Here are my notes from a fascinating interview on Early Stage Investing.
Fish close to High Return Intersections
The intersection of boredom and complexity – for example, investment in a great Accounting software can offer high returns
The intersection of exciting and complex gets a large supply of talented entrepreneurs which diminishes returns
Avoid easy
Heuristics of Power, Money, and Fame
Founders interested in power are good at execution, can be overaggressive, but need help with capital allocation.
Founders interested in money are better at finances and capital allocation but are generally too cautious
Avoid founders interested in fame
The hardest part is to get founders to reveal their ambitions
Consumer vs. Enterprise
Consumer-based business founders are intuitive – they tend to be keenly aware of human behaviors and patterns
Enterprise based business founders are rational - they gather business intelligence by asking customers and iterating
Entrepreneur personalities
The individual good at early-stage capital raise and bootstrapping is generally not competent or dis-interested at organizational building and vice versa
Patterns around Startup Success and Failure
1) Pre-seed to Seed
Good teams generate kinetic energy and propel themselves
Bad team do not gel and produce a high enough output to generate product momentum
2) Seed to Series A
Can the team achieve Product market fit?
Luck plays a big role
3) Series A
Can the Manager scale his team?
At a team size of 10 or less, the team manages the manager due to the high level of familiarity and influence
As teams grow, the lack of personal connections wipes out many startups. The managerial diseconomies of scale create lower output by larger teams.
4) Series B and above
The core managerial function is to institutionalize the organization by building efficient units for finance, legal, HR
A great founder will dis-incentivize organizational politics to maintain organizational integrity
Causes of startup mortality
We spend a lot of time studying greatness, but not enough time studying common causes of failure. To survive the initial years, the key is to avoid the series of mistakes that lead to catastrophic failures.
Stay alive until you get good
Hiring diligence and cadence
It is critically important to spend a lot of time on early hires
Going slower and picking exceptional people that have synergies with other team members is a game-changer
Avoid hiring bulges after each capital raise, be consistent over a longer period
Fish in qualified employee pools, in less competitive markets
Value creation vs. value Capture
What is the size of problem that you are solving, what value are you creating for the customer, and what piece of that value can you capture
The ideal business creates a high utilitarian outcome and has the ability to capture it
Three Ways to successfully invest at an early stage
Understand the founder better than anyone else
Understand the business better than anyone else
Swoop in on deals that other smart investors are pursuing and win them
Disadvantages of a Hybrid work model
The ‘Most political’ employees at Corporate will get promoted, which will create a toxic work environment
You have to pick - either fully remote or fully centralized
How to filter information?
25 years ago, the problem was a lack of information. Today, the problem is too much information
Use a secondary filter of amazing people to filter information effectively
The entire podcast can be found here: Invest Like The Best