I was a big fan of Formula 1 racing when I was growing up. But my interest really peaked once I discovered the magic that was Ayrton Senna
On May 1, 1994, at the San Marino Grand Prix, Ayrton Senna passed away doing what he loved and did best, driving to win.
The greatest honor that was paid to him was the eponymous documentary, “Senna” that is available online for purchase. Watch it.
Periodically, I take a look at some of my favorite quotes of his. In no particular order, here are some that have always seemed to resonate, particularly as I serve entrepreneurs.
"We are made of emotions."
“On a given day, a given circumstance, you think you have a limit. And you then go for this limit and you touch this limit, and you think, 'Okay, this is the limit'. And so you touch this limit, something happens and you suddenly can go a little bit further.”
“There is a great desire in me for improving...getting better. That makes me happy. Every time I feel I am slowing down my learning process - my learning curve is getting flat or whatever - then it doesn't make me very happy.”
"...the last qualifying session. I was already on pole, then by half a second and then one second and I just kept going. Suddenly I was nearly two seconds faster than anybody else, including my team mate with the same car. And suddenly I realised that ...I was no longer driving the car consciously. I was driving it by a kind of instinct, only I was in a different dimension. I was just going and going, more and more and more and more. I was way over the limit but still able to find even more. Then suddenly something just kicked me. I kind of woke up and realised that I was in a different atmosphere than you normally are. It frightened me because I was well beyond my conscious understanding. It happens rarely but I keep these experiences very much alive inside me because it is something that is important for self-preservation."
Ayrton Senna personified many things but his desire to redefine and push the limits of his car and himself was probably his best known trait. Navigating the maze that was an F1 circuit, at high speeds, fused to the car he was driving, one with the machine, and focused on winning, while constantly in paddle-shifting self- and situational-awareness mode, was an incredible display F1 fans were fortunate to have enjoyed. I miss him.
Chris notes that ‘it’s impossible to completely map out the 'idea maze' (quite different from the race circuit where you can in fact map it in advance but on race day there are all sorts of new, random and competitive variables affecting said map) but recommended starting points would include research and analysis of the history of the segment (and those who came before you), analogy, theories, and direct experience.
It’s a helpful way to think but I’d posit that it omits a key underpinning.
There is a power that lies in a founder’s ability to syndicate her cognitive distortion and recruit a team to pursue the vision and bravely go forth into the idea maze. The result of this is to weld involvement with commitment. Execution thereafter is fueled by conviction. So if execution is everything, ideas are a necessary firestarter and conviction is the fuel (and accelerant).
I see many entrepreneurs that exemplify this.
But there’s a problem.
While the entrepreneur and her team have shown the readiness, willingness and ability to go on the journey, the pursuit may usually require tiered financings.
The first level financing is supposedly plentiful at seed-stage and available to all good teams with good ideas and/or products. May the Lord continue to shower blessings on the AngelList team for all the good they do and continue to. The angel investors’ marching orders to the company are usually simple: in exchange for cash (and quality company building advice), build or reinforce a good product, for a willing market, that pays (or appears willing to pay) for it, either in cash, or some other form of currency, like attention.
For pure consumer facing applications or services or even enterprise SaaS plays, the marching orders seem simple enough. Execute to the said milestones, and you'll be in a good position to raise additional financing.
Well, theoretically that is.
As an entrepreneur, you may struggle to convey your idea map at the onset, particularly if you are addressing an undiscovered need versus an unmet need. And the routes on this 'map' will be more long-winded than any other. The paths will be longer and harder. Sometimes, your GPS will fail you, not unlike the first iteration of Apple Maps. Trust me, as I have lived, and continue to learn, this.
Our entrepreneur, as most of the ones I have run into, has gotten caught in no-woman’s land. Met or exceeded seed milestones, but slipped and fallen into the trough of conviction that is today's Series A VC environment.
What exactly is going on?
I have some theories. But I will focus on two that have consistently bothered me. One is the apparent over-reliance on pattern matching as a substitute for forming theses. Another is the seemingly moving target that is called ‘fundable traction.’
Conventional wisdom has always been incredibly seductive. Particularly as it requires little to no intellectual effort. I am slowly forming a hypothesis that pattern matching in VC is showing similar characteristics, oddly enough.
Today's VCs are falling prey to the minefield of so-called axioms masquerading as truisms. So sticking to the ‘x for y’ or ‘a for b’ pitches is simple, believable and thus fundable. I have no issues with this framework. It helps entrepreneurs to tell a story and VCs love to fund storytellers.
But it implodes when faced by disruptive innovation, which I have seen recurrently present itself as an undiscovered versus unmet need. VCs love the latter, relying on the oft-quoted cliché of investing in painkillers and not vitamins, ignoring the fact (not truism) that the market for vitamins is (not just a little bit) larger.
