Has Price Discipline Disappeared? Is it Possible to Build Ownership Over Time? Why…

Well, appreciate the

Well, the story is really the story of Nigel Morris and myself. He’s the only constant in my adult life. We’ve been together now twenty eight years as of August 9, and I don’t remember getting an anniversary present, so he’s a little delinquent. But, you know, basically, was hired directly out of the University of Virginia, graduate degree in artificial intelligence, systems engineering, applied math, and statistics, like a whole bunch of really nerdy math type things, was hired by Nigel into what was Signet Bank at the time.

And Signet Bank had this little credit card division, and I was hired with a small team of people to go figure out how to turn it into something much bigger. We eventually spun it off into Capital One, and I played a variety of roles within Capital One over the twelve or so years that I spent there, mainly building businesses from scratch that the company needed. But I also fixed some of the big businesses when they were broken, and I played some horizontal roles. I was the first credit officer for the company before there even was a chief credit officer, helped Nigel with internationalization, eventually helped buy banks.

And then Nigel left in 2004. I left shortly thereafter to go build a student lending company. And that whole story did not end well. But it was amazing to actually try my hand as an entrepreneur, but then joined back up with Nigel in late two thousand and seven to really envision what became QED. The two of us just wanted to work together again, and it turned into QED.

Well, first, Annie is the actual rock star. I just play a poker player at night on TV. So it’s not exactly a superpower, but I did play a lot of high stakes cash games. You know, but poker, there are a lot of analogies, and it teaches you a lot about decision making more than anything else. Poker taught me a lot about being process focused rather than results oriented. The clarity of thinking and the ability to understand why you’re making the decisions that you’re making and being able to see the outcomes, see how people react as a result of your actions over and over and over again, recognize that the decision making process is more important because it’s repeatable over time rather than being results focused.

You know, the biggest difference, though, between poker and venture investing is that you get very few decisions that you end up making in the venture world. N is very small. And in poker, n is very large. So you end up playing tens of thousands of hands. You can actually have a feedback loop that’s very fast. You can study the result of your actions. You can try new things and learn new skills. In venture, one cycle of venture investing is ten years. If you think about the number of companies that you invest in during that period of time, if you’re an active investor, you might invest in two to four companies a year.

You might see hundreds of companies a year that result in two to four decisions that you make about investing, but the feedback loops are very different, which means you have to concentrate a lot more on the process up front.

What’s infuriating? You know, when you’re an operator, you get daily results. There’s something that’s just so pure about that. Every day, have targets. Every day, you see whether you’re hitting your targets or not. You have goals that you can measure in, you know, hopefully, days, weeks, months, quarters, years. It depends on how difficult the goals are. But these are short time frames relative to venture investing. I mean, it it’s really interesting because we’ll talk about this with Capital One.

But there’s a very, very big difference between a machine that’s working and working at scale and, you know, the feedback loops and the small time frames that things are optimized around, you know, versus venture where you have to get things right over extended periods of time in order to build any business of size. So the feedback loops are different. The conviction that you have to have around the decisions that you make are different. You have to be much more thoughtful about each and every decision that you make because you make fewer of them, and they have bigger consequences.

I will say that there’s a part of me that likes being an operator more than being a VC because of the feedback loop, but you do eventually get used to it, and you figure out how to operate with very long cycle feedback loops.

Well, it’s not actually a paradox. It’s kinda funny because I literally was almost fired twice. Called into offices. I wasn’t even sure if I was going to walk out of the office with or without my bad. So there were some big things that happened at Capital One where, you know, I executed something that was seminal and very important to the company, but executed in a way that it either put the company at risk or wasn’t executed the way that the machine of Capital One wanted it executed.

So, yes, at some point, the way you actually get the work done matters. But the reason why it’s not a paradox is because companies go through phases. And if you think about the difference between a very small company, a startup and a very large company, let’s just take a giant public company that reports earnings every three months. The difference is at a big company, you earn your bonus one year at a time. You know, the powers that be tell you what’s important. You know, it’s decided within a smoky room.

All of the goals are actually handed down, cascaded through the organization, broken into small pieces. Again, there’s something that’s pure about being an operator and, you know, figuring out how to make those small goals actually work every single day, every single quarter, every single year. But you can actually earn 80 to 90% of your bonus saying no to everything that’s new. Right? If you literally say no to everything, you have the power to optimize what’s in your control so that you could hit 80 or 90% of your bonus saying no to everything new.

