memorable

August 2023

Below is an excerpt from my quarterly LP update — reflecting on Moth Fund, VC, and me; circa Q2 2023:

I’ve been enamored with the idea of “taste” in early-stage investing this past quarter: What is it? How is it built? Why is it so rare? Is it becoming more valuable? The answers I’ve heard back to these questions from independent investors I admire have been all over the place — the only commonality being how little overlap there is in what each personally believes taste to be. This got me thinking… is there actually something to that? 

True taste in early-stage investing (the kind that proves itself over decades of investment decisions) is embodied by people who are seekers, not followers. They’re the ones reading research papers and then hunting down the right people to make an idea for commercialization real. They’re the ones finding founders before they’ve even considered starting a company. They’re usually the ones you’ve never heard of but who are adored behind closed doors. They’re often insatiably curious singular personalities, are comfortable with the reputational risk of being first check in, and frequently operate as lone wolves. In contrast with “thesis-driven” investors, making taste-driven investment decisions is far less defensible but much more adaptable to market changes. Taste-driven investors have independent conviction and are as rare as unicorn companies.

But has this always been true? Survivorship bias aside, the investors I most admire for their taste all share the aforementioned personality archetype — while also being the people who previously generated huge returns for firms such as Sequoia (Michael Moritz), Benchmark (Bill Gurley), and USV (Fred Wilson). In the 80s and 90s when venture was still in its early days, taste was a prerequisite to being a well-respected VC (back when respect was the main quality needed for good deal flow).

So what changed? If we look around at the landscape of the venture industry today, this strategy seems to no longer be the norm. The more I’ve studied the history of venture capital, the less convinced I am that the role of venture capital allocator in its current form is here to stay. As small firms became more specialized and “thesis-driven” in order to defend their decisions and market their offering, their returns become constrained to the maximal outcome of that thesis — a single bet about the future that they very much hope pays off. Yet the VC model itself isn’t what changed — Tom Nicholas in VC: An American History:

“If one asks how exactly VCs do what they do, it is not clear that the answer today is much different from half a century ago. The dominant form of organization is still the limited partnership with an ephemeral fund life, even though this places constraints on the time scale of investment returns. Although there have been some organizational structure and strategy innovation, these have been paradoxically rare in an industry that finances radical change.”

So if not for the structure, what caused venture’s shift towards such risk-averse investing? As fund sizes grew dramatically and a tech boom spurred a startup surge, the industry's emphasis shifted from discerning selection towards a more diversified 'spray and pray' approach, diluting the value of traditional tasteful investing. When the game of being a VC became one of simply generating high-volume deal flow, mediocrity proliferated and distaste for venture as a whole grew — and rightfully so. Historically, venture was perhaps the closest we’ve ever gotten to a modern meritocracy (only the best funding the best). But the commodification of venture capital has made the industry far more egalitarian in recent years, introducing an influx of risk-averse investors who harbor insecurities about their own skill. As Sebastian Mallaby puts it, “Skeptical observers have sometimes asked whether venture capitalists create innovation or whether they merely show up for it.” When merely showing up can reap similar returns to deploying tastefully, we get the cacophonous state of venture that occurred in 2020-2021.

However, I’d argue that this is all changing. Due in part to the general market slowdown and SaaS reaching oversaturation in many sectors, there are far less home runs to be had by taking a grab-bag approach. While VC is in many ways a random game of chance, where and when those random chances happen is what ultimately dictates your performance. This is when taste comes into play. Picking well is often the product of an investor’s competency, specialized knowledge, and skill — but perhaps not for the seemingly obvious reason of skill leading to better evaluation of the validity of company-shaped ideas. Instead, skill is often more useful for the same reason being respected is useful — it makes people think of you for high-quality things (investors with backgrounds in AI are a good example of this today).

Read full essay →

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Links

• Escaping High School by Skunk Ledger (essay)
  A tactical self-directed learning “master post” a la the Tumblr days.

• Runnin Down a Dream by Bill Gurley (speech)
  I love case studies that teach us what we can learn from outliers: specifically exceptional people and small groups. This speech by Bill Gurley is that to a T.

• Parenting by Robert Heaton (blog)
  Simply lovely reflections on parenting — you can feel how much he loves his kids reverberating through the screen. “For Julia, In the Deep Water" by John Morris carries a similar message, packaged in poetry form.

• What the humans like is responsiveness by Sasha Chapin (essay)
  People really just want to be reminded and reaffirmed of their humanness! This is another great post on the topic from the internet writing archives.

• A relatively small amount of force applied at just the right place by Tony Kulusa (essay)
  There’s an interesting argument to be made that early YC was successful mostly as a result of their teaching engineers to sell, an arbitrage that no longer exists to the degree it once did.

• The Mike Speiser Incubation Playbook by Kevin Kwok (essay)
  I’ve been fascinated by what it takes for incubations to actually work and Sutter Hill is one of the best case studies (their proof points: Pure Storage and Snowflake Computing).

• Peter Pan and Neverland Returns by Bullfight Capital (essay)
  Excellent piece on the slowdown of “software-like” returns.

• Tyler Cowen interviews Paul Graham (podcast)
  Old news but this was indeed very good (while also slyly hilarious). PG’s recent essay on how to think for yourself was also excellent.

• Justin Mares on increasing entrepreneurship and the US health crisis (podcast)
  I had Justin on my podcast and our fun conversation covered a lot of ground.

• Me on Moth Fund, agency, and ways of seeing (podcasts)
  Interviews where I’ve run my mouth recently :)

• Dancing with Ghosts by Hania Rani (song)
  Stunning choreography to a haunting song.

• The Wolves by Bon Iver (song)
  One of the most moving and powerful live performances I’ve ever seen.

• Dear Summer by Kanye (song)
  I listened to Ye’s whole discography roughly 5x this past month and can definitively say that this song is one of his best unreleased sleeper hits.

• Jack Johnson sings to Preschool Class (video)
  Just uncomplicatedly good content.

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Parting thought

I always feel: when one person is indebted to another for something very special, that indebtedness should remain a secret between just the two of them.

― Rilke and Andreas-Salomé: A Love Story in Letters by Rainer Maria Rilke