Everything I Learned in my 2nd Year in Venture
All Things Venture #090
I recently passed the two year mark of working here at FirstMark and I wanted to memorialize the milestone by reflecting on everything I’ve learned in the past year. Working in VC has exceeded my expectations. Two years ago I expected to join a fast paced, intellectually stimulating, and competitive environment. All of those expectations have been correct. And while I had an inkling it could be like this, I didn’t fully appreciate that being a great VC, is an all encompassing profession.
To be great at what we do you have to have either A) an underlying interest in the frontier of innovation, or B) an innate passion for the pursuit of opportunity. If you want to be great, there really isn’t an “off” button for the job. Every day, every week, every month changes and every day, every week, and every month is an opportunity to improve.
So in the spirit of continuous improvement, I wanted to share all the things I’ve learned in my second year of working in venture capital.
Pursue the non-consensus: For better or for worse, the VC industry has a tendency for herd-like behavior. Given the power law nature of investing, when new technologies arise VCs naturally crowd in. This bottoms up consensus behavior leads to more competition in deals, and more competition in deals leads to higher prices. Higher prices lead to higher hurdle rates for subsequent rounds, as well as (conceptually) lower cash on cash returns. Non-consensus deals are the exact opposite. Keeping two opportunities the same, in a non-consensus deal an investor will be able to own a higher percentage of a company at a lower entry point, and give the company a greater opportunity to reach the milestones required for future funding rounds. Moreover, when the stars perfectly align and a non-consensus deal becomes a true power law winning company, you’ll return meaningfully more capital by virtue of the lower price you paid. As I continue to grow in my career, I want to spend more time pursuing the non-consensus ideas. This is easier said than done. However, a perfect example of this is a company my Partner, Matt Turck, invested in called Synthesia. Synthesia is an AI video generation company. It was “generative AI” before there was really “generative AI.” Synthesia was founded in 2017. Matt led the investment in their Series A in 2020. ChatGPT was released at the end of 2022, in 2023 Synthesia became a billion dollar Unicorn, and generative AI companies became consensus deals. Pursue the non-consensus, and trust that examples like Synthesia will still come to light.
Be a student of economic and investment history, in addition to technological history: In my reflection last year I wrote about how it’s important to appreciate, study, and learn from history. I’d like to take that a step further. At the time I had primarily been a student of technological history, and I was gaining my footing on the successive waves and cycles of technological innovation. And while no doubt this historical grounding is important, it’s just one side of the equation. Understanding how capital works, how capital moves, and how to think through the capital allocation cycles that naturally occur alongside broader economic cycles are incredibly important. A few books that have helped me further my understanding of economic and investment history are The Power Law, Merchants of Debt, and Slouching Toward Utopia. Pattern recognition applies to economic environments in the same way that it applies to identifying founders. But don’t take my word for it. Part of what enabled Steve Swartzman, the founder of $1T investment giant Blackstone, to capitalize on the dislocation in single family rental real estate markets in 2009-2010 is, to use his own words, “I’d seen seen something similar in the early 1990s.” History doesn’t repeat itself, but it does rhyme. Being a student of history across these disciplines allows you to see the rhythms of capital allocation.
Center your daily habits around compounding: There’s no real way to reliably accelerate your individual success in VC. As I’ve been coached and advised by my Partner (Adam Nelson, he’s the man) there’s just a certain amount of time and reps you need in this job, in order to be any semblance of good. Yes, you can get lucky early in your career a la John Doerr, but no matter what you will need time for your skill set to compound. How I think about it is no different from sports. Every day, you should want to further some portion of your craft. Establishing daily habits gives you the opportunity to accelerate the amount of reps you have in a given year. For me, what that looks like is doing a “2nd Order Thinking” exercise every day, where I try to map out what the downstream effects of some sort of change in the world may be. I was inspired to do this after re-reading the Howard Marks memo, “It’s Not Easy”
Interest rates go up, venture capital goes down: From 2013 to 2022 annual VC fundraising increased from $22.3bn to $168.3bn, a 25% annual increase for nearly a decade that more than tripled the amount of active VC firms. For the majority of that time period, interest rates were effectively near, or at 0%. In 2022, the Fed began its current rate hiking cycle to where we are today. As a result, 2023 is on track to be the worst fundraising environment for venture capital in nearly a decade. This is just a reality of venture capital. The cost of capital has gone up, but the risk profile has remained the same. Interest rates are the economic gravity of VC, and as a result the entire industry has taken notice. This is a rhythm of capital allocation I expect to repeat throughout my investing career. I don’t know where rates will settle, but I know they will have a profound effect either positively or negatively on venture capital as an asset class.
