Paradox of HFs Fail-fast/Flip-flop rapidly vs Startup CEOs Confirmation Bias
Startup founders/CEOs suffer from MASSIVE Confirmation Bias
- Most people go through life "this is how things work" buying into the consensus.
- Startups that disrupt go against common wisdom
- Need strong views, theories and a conviction when making a very big bet of time or money or both.
- So both founders/VCs/investors follow a consensus thesis, antithesis to a disruptive new synthesis
- Another hallmark is DETERMINATION and PERSISTENCE to achieve things when others give up!
- High Output Management, Only the Paranoid Survive by Andy Grove .. doggedly measure and improving
Seed investors/VCs support this DIFFERENCE Determination and supreme confidence
- Good "sameness" is not acceptable - good product, good customer refs, ok revenue/KPIs = dont IPO - VCs want THINK DIFFERENT extraordinary greatness - odd contrarian strong, non consensus views - But these magical unusual situations "may have all kinds of problems and issues" as they disrupt - Mindset we're ALL IN, BALLS FORWARD commitment of time/money for 10+ years - Also can't invest in competitors in same niche .. this team gets it all! Friendster VCs can't also do FB! - 1860s-1930 disruptors Ford, Rockefeller, JP Morgan built most of today's post-industrial world - SRC: Ben Horowitz’s book, The Hard Thing About Hard Things, Thiel's Zero to One
LOCKIN can end up in stubbornness.
- But the point is once they achieve their synthesis, they are LOCKED into it to do a startup company. They succeed partly due to extreme determination-stubbornness-headbanging persistence to synthesis Think Edison's 1000 attempts to get to a light bulb.
Multiple synthesis! Reality is Product-Market-Team fits not Concrete
- It’s very important to us to have a full discussion and get all the facts on the table and really kind of vet these things out.
Change happens! Incumbents fighting back rapidly! SHTF
- Systems evolve, world changes - however flip-flops are seen as weakness or bad Business models!
- Uber as example of core model that remained same with optimizations (surge,geo-growth)
- Google's page rank, search-at-scale remained the same though pivoted to text Ad-words and CTRs
- Distractions (Uber Eats, self-driving etc) hurt profits and Google's 20% ditched/other bets
Paradox of fail fast adaptiveness and pivots
- You WANT to fail fast to discover fit, what is working and what is not
- Yet "Pivots used to be we f**ked up!" - lose momentum, waste cash and time
- Paradox is extreme determination-stubborness-headbanging persistence to original synthesis vs Ability to Adapt, fail fast and survive to create a new niche or competitive edge.
- 'strong opinions, loosely held' process - Conviction.Conviction.Conviction. New facts. Change
- Resolution: you have to fall back on judgment, open minds is not flip-flopping if survival NEEDS change.
Lesson: VC stress test - fighting well
- Top VCs empower GPs to pull the trigger if have conviction even if others are opposed
- But vital to have investing-rigor - stress test thinking => red teams debate/counter argue opposing view
- "When a GP brings in a new idea, I just beat the shit out of it ... he does the same to me .. a torture test." - Marc Andreessen
If presenting GPs idea survives then VC firm is all in - disagree and commit kind of VC culture
Lessons from great MFs - Finding Greats, Value and LT
Lessons from Great MF Asset Managers - GARP
- Investors are on a continual quest to find the holy grail companies with huge moats, competitive advantages, great management teams, etc
- Investing in Great LT Moats - not just innovations or disruptors. VCs do go for disruptors but bet on first mover advantages or back the best team edges.
Red team approach for Investing Rigor
- If it doesn't sustainably produce cash (not in theory but money he can see in a bank) without racking up huge amounts of expenses or debt, then generally WB is not interested. WB hasn't had a problem finding companies with these characteristics that he can buy at reasonable valuations.
- MFs managers identify the consensus view and then outline their variant perception.
- At Dalio's Bridgewater HF process of partner meetings, stress testing ideas and defend thesis in detail
- MF Risk & mitigant lists are also pretty commonplace in investment pitches these days.
Market Accumulation of Great Companies for LT
- To do this balance many MFs keep a watchlist of great companies and if volatility presents an opportunity, they strike, often selling 'good' companies to replace them with 'great' ones.
- You also have to be able to buy them at a decent price - it is hard to do both "Price is what you pay; value is what you get." - Warren Buffett
MFs esp. Value Discipline Invest in Constancy, VCs in Change
"Value investing is the only other place in the market where you can actually find long term investors." - Warren Buffett is the archetype but also Seth Klarman, ... Anything Warren Buffett's willing to invest in [VCs] run screaming in the other direction and vice versa. He invests in Heinz Ketchup and the reason he invests in Heinz Ketchup is that people have been eating Ketchup on hamburgers for 100 years and therefore the best guess would be that they're going to continue to eat Heinz Ketchup for the next 100 years. We're wired completely opposite. He's betting against change and we're betting for change. When he makes a mistake it's because something changes that he didn't expect. When we make a mistake it's because something doesn't change that we thought would. They could not be more different in that way. But what both schools have in common is an orientation towards original thinking, willing to view things as they are as opposed to what everybody says about them or what they've believed to be." - Marc Andreessen
Best HFs - love changing their mind.
HFs follow their thesis till it stops making money, then get out FAST!
They are quick to accept things have changed. - Inspite of any dogma or hard paid up insights, if a trade goes bad, the HF manager's job is to REVERSE it! - If you're wrong in the markets, you can simply sell the position as soon as the market opens.
Private Investments, Alternative and Total Return Assets
- Illiquidity: But if you make a mistake with a private investment, you'll either be waiting much longer to offload the stake and/or doing so at potentially less than favorable prices. Mistakes can easily be magnified.
Great Biographies get inside the heads of true disruptors - people don't change that much
- The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World.
- The Four Steps to the Epiphany
- Walt Disney great bio
- Schulz and Peanuts
- Titan: The Life of John D. Rockefeller, Sr.
- The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance