I don’t really love you anymore
Manchester Orchestra
That gold mine changed you
I am no longer investing in new companies.
This isn’t an indictment of investing now, it’s just that my strategy has run its course.
I started angel investing to help out a few friends while I thought of an idea for my next startup. When Greg Yardley started Pinch Media (later known as Flurry), I pitched in with a little bit of money and introduced him to Union Square Ventures, First Round Capital, and a few others. They invested and Greg thanked me, USV, and FRC in the press release. It was like opening a spigot.
I mean, the truth was—and I knew it then, even if I didn’t want to accept it—I had sucked as an operator. I had previously succeeded as an investor, though that was during the dot-com era so it was hard to know how much was skill and how much was timing. I wanted to make a difference, and investing seemed like the way I could do that. But it was complicated.
I did not think I would be able to raise a fund. My previous track record was at a corporate VC, so I wasn’t allowed to share it and, even if I could have, it was impossible to tell from the outside how much of the success was me and how much was the corporation. I had also fumbled the last days of my startup because I was preoccupied with my failing marriage; I was a fuckup two ways. And third, I was, and am, the worst salesperson ever, and selling myself was the last thing on earth I wanted to do.
Without a fund, I would be investing my own money. I had some from previous endeavors, though after the divorce it wasn’t really a lot. So the first caveat was that investing was my new startup. I had to be all in. The common wisdom is, don’t invest more than 2-5% of your money in venture, you need to plan to lose it all. I didn’t take this advice. In the first five years (and with the recycling of a few small, early exits) I invested more than 80% of my money, leaving me pretty much just enough to pay rent and for food. At one point, when people were paying attention to me as an investor, one founder teased me for driving a Honda Pilot. I shrugged and said something about fitting five kids into a Ferrari, but the truth was, if I had bought a nicer car I wouldn’t have had the cash to invest in his startup. (That cash earned me a 16x return over five years; one of the kids totaled the Honda Pilot six years later.)
I didn’t tell him, or anyone, this because I didn’t want the supercilious lectures on prudent financial management. I knew the risk I was taking. The entrepreneurs were all-in, and so was I. Like them, if I failed I would have to go get a job and start over. Seemed fair.
Of course, most entrepreneurs start taking a salary they can live on after they raise money. I had no income until I had two large exits—BankSimple and Flurry—in year six, so year five was nerve-racking. Not only was I running out of cash, I was no longer sure anyone would hire me after a five year gap in my resume.
Before I knew if it would work, I had a theory of company-picking that no one else seemed to have. I thought it was right. It was definitely right in theory, and it seemed to fit the data. But it’s easy to fall in love with your own theories, and I was wary of that. On the other hand, it would be weird to have a novel theory about some part of the economy and not try to make money from it. If you won’t put your own money on the line to test your own beloved theories in the real world, maybe you’re just selling bullshit? Idk, whatever. I’m not an economist.
I needed a theory both because this was my new company and I was going to run it like a professional, and because I was not going to operate like many of the VCs I had met over the years, I was not going to “trust my gut”.
So I thought through the dot-com portfolio: every decision I had made, every contractual provision, every outcome good and bad. I tried to link actions with outcomes. Then I worked through why I had made those decisions and how I could avoid the bad ones and improve the good ones. There were a bunch of lessons there that I assume every other VC learns from their mentors, if they learn them. I had to dig those lessons out of the data. I think that made them more real to me. Meanwhile I read every book and credible article on venture capital ever printed. This wasn’t hard because there weren’t many.
And I spent time talking to any VC who would talk to me. This was interesting because most of the VCs I talked to didn’t really have an articulable theory of company-picking other than “find good people with good ideas”. Sound advice, as far as it goes. I wanted a better theory, and I found one, an old one.
It came from an idea that had been stuck in my head since a conversation a couple years before. My friend Josh Reich and I were sitting in my office talking about startup valuations. He asked me why no one used DCFs, the gold standard valuation technique. I said it was because things were too variable. He countered that that was what the discount rate was for. I thought for a minute and said that things weren’t just risky, you couldn’t even know how risky they were, so you couldn’t rationally pick a discount rate. “Oh,” he said, “Knightian Uncertainty.”
