Lindy Investing Principles
Time-tested frameworks in venture capital
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A recent addition to my podcast diet is David Senra's Founders podcast - David's insatiable thirst for knowledge about the origins of great founders is infectious. He recently did a collaborative episode with the hosts of Acquired, another podcasting staple - expectations were high but even these were well surpassed by the final product. In a wide-ranging 3 hour conversation Ben Gilbert, David Rosenthal and David Senra discussed their journeys as business podcasters, the business model of podcasting, knowledge diffusion, and much else.
One section that's become firmly lodged in my mind is the ten minutes they dwelt on becoming a great investor. In typical fashion, David Senra recites examples of great investors of lore and the timeless principles that are as relevant today as they were decades ago.
Investing is an ancient business. We're just doing it in different ways now.
I always think of where did JP Morgan get his deal flow?
It was a relationship based. You got in if you knew somebody.
David goes on to give another example of Hetty Green, one of the wealthiest women in America in the 19th century.
It is the richest woman in America, Hetty Green
Investing is an ancient business, so you wouldn't do what Hetty Green did. Where did she get her deal from? People knew her
You build a reputation, so literally, there are stories in the book, where there'll be a line of people in financial crashes waiting at her desk.
Cornelius Vanderbilt did the same thing. She invested with him and a bunch of other people. I was like, what would you do today? You want an edge. Everything we're talking about is like, you need an edge.
Nassim Taleb, author of the Incerto series of books, presented a range of ideas in his work. One of these was the Lindy Effect: the idea that the expected lifespan of a non-perishable item or idea is proportional to its current age. That is to say, if something has been around for a certain amount of time, it is more likely to continue to exist for a similar amount of time in the future.
Putting aside the dubious origins of the name, the idea has caught on as a framework for assessing durability over time, with Marc Andreessen one of its many practitioners.
Some of our industry's most revered institutions are a smidge over 50 years old (i.e. Sequoia, Kleiner Perkins) - the industry as a whole is hardly much older if we hark back to Arthur Rock. Listening to David describe the ethos of Founders and investing as a subset of the underlying current of time-tested principles, it's a healthy exercise to reflect on Lindy principles of venture capital investing, all the more so in today's choppiness.
Storytelling
Digging through Bill Gurley's archives can sometimes be like opening a time capsule. In 1999, Bill wrote about how entrepreneurs were sustaining proxy valuations through the art of storytelling. In times when time to IPO had compressed to 2.5 years and public markets were salivating for high growth technology companies, effective storytellers were able to leverage the capital > talent > customers flywheel effectively to assert category leadership.
The company that is most likely to move first is most likely the one with the most money, and the company with the most money is the one that has had the proper ability to sell its story to the investment community.
Another string in the bow of the storyteller is the ability to proselytise investors to non-consensus markets, well before the trajectory to consensus is clear. Again, Bill Gurley would say:
In other words, if there isn’t enough proof that a business already exists, then they must make a judgment as to whether one will. This typically boils down to the executive’s ability to convince the investor community that (1) the opportunity exists, and (2) his or her company will execute against this opportunity. Like it or not, the skill we are talking about here is storytelling, and just as with proxy valuations, the executive is now trying to influence the consideration of the investor.
Just as entrepreneurs master the art of storytelling to their advantage, emerging GPs embarking on their own entrepreneurial journey have to craft narratives of where the tides are taking the venture asset class. Kyle Harrison is the first thinker that comes to mind, chronicling the path the industry has been on towards increasing commoditisation of capital and the consequential unbundling/productisation of venture capital, a secular shift that emerging managers are best placed to recognise and capitalise on.
In service of the entrepreneur
Venture firms are increasingly moving towards becoming 'product-led' by distilling their value-add down to specific components tailored to the ICP of founders.
That said, goodwill earned through a prosaic mindset of treating every founder as a customer will always have a place.
Fred Wilson wrote about this back in 2005 in a post as timely as then as it is today, noting that despite less than 0.3% of assessed opportunities receiving funding from USV, the way the firms conducts itself with founders is the hallmark of continued, long-term success.
Entrepreneurs are really difficult customers to serve well. It takes a significant investment of time, energy, money, and intellect to satisfy them. But if you do it well, you will develop a reputation for great customer service that will keep the best ones lined up at your door.
That goes not only for the founders that the investor meets but passes up the opportunity to invest in, but naturally to the founders that the firm does end up investing in. Kyle Harrison recently described how Sequoia don't celebrate the signing of term sheets, regarding the moment as simply the beginning of a long journey to success.
One of things I've heard from several people is that Sequoia never celebrates signing a term sheet (also known as "getting a deal done.") They see that as celebrating the firing of the starting gun. That isn't the time to celebrate, it's the time to get to work.
Some may oppose the argument that there is a Lindy effect here, given that much of venture's success in the '70's and 80's was attributable to professional CEOs replacing founder CEOs on the scaling journey. This is undoubtedly the case and even if this is far less common now, the customer mindset will be far more conducive to a cordial transition, as Fred Wilson would say:
If you really view the entrepreneur as your customer, when you walk into their office with the hard news that you aren’t going to keep funding their company if it continues on its current path, or that you want them to step aside and bring in someone better suited to run the company, or that they need to get a coach and start behaving differently if they want to keep their job, you will deliver that news as a friend, a person who honestly cares about them and their dreams, and with compassion and understanding. And that is the only way to get through those really hard discussions with a chance of coming out the other side with a relationship.
Performance trumps vanity
We'd have to squint to see the heady heights of 2021 from where we are now. Mark ups were easier to come by, capital was cheaper, enterprises were increasing their IT budgets - things couldn't be better. In such environments, the wrong outcomes are easily interpreted as measures of success.
Semil Shah, founder of Haystack, has talked about the 'interim metrics' that many an upcoming investor pursue instead of actual performance, which always boils down to DPI (dollars on paid in capital, i.e. returned to the LPs). With feedback loops being far longer than the typical fundraising cycle between different funds, it's an easy trap to fall into.
As a new investor, it can be exciting to co-invest with a great partner and/or to have a premier fund follow a deal you’re in; or for a company you’ve backed to raise a huge amount of money.
Newer managers will optimise for 'shots on goal', i.e. a broadly diversified portfolio, to maximise the surface area for an outlier company. This scattershot approach naturally impairs the relationships between the investor and the entrepreneurs, and arguably undermines success in the long-run. Semil Shah goes on to say:
They start to slowly realize that those interim metrics don’t mean much. They’re the vanity metrics of investing. And, as life unfolds, as folks get older, as people get married, have children, begin to limit their new relationships, those investors realize taking more shots on goals comes at a cost of not just concentration, but also of becoming a slave to those false metrics. To be clear, newer investors need the shots on goal to have a chance to catch fire, but over time, the way to generate returns is via concentration, by having conviction, and by taking on more portfolio risk.
The larger point here is about the singular importance of DPI as a measure of success in venture, over and above other shiny metrics. That being said, one of the topics friends and I have been ruminating on lately is whether the concentrated investing approach is a genuinely Lindy principle that has a long lifespan ahead of it, or whether the increase in company formation rates (owing to the cloud initially but now to AI) will end up diluting the success of this approach.
These are just some of the principles that were on my mind and that have surfaced in conversations with peers. What are some that you believe to be true?
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One from the archives as I went back to read Ben Thompson’s analysis of the Sequoia Fund announcement; as expected, he masterfully ties Carlota Perez’s technology cycle framework to Sequoia’s evolution as a provider of Production Capital to derisked, enduring companies, rather than the typical risk-taking Financial Capital provider to hungry startups.
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