This leads to the second half of the problem, traction. Sometimes I wonder if Andreesen Horowitz's Jeff Jordan should have titled his superb 'The Series A Round is the New B Round' post, 'Series A is the new N(ot Now).' The expectations that early stage VCs have of companies looking for Series A funding are so high right now, (particularly when led by entrepreneurs they haven't previously funded) that I'm advising seed companies that thrice as many ‘milestones’ agreed upon at the time of seed financing need to be achieved in half the time. Over promise and over deliver. And frankly, that may STILL not be enough. Series A VCs want traction. Which translates into: ‘please be a successful business that doesn’t need venture capital’ or ‘display up and to the right ‘methmetrics’ [which may or may not be defensible or repeatable but that’s what excites us].’ It's the remixed 'Rome wasn't built in a day, yeah but Rome didn't have OpenGraph either' cliche.
So is traction now the metaphor for a box hedge? And is the traditional Series A mostly lost forever? Knowing how entrepreneurs adapt, will this foreshadow the beginning of $8-10m seed rounds with uncapped notes? When does it stop? If risk is absorbed by increasingly larger seed rounds syndicated across many angels, do early stage VCs become redundant? As LPs concentrate funding allocations into a handful of firms that aren't increasing GP headcount, leading the fund GPs to have to deploy larger amounts per investment, don't the fund returns maths begin to stumble? The widespread belief that only 10-15 companies per year drive most of the industry's returns has forced VCs to exclusively focus on companies that 'look' like they will be in that group. And large funds require extra large returns so exits need to be supersized. There are only so many of those that can/will happen. In his usual prescient way, Union Square Ventures' Fred Wilson has called for more sub-$100M funds to be supported by LPs as they are best suited to fill the widening risk capital gap. I agree.
I understand that the VC industry will evolve as all industries do (some much slower than others) but early stage VC was and is risk capital. And it seems my fellow travelers have all but forgotten. Now everyone is chasing (increasingly gamed) traction data as the underlying risk-mitigated basis for making early-stage investments. How does this end well?
Mr. Dixon suggests studying the history before you set out to navigate the idea maze. In doing so, I am reminded of one of my favorite documentaries, ‘Something Ventured.’ Maybe Series A VC firm partners would do well to watch it, repeatedly. It’s like going back to the golden age of hip-hop. You don’t have to replicate what you hear but you can learn from it. The story of Tandem Computers and Kleiner Perkins is particularly instructive as it was the last investment made out of the fund and if it failed, so went the fund. KP didn’t flinch.
So all this boils down to the apparent calcification of pattern recognition (formulaic VC?), and the departure from the two-sided risk-taking marketplace (entrepreneur AND venture capitalist) that was always a key part of early stage venture. A fulltime dependency on pattern-matching when unaccompanied by thesis formation means that you will miss the big winners. As the venerable Tom Perkins declared, 'If there's no risk, you've already missed the boat.'
Not sure I could say it better than Elon Musk who, loosely paraphrasing my good friend Semil Shah, is girding up to be a first ballot nominee for the Mount Rushmore Tech Faces of Fame. I am going to quote most of the piece (hat tip to KetanJ for capturing this key insight) because it’s that good, and he echoes my sentiments so perfectly, it would likely amount to a tautological error to opine.
“I think it’s important to reason from first principles rather than by analogy…The normal way we conduct our lives is we reason by analogy…
We are doing this because it’s like something else that was done..or it is like what other people are doing…slight iterations on a theme…
“First principles” is a physics way of looking at the world…what that really means is that you boil things down to the most fundamental truths…and then reason up from there…that takes a lot more mental energy…
Someone could –and people do — say battery packs are really expensive and that’s just the way they will always be because that’s the way they have been in the past…”
The key takeaway for me here is that when one doesn’t put in the intellectual curiosity and effort to reason from first principles, and build theses therefrom (with the acceptance of risk that that requires), then one is relegated to incremental advances and key product advances are dismissed as science projects because the entrepreneur can't answer the question of the day, viz, 'so what's the killer app?' Sure, if early stage venture is all about playing defense and taking no risks, then it absolutely makes sense to be reactive, sit in your office, sagely listen to pitches all day and simply hop along for the ride as decaled by the presence of ‘traction’, like any quality growth-stage investor would, and trade in the upside for a potential 2-3x cash-on-cash return. Of course, one slight impediment to that reasoning is that the growth-stage investor’s fund return and risk profile is incredibly different. Which leads to the perverse situation where growth-stage investors are paying growth valuations for early-stage risk, and early-stage investors are doing the same, but for different reasons. Why have early stage investors then?
Is pattern matching a spur for intellectual laziness and does calcification of curiosity result therefrom? Research from Michael Mauboussin and Nassim Taleb would suggest that luck tends to override skill (and thus is repeatedly underestimated) but that one can improve one’s luck by putting skin in the game, taking risks, winning AND losing, and constantly operating with a convex heuristic.