Feedback loops will be longer than you expect:. When I think back to initially recruiting in VC, I was constantly told to be prepared for long feedback loops on your ability. In my first year, I was so consistently drinking from a fire hose that I didn’t really notice. I was heads down, learning the basics. By year two though, I’ve made a few investments and I’m seeing first hand the temporal nature of the feedback loops. Some of my hypotheses about how the world will change will be correct, some of them will be wrong. Some will come to fruition quickly, others could take a decade. In any event though, as I look forward to years three and beyond, I know that VC investing is a long term game, with long term outcomes, and therefore long term feedback loops on my performance. In the indomitable words of former 76ers GM Sam Hinkie (now a VC), I’m going to “trust the process.” If you are new to VC or thinking about become a VC, know that Rome wasn’t built in a day, and neither will your track record. Pursue the niches you find interesting, soak up knowledge, and be a net positive to the ecosystem. People won’t always remember what you said, but they will remember how you make them feel. Act accordingly.
Narrow focus, increase velocity: I would argue that narrowing focus is the cousin of compounding. I think that the universe of investable assets has gotten so wide, that even in a vertical like fintech, it can be hard to keep up across the deluge of new ideas. In fintech alone you could specialize in categories as disparate as lending infrastructure or risk and compliance and have more than enough opportunities, and in addition to that, prosecuting ideas in each of those categories can be wildly different. As such, I think that narrowing focus will counterintuitively increase your velocity in the job. Not because your speed increases, but because your direction has become more accurate. Narrowing focus also has a secondary effect of increasing your specialization. I’ll never forget when I was working at Cadre and talking with our COO. I was debating a few career paths and he told me effectively that, “generalists can have oversight and pursue a broad range of interests, but specialists get paid.” It’s an anecdote that has stayed with me and one I’m carrying forward. I find that the best conversations I have with founders are ones where I’m already deeply embedded into their industry or vertical. Those types of conversations go from ones that generally sound like “So, tell me about your business?” to ones like, “It’s absolutely insane that 40% of the value chain accepts 120 day payment terms.” Specialization unlocks deeper insight, and deeper insight unlocks value. The value is unlocked in the form of being able to form connections in the industry, being more memorable than the next guy or gal, and in improving your ability to pick winners.
VC is a sales and marketing job: Finally, I think I would be remiss if I didn’t call out that from year one to year two in VC I’ve realized that not only is VC a sales job, but in today’s media rich, highly competitive digital environment, it is also a marketing job. In some way, shape or form, you have to make noise in this business. For some people that is putting out market maps and publishing research, for others it is hosting events or starting a podcast. Whatever your medium of choice, one to many communication is essential due to A) the random dispersion of talent and B) the amount of competition in the industry. I’ll be honest though, at times the sheer amount of content that is produced can be a bit annoying and I think 80% of the content is just noise. That being said, it’s the game on the field and even making the decision not to participate in the marketing aspect of the business is a decision in itself. Love it or hate it, it’s not going to stop, so if you’re new to VC just decide what is most authentic to you and what comes most naturally. No sense in trying to start a newsletter if you hate writing, and don’t feel pressure to start a podcast if you don’t like interviewing people. Just make sure you’re playing in some form of marketing traffic.
Lastly, I’ll leave you all with this video titled, “How to Live an Asymmetric Life.” The video is a recording from a talk given by Graham Weaver who teaches a management course at Stanford’s GSB as well as is the founder of Alpine Investors. I highly recommend the video and think it is broadly applicable across careers, and is related to some of the themes I talk about above. In any event, I hope you all enjoyed this reflection. Onwards into year three.