E312: The Power Law of Reputation in Venture Capital
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What is the main topic discussed in this episode?
You have 25 years of venture experience from August Capital to now Lobby Capital. You've invested everywhere from seed to pre-IPO. Do you find that the greatest founders are quote unquote good people, aggressive people? Is there a certain archetype that really comes through as correlated with the extreme power law outcomes?
I will only back people who are unflinchingly ethical. And in fact, part of my process... How do you define that? There are definable truths. And if you are willing to, you know, if you are willing to stretch the truth, you are not unflinchingly ethical.
Is pushing somebody to work 100 hours a week, is that ethical? Is telling somebody you're going to go and deliver something that you're not sure that you could deliver, is that ethical?
Choosing how much and how hard you're going to push is not an ethics question, it's a culture question. And I do think that's an extraordinarily important question. I backed a phenomenal entrepreneur, and in his first startup, one of the tenets of his company was work-life balance. And then I backed his second company.
How do ethics and long-term relationships impact venture capital?
And when he built a second company, he said, under no circumstance is that going to be my tenant. Now, he remained an extraordinarily good human, a very devoted family man. But he realized that an emphasis on work life balance suggested that the startup world was not an unimaginably rigorous thing that one had to engage with all of one's energy. I don't think he became any less ethical when he said work-life balance is not the thing we're focusing on. Selling something you think you can deliver, although you're not certain, is one question. Selling something you know you can't deliver or you know you don't have is another question. And I would not back someone who is selling something that they know they can't deliver.
That is dishonesty.
Private equity, you invest, you have this plan to get to the 2 to 4X return. You have this kind of very rigorous plan. And venture capital all relies on these outliers, these highly uncertain businesses. How do you, as a venture capitalist, build a career strategy around this uncertainty?
Man, it's crazy. I literally gave a talk this week about all the ways in which I've failed. You know, and I said, you know,
What defines an unflinchingly ethical founder?
So venture capital is about disappointment because the reality is that I've invested in, let's call it, 50 companies over the last 25 years. And every single company in which I invested, I believed, could be a standalone public company. I don't invest in a company that I don't think has the capacity of a standalone private, you know, independent company because the best outcomes are a result of your capacity to do that. Right. And so and yet of those 50. uh four have gone public and and been standalone businesses uh i have a fifth i think is a lot is the likely fifth so you know one in ten of those companies has done the thing that is that i hoped was true of the other nine and ten and so yeah there's a whole lot of oh my gosh i was wrong or that worked in a way i didn't think it was going to or the environment changed uh but
But as long as you're backing astonishing people who you think are doing the right thing and one time out of 10 it works, then the business model is a success and you get to continue to do it.
Does this string of disappointments in nine out of 10 companies not working out the way that you envisioned, does that get easier as you progress in your career? Meaning it's kind of becomes part of the expected ride that you have on a year to year basis? One of the hardest things of investing is seeing what's shifting before everyone else does. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and to stay ahead of consensus. Meanwhile, smaller funds have been forced to cobble together ad hoc channel intelligence or rely on stale reports from sell-side shops. But channel checks are no longer a luxury. They're becoming table stakes for the industry.
The challenges has always been scale, speed, and consistency.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:00–1:13
2
How do ethics and long-term relationships impact venture capital?
1:13–2:28
3
What defines an unflinchingly ethical founder?
2:28–11:59
4
How does uncertainty shape a venture capitalist's career strategy?
11:59–17:51
5
What are the challenges of backing entrepreneurs in venture capital?
17:51–34:46
6
How does reputation influence investment decisions?
34:46–41:13
Speakers
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