In a world of endless signal and noise coming at us from all angles including TV, radio, the web, Facebook, Twitter, Snapchat, blog posts, email, text messages, Slack, and fill in another 50 different sources of stuff, we don’t have a measurement for the sentiment of the noise (and signal) and the toll it takes on our thinking.
If you pay attention to finance, you are familiar with the VIX, which is officially the implied volatility of S&P 500 index options. It’s unofficially known as the fear index and is a measure of the market’s expectation of stock market volatility over the next 30 days. For example, here’s the VIX for the past 12 months.
I don’t pay attention to the VIX on a daily basis as I don’t care about the stock market but I find it interesting in hindsight to see how it correlates to changes in the DJIA over a long period of time.
In February, I was pondering the tone of the noise – and the signal – that was coming my way. If I had a measure for it the fear in it, it tracked the VIX pretty well (a sharply increasing level with a peak some time in early March followed by a rapid decline back to normal). At the same time, the cognitive load from my daily life (work and personal) increased very significantly in Q1 due to a series of things good and bad.
I reached a point in March where I actually said out loud to someone “I can’t take on anything new – my cognitive load is maxed.” I literally couldn’t think about anything beyond what I was currently trying to process. While I’m still at a high load, I don’t feel anywhere near as maxed as I did at the end of March.
In the past 24 hours I’ve responded to a few emails that were particularly tone deaf to reality. The level of aggression in the noise seems unusually high these days. The random hostility from people I don’t know very well, but who feel like it’s an effective personal strategy to attack as a way to get attention, seems at an all time high. I presume some of this is from our current political cycle and the corresponding tone, but I could be coming from other dynamics as well.
Regardless of how zen one is, all of the noise, signal, interactions, and life activity creates a cognitive load. While I’m not sure a macro measure – like the VIX – is useful, I certainly feel like a personal one would be.
We had the first Reboot VC Bootcamp several weeks ago in Boulder. Based on the feedback and the experience, we’ve already decided to have another one, probably early in 2017.
Three of the participants – Steve Schlafman, Rob Go, and Josh Guttman – wrote posts about the bootcamp. Since the content was confidential, each of them is careful about what they say and does a good job personalizing the experience.
In A bunch of VCs went on a retreat. Here’s what happened Steve lists 16 things he took back with him to New York and his daily life from the bootcamp. To get a feel for them (and hopefully inspire you to go read the whole post), here are the first three:
“The idea is that one’s “shadow” is a deep rooted thing (not necessarily good, not necessarily bad) that exists in one’s psyche that drives your choices, behaviors, or emotions. The shadow is often linked to early, memorable childhood experiences, and is reflected in multiple arenas of life over and over again. The challenge occurs when one is unaware of these influences, and as a result, it drives him/her to make decisions or react to circumstances in a less than ideal way. Often, we can go years not really understanding how major decisions have been guided by hidden motivations, and that can get in the way of being the best leader, friend, or team member one can be.”
Josh wrapped the summaries up in his post Keeping it Real with an overview of the structure we used for the bootcamp
Practical Skills + Radical Self-Inquiry + Shared Experiences = Enhanced Leadership + Greater Resiliency
followed by a good discussion around imposter syndrome, which came up a few different times and manifests itself in many different ways in our daily life, especially around entrepreneurship and investing.
It was deeply enjoyable to host this event at my house and spent a few days at a very emotionally intimate level with some VCs I know and have worked with and others that I met for the first time. I was a player-coach for the weekend – participating instead of facilitating, but also co-hosting with Jerry. I was concerned that this would be a challenge, but in hindsight it felt very natural to me. And, during a session where I became Jerry’s focus, I realized something profound that I had never put together before about my relationship with power.
To everyone who participated – thank you for being brave and taking the risk to engage at the level that a Reboot bootcamp demands.
Tami Forman, the Executive Director of Path Forward (a new non-profit that I recently joined the board of) just did a powerful five minute presentation on making space for moms in the workforce. I knew that Tami was a great speaker because of my interactions with her at Return Path, but she just totally blew me away with this talk.
My favorite one liner in the talk is “In the S&P 1500, there are more CEO’s named John than women CEOs.” This is definitely worth five minutes of your life to watch right now.
Bill Gurley wrote an incredible post yesterday titled On the Road to Recap: Why the unicorn financing market just became dangerous … for all involved. It’s long but worth reading every word slowly. I saw it late last night as it bounced around in my Twitter feed and then read it carefully just before I went to bed so the words would be absorbed into my brain. I read it again this morning when I woke up and I expect I’ll read it at least one more time. I just saw Peter Kafka’s summary of at at Re/code (We read Bill Gurley’s big warning about Silicon Valley’s big money troubles so you don’t have to) and I don’t agree. Go read the original post in its entirety.