The other point that Elon alludes to, but doesn’t address in the excerpt, is that it’s not just mental energy that this intellectual curiosity-shaped view of the world requires. It needs and demands all kinds of energy. The execution of disruption-related vision is energy-sapping. So is embracing risk. But there’s only one type of high-octane fuel you need to keep you going. And that’s conviction.
So was/is the Series A Crunch a crunch in dollars? Or conviction?
I left Intel Capital to start my own fund, partially frustrated by my seeming inability to communicate my conviction about paradigm-shifting companies like Facebook and LinkedIn sufficiently hard enough to be authorized to make large VC investments in them, and partially fueled by my desire to create a new type of venture fund, and a conviction that I would create a platform with the decision-making power to to do both. I was reminded by an ex-colleague a couple days ago about the upside of conviction when LinkedIn hit a $26B market cap, which achievement would have generated a 25x cash on cash return, in 5 years, on my initial $125M investment recommendation. It's almost impossible not to curl up in the corner and weep when i think of the cost of conviction associated with my investment recommendations for Facebook I (9/07) or Facebook II (1/09).
It’s been 3 years and having seen the cost and benefit of conviction first hand as an entrepreneur and investor, I can’t tell you enough how great and not-so-great it has been in cycles. The recurrent episodes of crises of self-confidence. The financial lows (and zeros in places). The need to be the life of the party for the entrepreneurs I served, even when it was the last thing I wanted to do, because they needed me more than I did. The resentment one felt as I saw industry folks whom I didn’t think had paid their dues or gotten the long-term benefits of apprenticeship (but who didn’t seem to care). The upset created by those who didn’t seem to work as hard or TRULY care as much about VC, entrepreneurs and the opportunity to change the world, again and again and again. The sparkle in the eyes of a founder when announcing a technical or customer breakthrough. The frustration I endured as I was ignored repeatedly by potential LPs because I wasn’t a ‘celebrity’ investor. The inappropriate questions I received therefrom. The Yes's that became No's, for no clear reason. The grind. Helping reassemble broken pieces of a dream and cheerleading the entrepreneur through the process. The giddiness when the market finally recognizes that the entrepreneur's vision is reality. Convincing parents of entrepreneurs that what (s)he was doing actually was a real job (or at least was going to be at some point, hopefully). Convincing my parents of same. The physical distance I endured having to be away from my children to relieve some of my support obligations so I could fund my dream. The support I received from my ex-wife even when she didn’t have to. The financial obligations to family that trumped obligations to self (and which I met every month, without fail). Learning that conviction requires a long runway and you shouldn't try to land a jumbo jet on an airstrip because the physics won't let it happen. The amazing entrepreneurs and their progressive little wins that aggregated over time into awesomeness. The believers who stood by me. The skeptics who did the same, but reminded me every day that they couldn’t understand why I took the road less travelled and seemingly suffered for no reason. The unbelievable stress that came with all of it. How oddly opaque it was to folks from the outside looking in. The givers, takers and matchers. And the partner who stood with me through the echo.
I understand conviction. I have lived it. Hard. I know where it lives and what it looks like. I have ridden its roller-coaster. Shoot, I exchanged vows with it and it sleeps next to me every night. And I am not unique, for the founders I have been blessed to work with and support know/do the exact same thing. So when I stand with the entrepreneurs I serve, it’s with purpose, honor, dignity, focus and an absolute belief that I truly understand what skin-in-the-game means for them. So we go all in, together.
The amazing thing I learned about conviction is that it’s not a bottomless reservoir. It comes from within AND without. Yes, apprenticeship will help you process or navigate the maze a little easier. But the long winding path uses up fuel. You will hit RESERVE and sometimes may actually get thisclose to EMPTY. But refilling stations are along the way. Sometimes, they are people. Other times, they are markets, suddenly unveiled opportunities, abandoned then resuscitated ideas, competition, rejection, fear, etc. Although it may seem so at times, you never navigate the maze alone. But you will lead. The key is to stay in the game, with eyes on the prize.
While not all-inclusive, there are several well known folks in tech that have consistently exemplified conviction: Bill Gates, Steve Jobs, Jeff Bezos, Peter Thiel, Elon Musk, Mark Zuckerberg, Reid Hoffman, Jim Breyer, Fred Wilson & Brad Burnham, Vinod Khosla, John Doerr, Ev Williams, David Sze, etc. It's worth correlating their returns.
I will end with my absolute favorite Ayrton Senna quote:
"Champions are made from something they have deep inside them. A desire, a dream, a vision. They have to have last-minute stamina. They have to be faster. They have to have the skill and the will. But the will must be stronger than the skill."
The will must be greater and stronger than the skill.
Conviction fuels will. And will powers one through the flats, mountains and canyons. Champions are crowned at the end.
Great founders have conviction, and take risks. Their teams have conviction, and take risks. Early-stage VCs should have conviction, and take risks.
I named my first son Ayrton.
Something ventured. Something gained.