In a smaller company or a startup, it’s the exact opposite. You have to string together seven years worth of yes decisions in order to build any company that has any value. So you have to figure out how to get to yes every day instead of getting to no. You might as well shut the door if you get to no, but you have to get to yes, and you have to string together these decisions over seven years, ten years in order to build any company of size.

So it is a huge difference where back in the the early stage of any company that you’re building, where you have to get to yes every day, it’s about creative problem solving. And there is no machine. There is no specific way that the organization has figured out how to get work done. It’s about getting to the answer. And when I was at Capital One, I have to admit, I felt like I reported to the answer, not to the machine. Figuring out how to get to yes was basically who I was.

It was my identity. When I was given very difficult challenges by the organization, the only answer was to solve the problem.

Yeah. I mean, a a startup’s power superpower is figuring out every day how to get to yes. It’s about unity of focus. It’s about a team that, again, reports to the answer and figures out how to break down barriers and get things done. And the superpower of a large organization is that they have resources. They have policies. They have procedures. They’ve created a methodology for getting good results and being able to produce whatever it is that they produce with certainty, with regularity, ultimately stamp out whatever the product is that they’re creating in a very uniform way.

So big companies have scale advantages. Big companies have consistency advantages. Big companies avoid mistakes. Big companies have fewer fire drills. Like, there are a lot of characteristics of big companies that are actually very valuable, but small companies can make things happen because, again, they report to the answer. They report to getting to yes rather than reporting to the machine and how work is done. When

Yeah. I mean, at Capital One, everything was about test and learn. It was about the scientific methodology. It was about figuring out how to prove things before you would end up putting a lot of money behind it and rolling out any new product or any new strategy. You know, that’s really where the the QED name came from. We used to use QED as a verb, as an adjective, as a noun. Like, we used it around Capital One as if it were just this all encompassing goal in mind, which was about proving everything.

And it’s affected the type investments that we make and how we think about investments. I personally like investments where you can systemically derisk. You can turn over cards. You can figure out how to break down a big problem into smaller pieces and theses that you can actually prove. You can figure out by putting things out in the market in small volumes or with tests, whether it’s working or not working. The market either agrees with you or it slaps you in the face and tells you that you’re absolutely wrong.

You know, if you can systemically turn over cards and figure out where you’re right and then put money behind the places where you’re right in order to grow whatever it is that’s working and then put new initiatives out into the marketplace, test new ideas and continue to grow on top of your successes. Those are the type of businesses that I really like. It’s not every type of venture backable business you know, that is really our sweet spot. But when we approach a business, it really is about breaking things down into learning agendas and figuring out what you’re going to learn.

Because, again, I think about the venture asset class is very simple. It’s about asking and answering the question, how much can you learn for how much money, how quickly? And when you can put a learning agenda in place and figure out what you’re gonna learn for how much money, then it becomes much more comfortable. Do you worry, though, that stay

It worries me a lot. It puts a premium understanding how a founder thinks, how good of a steward of capital they actually are. You know, I’ve talked about this before, but I affectionately think of myself as the cheap bastard around the table, you know, where regardless of how much money you would give me to build a business, the plans are probably going to be relatively the same. Right? Because it’s about breaking down the problem into smaller pieces and putting the right amount of money behind the initiatives, the minimum amount that’s necessary to prove out what you need to prove.

And then it almost feels like you’re cheating because you’re putting money behind your successes, and you’re guaranteed to do something very good with that money instead of, you know, spraying it around and then hoping that you find some successes. And ultimately, businesses are only real businesses when they’re self sufficient. So I think that there’s a a very, you know, dangerous trend in the VC market today where businesses that have been partially derisked, they’ve gotten partway through their journey, they haven’t proven out the business model, are attracting massive amounts of capital, and a lot of these companies are even going public before the story is actually completed.

But the last I checked, there’s a 95 plus percent correlation between earnings per share and share price of companies throughout the history of the stock exchange. When you think about public companies, it all is in the long run about earnings per share. And if companies can’t make money, they’re not worth what people are paying for them. So, yes, we’re in a different mode right now where it’s risk on and it’s about growth, and it’s about not worrying about bottom line earnings until sometime deep in the future.