Fred Wilson’s daily post referred to the article in Don’t Kick The Can Down The Road. Fred focuses his post on a small section of Bill’s post, which is worth calling out to frame what I’m going to write about today.
“Many Unicorn founders and CEOs have never experienced a difficult fundraising environment — they have only known success. Also, they have a strong belief that any sign of weakness (such as a down round) will have a catastrophic impact on their culture, hiring process, and ability to retain employees. Their own ego is also a factor – will a down round signal weakness? It might be hard to imagine the level of fear and anxiety that can creep into a formerly confident mind in a transitional moment like this.”
Fred and I have had some version of this conversation many times over the past twenty years as we both strongly believe the punch line.
Entrepreneurs and CEOs should make the hard call today and take the poison and move on
But why? Why is this so hard for us a humans, entrepreneurs, investors, and everyone else involved? Early in Bill’s post, he has a section titled Emotional Biases and it’s part of the magic of understanding why humans fall into the same trap over and over again around this issue. The “Many Unicorn founders …” quote is the first of four emotional biases that Bill calls out. If that was it, the system could easily correct for this as investors could help calibrate the situation, use their experience and wisdom to help the founders / CEOs through a tough transitional moment, and help the companies get stronger in the longer term.
Of course, it’s not that simple. Bill’s second point in the Emotional Biases section is pure fucking gold and is the essence of the problem.
“The typical 2016 VC investor is also subject to emotional bias. They are likely sitting on amazing paper-based gains that have already been recorded as a success by their own investors — the LPs. Anything that hints of a down round brings questions about the success metrics that have already been “booked.” Furthermore, an abundance of such write-downs could impede their ability to raise their next fund. So an anxious investor might have multiple incentives to protect appearances — to do anything they can to prevent a down round.”
Early in my first business, a mentor of mine said “It’s not money until you can buy beer with it.” I’ve carried that around with me since I was in my early 20s. Even when I personally had over $100 million of paper value in an company I had co-founded and had gone public (Interliant), I didn’t spend a dime of, or pretend like I had a nickel of, that money. In 2001 and 2002 I learned a brutal set of lessons, including experiencing that $100 million of paper money going to $0 when Interliant went bankrupt. And, as a VC, I experienced a VC fund that was quickly worth over 2x on paper that ultimately resulted in being a money losing fund. I didn’t buy any beer or spend all the money on random shit I didn’t need and fundamentally couldn’t afford.
This specific bias is rampant in the VC world right now. As Bill points out, many funds are sitting on huge paper gains which translate into large TVPI, MOC, gross IRR, or whatever the current trendy way to measure things are. However, the DPI is the interesting number from a real perspective. If you don’t know DPI, it’s “distributed to paid in capital and answers the question “If I gave you a dollar, how much money did you actually give me back?” This is ultimately the number that matters. Structuring things to protect intermediate paper value, rather than focusing on building for long term liquid value, is almost always a mistake.
Let’s go to number three of the emotional biases in Bill’s list:
“Anyone that has already “banked” their return — Whether you are a founder, executive, seed investor, VC, or late stage investor, there is a chance that you have taken the last round valuation and multiplied it by your ownership position and told yourself that you are worth this amount. It is simple human nature that if you have done this mental exercise and convinced yourself of a foregone conclusion, you will have difficulty rationalizing a down round investment.”
This is linked to the previous bias, but is more personal and extends well beyond the investor. It’s the profound challenge between short term and long term thinking. If you are a founder, an employee in a startup, or an investor in a startup, you have to be playing a long term game. Period. Long term is not a year. It’s not two years. It could be a decade. It could be twenty years. While there are opportunities to take money off the table at different points in time, it’s still not money until you can buy beer with it, so the interim calculation based on a private valuation when your stock is illiquid just shifts you into short term thinking and often into a defensive mode where you are trying to protect what you think you have, which you don’t actually have yet.
And then there’s the race for the exit, in which Bill describes the downward cycle well.
A race for the exits — As fear of downward price movement takes hold, some players in the ecosystem will attempt a brisk and desperate grab at immediate liquidity, placing their own interests at the front of the line. This happens in every market transition, and can create quite a bit of tension between the different constituents in each company. We have already seen examples of founders and management obtaining liquidity in front of investors. And there are also modern examples of investors beating the founders and employees out the door. Obviously, simultaneous liquidity is the most appropriate choice, however, fear of price deterioration as well as lengthened liquidity timing can cause parties on both side to take a “me first” perspective.
