of that I’ve been selecting startups for 11 years. Now, when I look at a company, I can pretty quickly understand the size, dynamics and attractiveness of the market, the uniqueness of the company’s proposition and the strengths of the team. With 70,000+ hours of experience, I’m quick and thorough. And I believe this gives me an edge.