Investing returns don’t follow a normal distribution (rather, 80/20, 90/10 etc.) … a tiny number of firms and deals represent the vast majority of gross profits generated.
Very few people organize their day / life / firm around this knowledge.
It takes the same mental and emotional effort to start a restaurant as to start the next Google…make sure the outcome space is large enough for the effort.
Supercycles
- Internet…hundreds of millions of people coming online…who would be the biggest beneficiaries?
- Search — make sense of the chaos of information
- E-commerce — search, for products
- Mobile and mobile apps
- Principal / replacement mechanism for communication, entertainment, interaction
- Wasn’t a market…question was whether there were huge tailwinds for e.g. continuous news feed in China (not about market for news)
- Biggest yet…all storage and compute moving to cloud
- More performant, lower cost, etc.
- Focus was/is supercycle and power laws within them, not end markets
Look for pattern recognition around companies that become market leaders in supercycles
i.e. [1] maximize quality of bets, [2] against biggest supercycles
trend following in venture (once a clear winner emerges) has fared relatively poorly…best outcomes have been VCs figuring out what they need to find (e.g. eventual market leaders within supercycles) and finding investments that match
We’re anthropologists that just happen to be investors.
When the facts within a business radically change, underwriting completely restarts.
Value re-shuffling e.g. multiple compression
- interest rates are to valuations what gravity is to the apple
- until recently investors could only ignore macro because they were investing during decades of very low and stable rates
- rate of change of rates is super impactful
Altimeter applying 20% discount to pre-Covid 10-year average multiple — to estimate target exit multiple
50 bps to 400 bps on 10 year = paralysis, inability to forecast the future
logical extreme: if Treasurys offered 20% yield, no one would invest in anything else
price taker for rates — assume current rates futures are accurate and act accordingly
new normal likely to look a lot like the old normal, but have to get through rates volatility and uncertainty
…to underwrite to a predictable cost of capital
As a firm we never say all-or-none, we say less-or-more.
When multiples are at ATH you should only do the best deals because only the best deals will clear their valuations (and vice versa).
This is not a blood in the streets moment. Look at where growth co’s are vs. Jan 2020…many are just getting back to normal / average valuations. We were in left-field for valuations…don’t anchor to that.
The secular curve around value creation and disruption…there will be more value created over the next 10 years vs. the last 10 years.
When to distribute capital back to LPs
- Do we still have venture returns left in positions over a reasonable period of time? (3-5x over 3-5 years)
- If no, then distribute
There is a permanent increase in the amount of dollars flowing into venture (pensions and sovereign wealth funds only started en masse in the past 1-2 decades…and have much lower hurdle rates than e.g. endowments).
Portfolio Concentration
- diversification is a great way to preserve wealth but a terrible way to create it
- can you generate alpha…where you can, put maximum dollars to work
- slugging pct. > batting avg.
- Gross Profit $$ come from having conviction before the rest of the world does and putting sufficient money behind it
You prepare yourself for risk moments (e.g. never jump before inspecting landing) — that de-risks situations in ways that are not apparent to the outside world. (e.g. is Alex Honnold that risky, or just better prepared than anyone in history?)
To the person who has done the work and prepared themselves, it is/feels much less risky than it looks from the outside-in.
When you believe something you want to do something about it (life choice) — ergo this view of risk stems from a desire to operate a certain way.
Cultural north star: essentialism (the art of doing less, better)
Biggest risk moments of past 24 months
- did more than they should have (against essentialism)
It’s harder to pick people than it is to pick stocks.
It’s not what you say to your kids, it’s what you do. The life you live, how they see you treating others, the choices they see you making.
The most important thing:
We are all just passing through. Not thinking about your own mortality leads to bad decision making, death bed regrets, etc. Don’t waste it. Be intentional about how each day is spent…get it done now because life is short.
What are the eulogy values you want to live by?
Book: Snowball…start with a really small snowball and a really big hill (for all things…love, relationships, impact, invention, investing, etc.)
Some of the best venture returns ever occurred in the public markets.
booking.com, priceline, google, etc.
Buffett: Marry someone you love. If you have a harem of 100 women you don’t get to know any of them very well. (apply this same logic to your portfolio)
Resist groupthink, fomo, following others vs. doing your own work.
Core value of burning man: no judgement…through that you see the art of the possible. An open source experiment of 75,000 people
Biggest insecurity
- Terrified doing a bad job as a dad (entitled kids, not living to full potential, deprived of arduous but beautiful journey up the side of the mountain)
- dying with regrets