TLDR: Having a theory about the game requires obsession, theory, and execution.
We hosted the VC & PE club from Chicago Booth at Antler last week.
One of the topics we spent a fair amount of time on is the idea that…
It’s not enough to play the game well, you also need to have a theory *about* the game in order to be an outlier.
I think about and share this idea often, but it doesn’t always seem to land.
Maybe it will today, or maybe it won’t and that’s because most people are, by definition, average.
I first started thinking about this as a baseball player growing up. Of course it’s not enough to just show up and play the game well. You not only need to outwork and out-prepare the other team, but you need a game plan too.
The same became true in my sales career.
Most salespeople simply share best practices and execute the sales enablement playbook provided. Meanwhile, Sales Operations is setting quotas for what can be achieved by following those same best practices and aim for 50% of reps to achieve their target in order to run an efficient P&L—that means quotas are also set for average.
And to make it worse, most of the of “poor me” attitude sellers will blame their book of business or that their quotas are too high, but in reality, they’re simply doing what everyone else is doing, and therefore have a 50% chance of achieving “acceptable” results.
If you have the motivation to better than average, by definition, you need to be different than average.
That’s where having a theory about the game, rather than simply playing the game, begins.
But it’s more than that. Having a theory about the game is just a leading input, not what makes someone an outlier.
Obsession, Theory, & Execution:
Obsession
Everything is as hard as everything else, if you care enough about it.
Whether you’re knitting socks or revolutionizing venture capital, if you care enough about it, you will see that it’s filled with infinite details and variables. And, if you’re not obsessed with every aspect of what you’re working on, you’ll never be able to take the system apart and rebuild it to the level of best-in-the-world.
It’s paramount to have an endless curiosity about your work, obsess over the details, and imagine where and how the game you’re playing is flawed. In sales, this was often found in the compensation plan and in the sales narratives used by peers, which with enough creativity, can always be reworked to benefit the seller over sales operations’ expectations what’s possible. In my experience, 90% of reps never develop an obsession or theory about how to win their year beyond what has been prescribed to them by teams around them.
Theory
To be an outlier, you need to have a theory about the game.
Developing a theory about the game requires creativity. If you obsess and begin seeing opportunities, you can start to rearrange the building blocks of your role and your domain to create systematic advantages that become your edge.
Take “early stage” venture vs. accelerators for example. In traditional “early stage” venture, the game is simply to own 10% of a company and maintain ownership as long as possible on the premise that $100m of a $1B company is a 5X on a $20m fund. That is essentially most every emerging manager’s strategy, although very few actually understand the dilution math and retain enough follow-on capital to maintain the ownership required to have a top decile fund.
In fact, most of them are just trying to prove they have the access to good deals, which even on a unicorn net of dilution, only nets them $30m on a $20m fund for 1.5X. From there, they use that narrative to raise a larger fund with more follow-on capital citing the missed opportunities of their earlier funds. However, what they’re really pitching you is a missed opportunity for them to make more management fees off of AUM because statistically speaking, fund managers who pick and choose what to follow onto have underperformed the index of their own funds.
Now compare that to the accelerator business which purchases 7-10% of 50-100 companies for the same amount of capital as the seed fund, but achieves greater volume and diversification by coming in much earlier. From there, measuring graduation rates, they aim to have 25-75 companies in their seed portfolios, with a SAFE that converts post-money for the same ownership target.
Would you rather have 20 companies in your seed portfolio or 25-75, and an entry price that’s on average a 70% discount? That’s called systematic alpha. The risk has never been, and still isn’t, appropriately priced.
Of course, as we’ve explored in recent posts, that accelerator game—while still wildly compelling—has become somewhat outdated too. Nevertheless, it’s a good depiction of why Paul Graham has outperformed nearly every seed fund to ever exist.
That is, except for maybe Chris Sacca’s Lowercase I (250X), Benchmark I (92X), Initialized I (55X), and some of the most storied funds in the valley who not only have incredible access by way of network and brand, but the capital to maintain ownership and guide the board.
Execution
And then of course you have to put the hands on the keyboard and get to work to make sh*t happen. You can obsess and theorize all you want, but if you aren’t willing to put it to work and see it through, you’re basically just a posturing snake oil salesman with egomaniac tendencies and a fake crystal ball.
I think most people fail not because their theory is wrong, but because they don’t remain obsessed and nimble, so instead of persisting and adapting, they pull back and give up.
Back to the sales example, I have always found a direct correlation between the very top performers and their theory about the game. These people tend to build spreadsheets and calculate their edge, they find the cracks in the comp plan, track different datasets than their peers, and they engage customers differently. Now, regardless of whether they are right or wrong about their theory, they have created a system that they’re motivated to prove right. That motivation, by virtue of its creation and ownership, drives an outsized daily and compounding effort, that over a long enough period of commitment, delivers very different results than their peers.
The same is true in venture. If you’re truly different, you’re developing a different surface area of luck than others, you’re exposed to other opportunities, and whether you’re right or you’re wrong, you’re still an outlier.
That’s the risk, but it’s also the reward.
So if you look around and you’re following the best practices, then you need to pick your head up and realize that you are destined for, with the exception of luck, a future of being average.
Think about it.
Always challenge the status quo.
It’s far better to be right when others are wrong than to be right when others are right.
See you Monday.