You know, I would suggest that people think about the interest rate environment we’re in and what choices people have about putting their money to work. This is an artifact of the environment we’re in. It’s not a permanent artifact of how to build business.

Yeah. I mean, venture is venture. Venture is about taking business ideas that have amazing promise, but also have risk and figuring out how to systemically put money behind them to figure out whether the thesis is right or wrong. Like, that is the venture asset class. And there are a lot of different types of risk that you can end up taking. It could be technical risk. It could be product market fit risk. You know, it could be a regulatory risk. I mean, again, venture exists to de risk businesses before you put them in the public markets and before you build a big business.

So I think venture as an asset class is going to exist, but it might look a little bit different in different interest rate environments. There might be a little bit more price sensitivity. It might be that we go back to a time when it matters how quickly you can make money as an organization. These things come and go in cycles. History will repeat itself.

Yeah. I mean, it is exciting and disappointing at the same time, the environment that we’re in. You know, ultimately, I think outcomes are bigger than anyone expected them to be. You know, that’s a very interesting observation more than anything else and should factor into what a company is ultimately worth. But at the same time, a lot of capital has flowed into what is a pretty shallow asset class. Like people think of venture as a very large asset class. But if you study it relative to the truly large asset classes, it’s tiny.

It’s getting larger. And I think that’s why it’s attracting capital. You know, companies have been staying private longer. That means the area under the curve of where you can make money is bigger than it’s ever been. There are more startups than ever before. It’s easier to launch a business than it ever has been. It’s easier to figure out whether a business is working or not working in the first few years than it’s ever been in the past.

So you really have to take all of this in when you start to think about the math of putting money to work in companies that literally have a distribution of outcomes that range from zero to, in some cases, you know, a trillion dollars in the public markets if everything goes right over twenty, thirty years. So, I mean, that distribution is pretty wide, I would say. And because of that, if the distribution is shifting, you have to consider that within your math. Now what I’ll say is, you know, the price discipline has disappeared from the market, and I think it’s collapsed to math.

So many investors basically say it is now a founder’s market, not a venture capitalist’s market. And by being a founder’s market, it means that there are great businesses that lots of capital would like to fund. Right? So you have one to many issue. Here’s a one business that everyone wants, and there are many VCs, many dollars that are chasing that founder. So when you’re in this type of market where it really is a founder’s market, the founder is dictating a lot of the terms, and the venture community is saying that’s the game that I have to play in order to win.

And it’s really math. If a founder says, I want $10,000,000, and I do not want more than 20 percent dilution, that’s not valuation math. That’s just division. The founder asked for something you believe to win the deal, you have to give them what they asked for, and that literally is dividing two numbers to figure out what a company is quote, unquote worth. And I find myself in, you know, conversations with founders to say, look, you know, ultimately, a business is worth the intrinsic value of what the business is worth today, plus the option value of what it could be worth in the future.

And if you’re ascribing massive amounts of value to the option value to a business that has no intrinsic value, you could not sell it today. You know, you’re basically looking at a distribution of outcomes, and we might see it differently. So we have these conversations with founders where you say, look, when you say your company is worth x, until you show me that someone has a term sheet to buy your company lock, stock, and barrel for that price, 100% of the business, that’s not what the business is worth.

Let’s actually sit down and have a conversation about what the risk is of the business, what you want to accomplish, how much money you actually need, what you’re going to accomplish with this money, what the business is going to look like after you’ve put this money to work, and then let’s have an open dialogue about what the right price is for the company. So it’s a frustrating environment to be in, but I would say is the environment we’re in, and it means that you have to understand the dynamics

It’s about comfortable being uncomfortable. It’s about conviction. It’s about knowing when to bend your own rules. And we’ve done it with a number of companies over the past year where the environment has just shifted so quickly, where I thought we were offering the highest price that we could, and it was the lowest by a factor of two.

For a lot of the companies that, you know, we ended up paying up for, so far so good. You know, they were the ones that we stretched. They were the companies that had massive momentum on their side. I mean, extraordinarily high growth companies are hard to figure out what the right price is because you’re staring at a plan and you’re looking at trajectory of the company and momentum that they have. And the plan is almost unbelievable. Right? Mean, the the speed with which companies can grow today are so far beyond the speed at which they were able to grow in the past.