This is one of the most confounding issues that accelerates things. Rather than making long term decisions, individuals optimize for short term dynamics. When a bunch of people start optimizing independently of each other, you get a situation that is often not sustainable, is chaotic and confusing, and inadvertently increases the slope of the curve. In the same way that irrational enthusiasm causes prices to rise faster than value, irrational pessimism causes prices to decline much faster than value, which increases the pessimism, and undermines that notion that building companies is a long term process.
Those are my thoughts on less than a third of Bill’s post. The rest of the post stimulated even more thoughts that are worth reflecting deeply on, whether you are a founder, employee, or investor. Unlike the endless flurry of short term prognostications that resulted from the public market decline and subsequent rise in Q1, the separation of thinking between a short term view (e.g. Q1) and a long term view (the next decade) can generate profoundly different behavior and corresponding success.
Our friends at Revo Physiotheraphy and Black Lab Sports are hosting a book event for Steve Case’s great new book The Third Wave on May 12th. David Brown from Techstars will be introducing Steve. The book is dynamite and Steve is always a super engaging speaker.
Amy and I have started to buy some video art. I’m personally fascinated with the interactive stuff and am starting to learn more about different video artists. Here’s an example of one – Rafael Lozano-Hemmer – that my dad aimed me at.
If you have ideas of folks I should look at, can you toss them in the comments? Oh – and I’m also looking for giant sculptures of monsters, like the one I have of the predator in my backyard, which I’ve named The Shrike.
Techstars had an incredible year in 2015 and grew the organization on many dimensions. If you want a full view of what Techstars is – and is doing – today, take a look at the 2015 Global Impact Report.
To everyone who has been involved in Techstars in any way, thank you!
Jon Hallett, a prolific angel investor and successful entrepreneur who I’ve gotten to know over the past few years, dropped a major knowledge bomb on me yesterday afternoon when he sent me a post from David Politis titled This is How You Revolutionize the Way Your Team Works Together… And All It Takes is 15 Minutes.
I remember having a meal in December 2011 with David at the Plaza Food Hall in New York and talking about BetterCloud which we foolishly passed on investing in. So I wasn’t surprised to have the reaction I had after reading the post, which I said out loud to myself.
The simple idea is to write a user manual about how to work with you. My partner Seth has an email he sends out to companies he joins the board of titled Welcome to Foundry which is a roadmap for working with him, but also reflects how to work with all of us. It’s similar and touches on some of the questions that David addresses in his article, which he based on a presentation from Adam Bryant, a columnist for The New York Times, titled “The CEO’s User Manual.”
In this presentation Adam gave there were two sets of questions to answer to sketch out the User Manual. The first set, focused on the individual person, were:
The second set are focused on how the individual acts with others.
I’m going to do this exercise over the weekend and share with my partners and all of the CEOs I work with to get their feedback on whether (a) it’s helpful and (b) it’s truthful. I’m going to let them give me feedback (which will help me learn myself better). As I iterate through it, I’ll eventually publish it on this blog. And, if the exercise works, I’m going to encourage every leader I work with to consider doing it.
I had a great interaction with a friend several months ago. The question he asked was:
“How do you beat Michael Jordan at sports?”
I thought about it for a second. I knew Michael Jordan was a good golfer and I don’t play golf. I figured he was in better shape than me and could beat me on a track. There is no way I could ever beat him at basketball. And baseball – well this video kind of says it all.
So I eventually said “I don’t know.” My friend said:
“Take him surfing.”
What he meant, of course, was play a totally different game. Now, I’m not a surfer, but let’s presume neither is Michael Jordan (although he’s so physically talented that a dangerous assumption.) But let’s assume it’s true. When we are both on a surfboard we are each beginners. Assuming he doesn’t already surf, he’s probably not inclined to get on a surfboard. So I can have a huge head start on him if I start surfing now and practicing every day. After a few years, if he eventually decides to try to surf, I’ll likely beat him at a sport.
I’ve been a long time believer in Jack Welch’s famous thesis that if you aren’t #1 or #2 in a market, you should get out of it. Interestingly, for those who don’t realize it, he challenged his own thinking about this in his final shareholder letter at CEO of GE.
When I reflect on our investing approach, we have a very strong focus on helping the companies we invest in become the #1 or #2 player in their market. When we find ourselves in an investment where we aren’t #1 or #2 in a market, we try to follow the meta-point of all of this, which is to change the game and have a different point of view.
When I go through our portfolio, there are a bunch of companies that are clearly #1 or #2 in their market. These are very satisfying to be an investor in and their paths are clear.
Then there are some that aren’t #1 or #2, or are in very crowded markets where it’s hard to figure out what #1 or #2 is. And there are some that are in unformed markets, or their ultimate product and strategy is not clearly defined, so it’s hard to put them clearly in a market segment. This is the blessing and curse of being an early stage investor.
