This is post #51 of my #365 day series.First, I’m going to warn you that I’m going to speak in an abundance of idioms. I recognize that and the irony of arguing against popular wisdom by using…popular wisdom. With the irony called out, let’s begin.
Having spent a better part of a decade working with both companies and their investors, there are a few patterns that I’ve seen emerge from the two cohorts, one of which is a large gap between investor and operator thinking when it comes to solving problems. Much of the time, investors think that money will solve the problem. That’s not wrong in every scenario, because revenue means that the company is making money, and a money making venture is a good thing. That said, it does not solve every problem. It cannot solve an attitude problem among staff. It cannot solve an inept product manager problem. It cannot solve a design problem.
This is also the difference I see between private equity and venture capital. Private equity teams appear to be all about operational efficiencies and market logic (i.e. how the market will react to certain levers being pulled). This makes sense since PE funds have a more consistent return on investment strategy and percentage yield. That being the case, they need to know with some certainty how much the company is making and whether they can provide operational efficiencies in order to render a return on their investment (i.e. to get another buyer to come in at the desired multiple). PE does not operate for charity or in moonshot terms (although the discussion of them moving further downstream is an interesting one that we may tackle later). They operate in spreadsheets and likely outcomes.
When we talk moonshots, we talk about venture finance / venture capital. The prolific Silicon Valley VC shops. Venture (at least these days) seems to be the wall street bets (see Reddit thread) approach of YOLO invesment. One of the dangers of YOLOing with institutional money is that it is with other peoples money. The bet is that 1 out of 20 investments is a hockey stick that will yield outsized returns. If you think about that and your odds in Vegas, you begin to ponder what might be a better return on capital (especially when factoring in time). Further, much of the VC “strategy” is rooted in the only tool that the VC firms have in their toolbox — capital. I’ll overuse the heck out of this phrase, but “To a hammer, everything is a nail.” Got personnel issues? Money. Got engineering issues? Money. Got product market fit issues? Money.
“But Tony, VC’s invest and bet on people, not just companies.” Yeah…because that’s a more reliable approach to investments right? (See Theranos, WeWork, Peloton, Nikola, etc.). People are fallible, and what they say is even more so. It doesn’t cost anyone anything to say farfetched aspirational things except for the time it takes to speak those words. Skills however, well that’s a different story. There is no replacement for skill acquisition. Can you pay someone else to do it? Yes, but that doesn’t mean you acquired the skill, you only acquired the side effect of it. The only currency to be paid for skill is time, and even then it is not a guaranteed return. The 10,000 hour rule is an estimation about likely results, not a reflect of a guaranteed formula for return.
Having 10 average level engineers does not replace 1 full stack engineer with a deep understanding of the technology and the problem being solved. Why? There’s necessarily inefficient communication occurring among the team of 10 engineers, and the skills do not average out. The better way to think about it is in a group of engineers, you’re only as good as your weakest link. In an ideal scenario, the rest of the engineers will drop to the level of the lowest engineer and help them raise their level. More likely than not, it’ll just stay low.
Does this type of skill averaging versus return occur with every team? Probably not, but it’s good to keep an eye on, so that you’re not just focused on recruiting and hiring for the sake of it. If you need people, then figure out the type and quality of the people that you need. After that you can go hire those folks, but be discerning. You wouldn’t marry the first person you went on a date with, so why doesn’t that apply to recruitment and job offers?
So what’s the moral of the story? I think it is that there is no surrogate for spending the time and effort to acquire skills versus just hiring (i.e. throwing money at the problem). To defer or delegate has a cost. I’ll leave you with one anecdote. When I was chatting with a startup about how they seemed to be spending more than they were making and with no sales or profitability in sight, I was met with the response of “you underestimate how deep our pockets are.” I suppose that’s a fair statement. That same company went out of business a few months later.
