Eat What You Kill
The Meritocracy of Venture Capital
This is a weekly newsletter about the art and science of building and investing in tech companies. To receive Investing 101 in your inbox each week, subscribe here:
They say when you have two kids, the second is always more resilient than the first (and by "they" I mean memes on the internet.) Well, that certainly proved to be the case with my kids. My two oldest are about 2.5 years apart, and my first-born has always been cautious as a cucumber (that's a thing people say, right?)
I remember once he went to a friends birthday party, and was met with his first introduction to the concept of piñatas. At first, he thought it was a really cool statue of a donkey hanging in the tree. Little did he know he was about to witness the blood-thirsty dismemberment of that animal before his very eyes.
I tried, as best I could, to explain the concept of a piñata. But at the time, he was about 4. We're also not a particularly athletic family, so I think the concept of violence surrounded by mayhem didn't really sink in. He got his bag, and stood in the circle, smiling. Just waiting to see what the activity would entail.
The look of horror in his eyes as this little girl, who he knew from class to be a kind, sweet, very not-violent little girl, devolved into a mafia hit squad, just demolishing the face of this little papier-mâché donkey. But as unprepared as he was for the violence, there was nothing that could have enticed him into the mayhem that followed.
Candy burst onto the ground, and children scattered in every direction. Crawling over each other, clawing the dirt, casting off the yellow starburst in search of the blow-pops. If this had been a good ol' fashioned hunting frenzy, my boy would have become a vegetarian so fast.
I was reminded of this fond memory because of what I've wanted to call today's piece for a long time: "eat what you kill." Sometimes to eat, you have to hunt. But different creatures can hunt in very different ways.
Crash Coursing The Venture Capital Ecosystem
If you've been reading my writing for a while, you know that I spend a fair bit of time reflecting on venture capital as an ecosystem. There were two articles that were really the driving force in why I set out to start writing more: (1) The Unbundling of Venture Capital, and (2) The Productization of Venture Capital.
In 2022, as the markets started to change, I found myself reflecting on what kind of work I wanted to be doing as a VC. That led me to questioning a lot of the first principles in venture, and ultimately led me to a very different kind of venture firm in joining Contrary. I'd found myself reflecting on the who / what / where / when / why of venture, and that gave me a fair bit of fodder for future pieces unpacking the space.
Digging into the unbundling of venture led me to unpack the concepts behind the renegades of venture capital, why most VCs suck at talent, and how most people might design the perfect venture firm if given the chance. Across all that writing, I kept coming back to this core idea that can best be explained by this Charlie Munger quote:
“Show me the incentive and I will show you the outcome.”
That led me to my most popular piece thus far: "The Blackstone of Innovation," where I unpacked the business model of venture capital. But while you can talk a lot about economic incentives, there is also value in unpacking the cultural incentives. The behaviors and norms that help craft the "why" behind what people do.
Peeking At The Other Side Of The Table
Venture capital firms are complex webs of cultural politics, power struggles, and short-term measurements of long-term activities. In some ways, VCs can be the dumbest people you'll talk to. Not because they're normal dumb, but because they move so fast, and do so much while operating on so little information that their decision making paradigms can defy most forms of logic.
When I help the founders I work with prepare for their conversations with some VCs, I explain this dynamic. VCs will often leverage a heuristic you could call, "so what you're saying is." They'll hear a pitch from a founder, and put that famous pattern recognition to work in order to craft a narrative in their head. "So what you're saying is [blank]." Almost instantaneously, they'll then be convinced that that framework is a fixed reality, and it becomes almost impossible to change their minds.
They say you can only make a first impression once, but with VCs that first impression can sometimes last a lifetime.
Now, take that strange fast-moving poorly-informed decision making paradigm, and then stick a dozen or so of them in a room. That's a venture capital firm. For people coming up in a venture firm proving themselves, one of their primary responsibilities is to understand all those fixed-reality frameworks floating around in their partner’s heads (e.g. playing politics with who will like what deals).
On top of that, they will also fall victim to what I call the "little sister syndrome." A lot of firms are quite bad at ever seeing someone as more than the junior person they hired years ago, regardless of performance or experience. That's why so many VCs don't stay at one firm, but move from firm to firm, where they can anchor at more senior positions that better match their experience.
Finally, most VCs don't really trust each other. There is a constant organizational politicking that exists where people try and understand what other people say yes to, what concerns they'll have, and how best to frame the story of an investment in the best possible light.
I've written before about the luxury of trust that exists (or doesn’t exist) among investors:
"No one trusts each other and you don't know how to sort through people. So you let these people prove themselves until you trust them. And you usually don't really trust them until you've already established your own career. Trust is a luxury."