When I first started in this industry in 2008, you know, 2009, 2010, the early vintages of companies that we ended up investing in, the best companies would grow by 2x year over year. And now you’re looking at companies that between the signing of a term sheet and the final documentation, you know, getting across the finish line, a company could have doubled or tripled.

Well, when you’re being entrusted by your LPs to put money to work, hopefully, they trust more than a plan that has to change when you hit the field. The environment that we’re in is the environment we’re in. And the LPs, if you have the right LP base, understand that this is an illiquid asset class. It runs in ten year cycles. You know, hopefully, the LPs that you have are in it for more than one fund. I mean, when you’re underwritten, a typical VC is underwritten for multiple funds by their LPs.

Right? Two, three funds. Pretty typical. Some of them, they intend on being with you forever. So the LPs, if they are the right LP base, have an understanding that these things come and go in cycles. So this is the environment that we’re in. If you end up investing at the pace that you see good quality companies coming across your desk, which might mean deploying capital faster, putting more money to work in a deal than you intended when you originally went out, it means that if you’re right, it’s because everyone is right.

And if you’re wrong, it’s because everyone is wrong. Right? And it’s not like, you know, you are going to be different than the entire vintage. And it could be that there are vintages of venture that just underperform relative to other vintages. But within that, you know, hopefully you have a decision process that works. Hopefully, you have a competitive edge that, you know, makes you better than the others out there. You know, hopefully, you have a brand and value proposition that brings the best companies in. So within the vintage, you’ll do, you know, better than the average bear.

I would suggest anyone who’s in the industry, you’re in the industry, and you really do have to play the game, you know, that’s out there right now.

It’s interesting. The one truism in in venture is whatever the financial plan is that a founder puts in front of you just isn’t going to come true. Always. It doesn’t mean you shouldn’t analyze it. In fact, I spend a lot of time analyzing plans because I think about the plans as a numerical articulation, a financial articulation of how the founder sees the future playing out. And there’s actually a lot of insight in financial plans that, you know, people ignore. Find I it lazy underwriting when they say, well, the plan isn’t going to happen, so why should I spend time on it?

But there’s a lot of embedded information that you can pull out of plans by having conversations with the founders and understanding what they expect to happen, when they expect it to happen, why they expect it to happen, and it’s all embedded in their financial plan.

Yeah. A lot of it is really spending time with the founder questioning what you have to believe in order for the plan to come true. What do they already know that they’re putting money behind versus what have they not figured out that they’re going to have to figure out? And what is their learning agenda that’s behind the plans and what are the expectations and assumptions they’re making to deliver that plan? You know, so if marketing spend is going up, you know, do they know where they’re going to spend that money?

Have they tested those channels? You know, have they tested how deep the channels are? Have they ever spent that amount of money before? You know, so there are a lot of questions that you can actually ask for any given dimension of a financial plan. You know, you can ask about margins increasing. Like, do they understand where that margin improvement is going to come from? Do they already have plans in place? Are there resources being put against it? Is there a learning agenda? Or is it just saying we will figure out how to improve margin by two points every year for the next four years?

That’s a very different type of thinking than spending time with the founder, really, you know, diving into the business itself and tearing it apart down to the atomic unit and figuring out where they’re going to put their time and energy. I totally agree in terms of the atomic

It’s interesting because there’s a term that I use with founders that I help, and I call it everything that you do is either proof or anti proof. Right? Everything that you learn falls into one of those two categories. You’re either proving that the assumption that you had is correct or you’re getting anti evidence that it actually isn’t correct. And to me, lot of times that’s the market slapping you in the face and telling you that it was a nice try, but it’s not the way a consumer wants to buy the product or it’s not how things are really going to work.

And the problem with insider rounds is usually it comes on the backs of having some anti proof. Right? It’s about something that didn’t go well, something that didn’t go according to plan. And now you’re staring at anti evidence in the face of new projections for the business going forward and trying to attract new capital at a time when you just surfaced a whole bunch of anti proof is the wrong time to raise from a new investor. So insider rounds come together usually when you haven’t accomplished enough, you haven’t proven enough, you have anti evidence that something that you tried didn’t work.