The idea of Knightian Uncertainty, that some things, especially in entrepreneurship, you can’t predict and can’t even assign a probability distribution to, banged into another idea that had been floating around in my head: Taleb had argued in his just-published The Black Swan that unpredictable events drove fat-tailed losses in finance. If every problem is an opportunity, I figured you could take the other side of that bet. If it were true that financiers on the whole make profits slowly for years and then, every once in a while, lose them all and more in sudden “black swan” events, then there should be some way to lose money slowly for years and then suddenly make it all back and more. Black swans are awful in traditional finance, but they’re the winning lottery ticket in venture capital.
Uncertainty around startups and their power-law outcomes were exactly that reverse bet. My theory was that the power-law returns resulted from the uncertainty. You have to invest in startups where there was uncertainty around some key aspect if you wanted to find the occasional black swan. I’d think and write a lot about this later on, but I decided to take a leap and implement it immediately. It became the centerpiece of my investing strategy.
The funny thing was that while the theory worked really well, nobody else really embraced what I was doing. Because I didn’t waste a lot of time trying to form opinions on the unknowable people asked me what I did all day. When I explained why I made certain investment decisions, people took it as fluff and decided I was just lucky. In reality, I researched what was knowable. If it was all knowable, I said no. If something was manifestly unknowable, I embraced it. And, of course, I was lucky. Two of the fifty companies I backed are now among the 30 largest software companies in the world. And my IRR from inception has been consistently above 50% per year…for fifteen years. Of course, my sample size is too small to prove anything, but every venture firm’s sample size is too small to prove anything. I don’t know, really, if it was luck or thinking differently that made a difference. It doesn’t matter to me anymore. You can decide.
So why quit? Three reasons. First, I’ve felt for a few years now that the startups I’m seeing don’t seem so much like progress as just shopkeeping. This isn’t a dig: there’s money to be made razoring a thin slice off a huge market, and there’s certainly less risk in that than there is building a market from scratch. But it’s just not that interesting. The excitement I had as a 14-year old in 1979 trying to understand everything there was to know about computers, because this was something that could radically improve people’s lives, I just don’t get anymore. And not because people’s lives, the people who have access to the tech, aren’t better, I think they are (although this, of course, has not been as unalloyed as I imagined as a 14-year old.) But because I think the tech is no longer improving lives, it’s just maintaining the current status quo. It just feels, I don’t know, done.
The next two reasons are because I’m older. The first is that, as an angel, I’m not really building anything that will survive me. I mean, sure, I’m helping other people build companies, but they’re building them, not me. I thought, for a time, about building my own firm, and I got turned down by five or six LPs before deciding that I was still the worst salesperson on the planet. I thought about joining an established venture fund, and plenty of people wanted to talk to me, but it never went further than that. Occam’s Razor says it’s most likely because I’m an asshole and don’t even know it, but I like to think that, in the words of Glenn Branca after he turned down Thurston Moore’s first couple attempts to join his ensemble, they thought I was “just too feral.”
And then, of course, the other part about being older is that I’m going to die sooner. The actuarial tables say I have about a 15% chance of kicking it in the next ten years, all else being equal (and, as far as I know, it is.) Should I add that to my discount rate? Idk. But it’s certainly true that something has changed in my brain. Maybe I finally grew up. Twenty years ago, when my kids were little, the thought of having more money ten years later was pressing. Now, having more money ten years from now seems like the epitome of play stupid games, win stupid prizes. Right now I have enough money to do what I want. I don’t have enough money that other people do what I want. To me that sounds like the perfect place to be.
Even so, it took me a while to get to writing this. It’s hard to step away from a position where I could probably ride the coattails of my previous success for another decade, at least. It’s hard to step away from being relevant. The easy path would be to do what most VCs seem to do and just pretend I’m still investing. But, man, that’s a lot of time wasted just to get people to return my emails.
I take some comfort in the fact that most of you reading this probably had no idea I was a venture capitalist in the first place, that I somehow made a living teaching and writing. Yeah, no.
So what’s next? I can’t do nothing, it puts me in a bad mood. On dark days I think of what Jung said in his memoirs: “Only if we know that the thing that truly matters is the infinite can we avoid fixing our interests upon futilities, and upon all the kinds of goals which are not of real importance…The more a man lays stress on false possessions, and the less sensitivity he has for what is essential, the less satisfying is his life. He feels limited because he has limited aims.” My view of the infinite is probably different than Jung’s, but I think he’s right: the only way to avoid feeling like your work is pointless is to contribute to something much larger than yourself. I’m working out what that is for me, what I have the ability and excitement to contribute to. And always keeping in mind Bruce’s warning that “time slips away and leaves you with nothing but boring stories.” I hope whatever I do will leave me with something interesting to say.