Making Connections #3: On Reflexivity
As an investor in a small market, I often dwell on the impact of false negatives in our decision-making.
Which capital- or regulation-intensive business could have reimagined how we engage with the world but never received funding?
Early no’s from investors matter because of the role of reflexivity in startup creation. No startup has objective value. Instead, the value of the startup is entirely subjective - what do people believe this company could be worth in the future?
It is the job of the founder to craft a narrative that increases the subjective value of their company — to potential employees, customers and investors.
If they successfully persuade investors of a future world dominated by their product, they can tell a story to potential employees of being well-funded, enabling them to hire the very best. With those employees they build a high-quality product, which attracts customers, enabling a future capital raise.
But if they never get the initial investment, that future dies. The capital requirement to get started in the industry is unavoidable, so their sector-redefining idea is eventually reshaped into an incremental innovation in the existing paradigm.
As examples of companies made possible by reflexivity, Tesla, WeWork and Uber used narrative in astonishing ways to persuade investors of a future world where their unit economics are profitable and the competitive advantage is sustainable. They shaped the way we live and work and delivered excellent returns to their early investors (tbc on WeWork).
But why do the charismatic, idiosyncratic founders of those three companies all appear to come from exactly the same mould?
The most successful founders in our portfolio don't fit that hard-charging mould — they all have different backgrounds and skillsets but commonly get their heads down and execute without fanfare, reshaping industries in the process.
When analysing investments in very early-stage capital-intensive businesses where the need for subjective belief and reflexivity is highest, how do we most effectively screen for founders who have the capacity to contort the world to fit their needs?
Books
Common Stocks and Uncommon Profits by Philip A. Fisher
This is frequently cited as one of the classics by public markets equity investors. First published in 1958, Fisher's philosophy of investing holds enduring lessons for venture and growth investors.
Fisher firmly believed in holding a concentrated portfolio of growth stocks. Rather than focussing on purely quantitative metrics, he concentrates on 3 areas of analysis:
Operational excellence - Can the company grow strong profits from existing products/services? Is the company investing heavily in R&D to ensure it has a pipeline of future products? Is that R&D team well integrated with the rest of the business so the right products are developed? Does the company have an excellent go-to-market team? What is the margin today and how do they strengthen it over time? Is there a durable competitive advantage? How much capital is needed to fund growth?
People - Does the company have a strong culture across all levels? Do the executives work together towards a shared set of goals, unencumbered by bureaucracy and factionalism? Is there depth to the management?
Price - Stick to underlying fundamentals without following the crowd. Don't assume a high PE ratio means future growth is already in the price, sustained growth over the long term will keep the valuation high.
His due diligence process was affectionately labelled scuttlebutt - speak to competitors, vendors, former employees and customers. Find the research scientists at universities who can tell you whether the technology works. Speak to the execs of trade associations to get a sense of the competitive landscape and who has the best reputation.
Reading a book published in 1958 is a reminder of how some ‘truths’ endure over the long-term, while others fundamentally change. Fisher discusses behavioural economics in-depth, decades before Tversky and Kahneman started publishing, even before the Chicago school's efficient markets hypothesis had taken hold. But he also talks about how government deficits automatically lead to inflation — the past ten years have clearly shown us how the rules can change.
For anyone looking to understand the fundamentals of equity investing, whether venture, PE or public markets, this is a must-read.
Online Writing
“The Clock is Ticking”: Inside the worst U.S. maritime disaster in decades
This is an example of what Vanity Fair does best, longform pieces that draw you into a world you knew nothing about, capturing your attention with twists and turns in a surprisingly emotional journey.
Tracksmith is running a masterclass on how to build a DTC brand from the ground up
This article dives into Tracksmith, a consumer brand targeting runners, and the strategies they’re using to build an enduring brand.
The Enemies of Writing by George Packer
“As Christopher Hitchens wrote, “‘Views’ do not really count. It matters not what you think but how you think.” For writers, certainty has a flattening effect. It washes out the details of human experience so that they lose their variety and vitality. Certainty removes the strength of doubt, the struggle to reconcile incompatible ideals, the drama of working out an idea without knowing where it will lead, the pain of changing your mind. Good writing doesn’t deny or flee these things—it explores them down to their depths, confident that the most beautiful and important truths are found where the glare of certainty can’t reach.”
How will you measure your life? by Clayton Christensen
I wanted to resurface this article as a tribute to the author. Reading the book changed the way I think about my life. Ambitious people can often over-index to achievement at work, where success is more tangible than the nebulous areas of relationships with your partner, family and friends. Don’t make that mistake.
Podcasts
Robert Sapolsky's writing is glorious. Across a range of books, he vividly explains how our biology impacts our behaviour and the resulting implications for the idea of free will.
Without forcing anyone to swallow all 800 pages of his most recent book Behave, I've uncovered a few wonderful podcasts for anyone interested in the convergence of our neurology, hormones, genetics and culture and how it affects the decisions we make day-to-day.
The scientific one with Peter Attia
This podcast dives into stress, and particularly how low socioeconomic status impacts stress levels across generations leading to significantly worse health outcomes for the poorest people.
The philosophical one with Sam Harris:
In this podcast Robert and Sam investigate the moral implications of the impact our biology has on our behaviour — how can we be blamed for acts committed that were the result of sustained childhood trauma or a tumour pressing on our amygdala?
The youtube rabbit hole:
Robert Sapolsky's entire Human Behavioural Biology class at Stanford (all 25 lectures) is available here. I love the internet.
Let’s Connect
In Real Life:
I’m all warm and fuzzy from our first On Deck of the year in Sydney. It’s so fun to witness a collection of experienced operators from different domains building connections with people who could help them tomorrow and ten years from now.
The next On Deck will be in Melbourne next month. Apply to join us here.
Email me back:
The best thing about an email newsletter vs a blog is the ease of starting a conversation with a reader. I’ve loved hearing everyone’s thoughts so far, please keep them coming.