In the book Speed of Trust by Stephen Covey, he has a great framework for thinking about trust:
"Trust is not merely a soft, social virtue: rather, trust is a pragmatic, hard-edged, economic driver. Trust is a learnable and measurable skill that makes organizations more profitable, people more promotable, and relationships more energizing. The ability to establish, grow, extend, and restore trust with all stakeholders is the key leadership competency of the new global economy. High-trust organizations outperform low-trust organizations by nearly three times. Top-trust leaders enjoy significantly better results in areas such as profitability, productivity, innovation, employee engagement, customer loyalty, and stakeholder value. And while the benefits of trust are clear and well-documented, the implications of a lack of trust are stark: increased costs, reduced speed, and lessened loyalty, to name a few."
Unfortunately, for a lot of VCs, you have fast-moving diversified reactionaries that are operating with limited information, a fine-tuned sense of internal organizational politics, and very little trust in the people around them. Now, in a bull market a lot of that can swept under the rug. But what happens when the rug gets swept out from under you?
The Music Stopped Playing
Venture funds are often rampant with short-term measurements for what should be long-term activities. Promotions, carry, power, and influence are all tied up in paper gains. At the end of the day, the best investors care about DPI (aka cash returned to LPs). But the majority of people are too easily swayed by short-term measurements. And if you were measuring the short-term of the last 1.5 years, those measurements are all mostly down or in the red.
In a cultural organization set up to reward performance, you're now seeing a lot of frustration as the result of company valuations correcting, public markets getting wiped out, and portfolio markups going away. The strain of that reset can lead to some bad behavior.
So why are VCs acting that way?
Getting Out Of Their Own Way
Performance in venture is largely defined by this idea I mentioned before: eat what you kill. Your ability to get deals done will largely determine your career. And in some ways, that's exactly what should happen. You want there to be a performance-based component to your work. You want to demonstrate that you can be successful.
But there is a misalignment in venture between when an activity occurs and when its success can be effectively measured. In a typical venture fund you have a ~1-2 year deployment cycle where you're investing capital. Around the halfway mark, you start raising your next fund. Venture firms want to evaluate the near-term performance of partners or potential partners, because if they’re not doing well they don’t want to invite that person into the next fund to share in the carry.
The problem with that is that most of the realized value in a company's life doesn't happen in the first few years after investing (e.g. during the deployment period). Instead, it happens in the latter years of being invested (e.g. the harvest period). But if you're measuring the success of the harvest by the metrics associated with deployment, you're bound to make a pretty weak judgement.
As a result, people reward short-term behavior, like "getting deals done." I've written about this dynamic before:
"In a venture firm internal political power comes from "getting deals done." When the main currency for the culture is getting credit for making investments it aligns every activity around deploying capital and judges it against that bar."
I wrote last week, too, about Warren Buffett describing a world where "activity has become the order of the day." The "eat what you kill" mentality is the epitome of measuring what should be long-term activities (investing) using short-term measurements (getting deals done).
I've always loved this tweet from Josh Kopelman about the limited reflection most investors have about their own processes.
So I wanted to take that advice, and step back to reflect. Should we do away with "eat what you kill?" Or is it simply in need of reframing?
Painting A Perfect World
Defining Performance
One important thing to keep in mind: performance matters. Not to lean too heavily into the violent imagery, but if you want to eat then killing matters. I've written about this emphasis on performance before.
"Doug Leone says it himself. The two most important things are (1) performance, and (2) teamwork. But if you don't have number 1 then nothing else matters."
But, like I wrote about last week, "what gets measured gets managed." 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.
So what, instead, are the best investors measuring? Long-term success. When you look at someone like Warren Buffett's career, there's no question that it's phenomenal. But one of the most impactful things he did was enabled himself to keep playing the game without ever getting wiped out. And then he did that for 70+ years.
So much of investing can revolve around hype cycles. When you look at those cycles coming and going, there are so many people who said Buffett had lost his touch for not getting in on the frenzy in 2000, or in 2021. But the reality was that he was playing a replicable, disciplined, long-term game that he's been quite successful at.
Even the most successful venture investors aren't without flaws, but they've made sure that their ability to simply stay in the game long-term has been a huge component of their success.