And now you have to earn your way out of that anti evidence. Right? You now need to figure out something else to go right to basically brush the anti evidence under the rug and say we’re back on track. So insider rounds when they come together, and this is not universally true. There are good reasons for insider rounds to come together when a company is doing extraordinarily well. But for most insider rounds, when they come together, when it’s not preemptive and it’s not just saying you’re doing so well, here’s some more money, get back to work.

Don’t be distracted with sharing your information out with other investors and on the street. We don’t want data leakage. Like, again, there are lot of good reasons for insider rounds coming together. But if it’s an insider bridge round, it really is about figuring out more proof on the board to overcome the anti proof that you probably just generated.

It’s hard. I mean, you build long term relationships with people who you hopefully like and you want to see succeed. The hardest part of the business is when someone is trying, they’re executing well, and the thesis is just wrong. Right? And the market is basically telling them that the business is just harder to build than they thought it was going to be. And as an investor, you’ve got to think about that. Every dollar that you put to work in company x is a dollar you don’t put to work in some other company.

You know, so having that tough conversation with the founder and saying, look, the business actually is having troubles. The thesis isn’t playing out the way that we thought it would. You know, we want to be supportive of the company in many ways, but maybe not with a capital check. And that is a very, very hard situation to navigate, especially when a founder is trying to raise capital. You know, I like to think in terms of truisms.

And I can tell you with the tens of thousands of businesses in the venture world, I would be surprised if you did an analysis of them if it was more than 1% of the companies, probably even a fraction of 1%, where the founder shuts the door on the business for any reason other than they run out of cash. Right? So founders quit when they run out of cash, not when they run out of ideas. So the founder is going to constantly be trying to get to yes answers and trying to figure out how to fix the business.

Their identity is actually wrapped up in the business. The people they’ve hired, their identities are wrapped up in it. They’ve spent a lot of time championing this idea. Their identity is the business. So they are going to keep trying. And the hard conversation to have sometimes investor is to say, it’s okay. You did everything you were supposed to do. It just didn’t work. You know, there is a fine line about being supportive and actually being supportive to a point where you’re actually enabling the business to continue that maybe the market is telling you shouldn’t exist.

Yeah. It is amazing. When I was very early in the investing journey, you realize that the pain of a company actually not succeeding is so much greater than the joy that you get from a company hitting plan or growing or raising a funding round. Like, the pain of a founder who’s struggling, who you like at just a friend level, in addition to being a mentor and an adviser and, you know, hopefully, someone who is along the journey with the founder.

Yeah. It’s gotten to be very, very difficult to buy up your ownership stake over time. So that’s been a major shift in the venture community. There’s so much capital sloshing around, so many new funds that are out there that if you’re a founder, you have to weigh the benefits of taking additional capital from people who are around the table, you know, versus going back to market, you know, really taking a pulse on what your company is quote unquote worth. I use that word loosely because, you know, what a company is worth is in the eye of the beholder.

And ultimately getting potentially someone who has a different skill set or a different Rolodex or is additive to the business by bringing in new capital. The challenge in venture today is that that initial check that you write almost sets the stage for how much ownership you’re going to have in the future unless you are an extreme value added venture capitalist, a player where the founders, the other investors around the table are incredibly supportive of you buying up your share to not disrupt the dynamic of what’s happening around the board and the advice that the founder is getting.

So we’ve been able to execute back to back lead checks into companies a few times. And it’s when the company is doing extraordinarily well, the dynamic is extremely healthy with the other investors around the table, and the founder starts to think this would be really easy just to raise capital from the people around the table. They’ve already raised their hand. They said they’re interested. I like working with them. Things are going well. I won’t have to go back out to market to fundraise, and then we can run for another eighteen months or twenty four months before we have to figure out what the narrative is and how to tell the story.

So we’ve been able to actually do that a few times, but the stars really need to align in today’s market for that to happen. Do worry about

No. There’s no signaling risk because some of the companies that are the absolute rock stars in our portfolio, like, they grow beyond our ability to even fund them given the market dynamics. And sometimes it’s very rational for a founder, you know, to take outside money and, again, bring extra skills around the table that they might not have otherwise. You know, conversely, the other end of the distribution, there are there are companies that, you know, we might not want to lead a second round, and we’re very comfortable with our ownership stake in the company.