Then there are some who should simply go surfing. We try to tell them that when we realize it and in some cases they’ve gotten very good at surfing. When this happens, it’s especially satisfying.
This weekend I’m co-hosting the Reboot.io VC Bootcamp at my house in Boulder. It starts tonight and goes through mid-day Sunday. It’s an experiment with Jerry Colonna and about 15 other VCs to see if the Reboot.io bootcamp construct works with VCs, where the tag line for the experience is:
Practical Skills + Radical Self-Inquiry + Shared Experiences = Enhanced Leadership + Greater Resiliency
It’s either going to be valuable to this group or not. We’ll know more on Monday. The only way to learn is to try.
As part of the pre-work for the weekend, I went back and re-listened to several of the Reboot.io podcasts that Jerry recommended in advance (for you Soundcloud people I made a Reboot.io VC Program collection.)
So, my brain was already trending toward the headspace around radical self-inquiry in the context of venture capital. Yesterday, Fred Wilson wrote what is the best VC-related post of 2016 so far titled Losing Money. In addition to exemplifying the notion of radical self-inquiry, it is filled with gems about how to think about struggling companies and what to do with them in the context of a VC portfolio.
Go read Fred’s post Losing Money right now. I’ll be here when you get back.
When I woke up this morning, I noticed a tweet from Rand Fishkin aimed at me and Fred.
— Rand Fishkin (@randfish) April 7, 2016
Fred answered “it is one of my weaknesses that I let a bad experience sour me on a market for life.” And, I’ve seen some of Fred’s own behavior around this, as he won’t touch anything hardware-related at all because of some miserable hardware-related failures during the Internet Bubble (or is it “internet bubble” now that the AP Style Guide says not to capitalize internet.)
But I had a different response to Rand’s question “Do you regret every investment that fails?”
I’d like to think that I no longer regret any investment. As Fred discusses in his post, many VC investments fail. I’ve yet to meet a VC who says “This is a totally shitty company and a lousy opportunity so I’m going to invest in it anyway.” When a VC makes an investment, she is incredibly enthusiastic about the opportunity. If you know that failure is part of the process, then there is enormous emotional dissonance that gets generated if you regret the investment in hindsight, as you are going to have a lot of regret over the years as a VC, which I think creates a very negative feedback loop in terms of how you think about new investments.
Instead of “regret”, I think it’s much more important to embrace failure as part of the overall experience and focus on learning from every investment that fails. And, a failed investment often has many lessons – some new and some old. Some of these lessons are temporal and while others are foundational. In Fred’s post, he opens with:
“I remember back in the mid 90s, I used to say with some pride that I had not lost money on any of my VC investments. Then one day, someone told me “then you are not taking enough risk.” I ended that streak of not losing money on VC investments in the late 90s in a series of epic flameouts. I lost somewhere between $25mm and $30mm on one single investment. I am not proud of those mistakes. They were stupid. I am ashamed of them to be honest. But I learned a lot from them. Not only was my “winning streak” a case of not taking enough risk, it was also a case of not enough learning. The go-go Internet era of the late 90s fixed both of those things for me. I took more risk and learned a ton.“
The bold section is what I’m trying to say. And, when I say “embrace failure”, I’m not suggesting that one be proud of failing, but I also don’t think there’s any shame in failing. There’s only shame in not learning.
The second part of Rand’s question “Or do you ever think ‘I’d place that same bet again'” is more complicated for me and my view diverges from Fred’s quick response of “it is one of my weaknesses that I let a bad experience sour me on a market for life.” For starters, I don’t think of my investments as bets, so I have an immediate knee-jerk reaction to characterizing investments as bets. That always creates fog for me in answering something, so I have to let the fog clear. Then, given that we invest in a set of themes over a very long period of time, a failed invested is a fundamental component of our ongoing learning in a theme. So I thought hard about what about a failed investment would cause me not to invest in some aspect of the investment again.
The answer appeared before me as “bad people.” My favorite entrepreneurs to back are ones who have had success and failure, so I’m very comfortable making multiple investments over time with people I trust and enjoy working with, even if we’ve had failures along the way. But if the people are fundamentally dishonest, immoral, unwilling to listen and learn, or behave in what I consider to be inappropriate ways, I don’t want to work with them again.
So the essence of regret for me comes from when I make a mistake around people. This is not only the founders but also co-investors. And, after 20+ years of doing this, I’m much better (but not perfect) in figuring out in advance who I shouldn’t work with.
I’ve accepted that in the end we all die. So, as part of my own radical self-inquiry, I’ve tried to isolate and limit my own regret to situations where I spent a lot of time and learn (or teach) nothing. Fortunately, this rarely has anything to do with the investments that I make.