In an episode of Invest Like The Best, Aswath Damodaran, a Professor of Finance at NYU, talked about evaluating managers. Granted, he was talking about value investing. But I think the principle holds true:
"I think the way we rank managers encourages them to be not just risk takers, but reckless risk takers, because that's how you end up at the top of the alpha list or the best performing managers... I would never invest in the best performing manager in any year or even over a five year period, because they're going to almost wager that best performing manager has a much greater chance of being the worst performing manager in future periods than the middle of the group. I think that rather than look for the highest alphas, you want to go for consistency, even if it means settling for little or no alpha. The Hippocratic oath of doing no harm should really be first, front and center for anybody's managing other people's money. If it's your own money and you want to make bets, big bets and hope they pay off, fine, but don't play games with other people's money. We take 40% of your portfolio and buy Valiant, which is what some value investing funds did in the five years ago before Valiant blew up and then say, well, we never saw this coming. I know you didn't see this coming, but you didn't have to put 40% of your portfolio into one company."
I mentioned how I've written before about the productization of venture. And, rather than an AI system that tells you whether or not to invest, the reality of every venture fund is going to revolve around whether that firm can build a "product offering" that justifies its existence. And the measurement of that product should be whether it contributes to a replicable, disciplined, long-term success engine.
Investing Is An Apprenticeship Business
One aspect of building a replicable, disciplined, long-term success engine is building a culture and team that doesn't revolve around flash-in-the-pan hype, but rather can persist across generations. Again, I think Sequoia has done this really well. Don Valentine personally mentored Doug Leone, who did the same for Roelof Botha, who did the same for Pat Grady, and on and on.
Unfortunately, the reality of most investment firms is that they don't incentivize apprenticeship or succession planning. I've written about this dynamic before:
"You'll often hear this idea that "investing is an apprenticeship business." It's not. There is no real tangible incentive for venture investors to mentor anyone. As a result you have a lot of VCs who turn out to be pretty terrible managers and mentors."
But without that collaborative spirit, you break down trust, which breaks down the productivity of the engine of the firm, and ultimately leads to poor performance. Like Covey said, "Trust is not merely a soft, social virtue: rather, trust is a pragmatic, hard-edged, economic driver."
Frederik Gieschen has a great interview with Alix Pasquet who describes some apprenticeship characteristics that took place at the original Tiger Management in the 90's:
"There were two guys inside of Tiger in the 90s. One of them was Andreas Halvorsen. The second guy shall remain unnamed. If you were a young analyst, you went up to Andreas and said, Hey, I really like this idea. I want to pitch it to Julian. Andreas would say, let's work on it together. I'll help you shape the idea, point you in the right directions, the strengths and weaknesses of the idea, the process they should take, and so on. And then once you're ready, go and pitch it to Julian. And that analysts would go and pitch to Julian and Julian wouldn't even have a clue that Andreas had pushed this guy forward.
The other guy would take the idea and speak to Julian and say, you know, I spoke to so and so. He's got an idea. I think the idea is okay, but it's not really fine tuned yet. I'm going to help them fine tune it. And then they would go and do that. That young analyst never really got the full credit from Julian. Guess which guy is actually the wealthiest and most successful fund manager today? And by the way, the second guy is also very successful, doesn't matter. But it's Andreas, right? So you want to be that guy. You want to have a cultural impact on your business. Be the teacher.”
Perfecting The Partnership
Finally, we come to this question of building a partnership, the traditional venture capital monolith. The "eat what you kill" mentality very much gives credence to the idea of a "lone wolf" culture hunting for that kill. I've written before about how "a lot of VCs would prefer to work in an effective team that can all trust each other and contribute to exceptional success."
Peter Fenton has a great line about how "the venture firms that have fallen off the leader board are those who keep their partners in power after they pass the age of 55." The more top-down a venture firm is, the harder it is to build a collaborative and creative team. But there is also a chasm between specific breadwinners and how to bridge the rising stars from the decorated veterans. That's where the previous section on apprenticeship comes in.
There are countless resources on how to build a partnership, what ways other teams have tried to work more successfully in collaboration with each other, and how remote work could have changed the way partnership decisions are made. But at the end of the day, the partnership is just a shorthand for what some people think of as a VC's product: "their decision making engine."
For those partnerships that refuse to evolve, and focus on building replicable, disciplined, long-term success engines? Well, in the words of Jeff Bezos, "your margin is my opportunity." I had a friend at another venture fund text me with a translation of something members of a partnership often say, and what it actually means.
Those are the kinds of partnerships that I intend to beat. Building a replicable, disciplined, long-term success engine is more than just "getting deals done." It's building a culture, product, institution, and mentality that drives towards success. That's the kind of output that I want to measure, and that I want to be held accountable for building.
Thanks to Kelly Toole, Rex Woodbury, Sam Crowder, Molly Alter, Kathi Wilhelm, and Anthony Kline for jamming on this subject over the years.
Thanks for reading! Subscribe here to receive Investing 101 in your inbox each week:
Amazing! Thank you.
this one feels like it could have been three different posts :)