So it’s not like the signaling risk is a single signal. It’s a bunch of mixed signals, and, you know, the market is the market, and it’s competitive. You know? So, you know, all the players out there are trying to figure this out for themselves.

of the biggest areas of disappointment about how the industry has evolved over the past ten years. I actually used to be more collaborative where the venture community would come together and discuss companies. You would see syndicates come together with, you know, two major leads or even three leads coming together and splitting ownership, you know, figuring out how to ultimately get the ownership that the early investors need, maybe in a later round. Right? But the founder would get the benefit of having multiple voices around the table.

And I think that that environment worked incredibly well when you had unity of vision within a business, but diversity of experience and diversity of Rolodex. As long as everyone had a unified vision for what the business should grow up to become, and more importantly, what the business should do tomorrow. That’s where you need unity. And the diversity of having multiple voices around the table really gave the company better chance of success because it meant they had more resources at their disposal. The challenge of building a startup into one of the world’s greatest companies is such a daunting challenge that having more people around the table with you just felt very comfortable, and that environment has shifted.

Yet the constraints are real. Venture capital is a product like anything else that the venture fund is actually selling to the founders. Right? It’s a combination of capital. It’s the time and effort that the venture capitalist is actually putting in. It’s the hands on help. It’s the brand. It’s the network effect. I mean, there are a lot of things that come with the product that they’re actually putting in front of the founder. And unfortunately, there are some constraints that come with it, especially if time is a constraint.

So the reason why ownership matters to a lot of venture funds is because there only are so many investments any individual partner can manage if they’re an active investor. So that’s a real constraint. Unfortunately, it means that this world of collaboration of highly active investors can be challenged when not enough equity is being sold in the round. And this is something that’s changed as well. Founders are selling less equity in rounds than they were in the past. So typical dilution in the past might have been 30%, you know, in a round, and that might have shrunk to 20% in a round today.

That delta of 10% equity could make the difference between having two co leads and having a single lead for the round.

I think time will tell. There’s a lot of innovation that’s taking place, you know, in that space. We’ll see if these solutions scale. You know, we’ll see if they’re able to actually create a form of nondilutive capital that makes founders less price sensitive or less dilution sensitive in the early rounds. I think the environment that we’re in right now, you know, again, the founders have a little bit more control than the the venture community does in figuring out what the clearing price is and the clearing dilution is for any given funding round.

So in the environment that we’re in today, I think founders are going to look at some very good options on the table, and they have the ability to choose among great partners that are out there. And they can have the valuation they’re looking for, the capital they’re looking for, and the help they’re looking for all in one clean package. So it’s made us and all of the other venture capitalists up our games, what it takes to actually win a deal, what it takes to woo a founder and be part of the journey because you’re really being invited along to their journey.

Well, this is actually one of the challenges in today’s environment. You know, historically, the way that, you know, QED has won deals is that we’re all x operators that aim to be the best advice that you can get from any of your advisers around the table. And not advice that’s generic about what you need to do to grow up to be a great company five years from now, but more importantly, what should you be doing tomorrow? Right? It’s a very different type of advice. Yes. We can give advice on what the company should grow up to look like in five years, but we can actually get down to the granular unit of what are you actually working on.

Right? How could we be helpful to kinking the curve on outcomes? Is there something that we could do to actually help you avoid mistakes or sharpen the pencil on your learning agenda, actually find resources that can, you know, help you kink the curb on outcomes in different ways? But we’re there at the line of scrimmage with a servant’s mentality to help the founder actually succeed. And the way that we would win deals is during the diligence process, the founders would very quickly realize with the questions that we are asking, the way that we were helping them think about their own business during diligence, what it’s going to be like working with us, and we’d win the deal during diligence.

So if we would get to a yes answer, we almost uniformly would end up with a yes answer from the other party. And in today’s environment, that entire diligence period has been compressed. It’s gotten to a point where there’s very little time for diligence. In some cases, you can just put a diligence question mark like it’s optional. You know, check the box. Yes. No. But for us, that’s how we would win deals. Like the founders and the first calls would realize that we were different than the other VC firms out there.

And within two or three conversations with us, you know, many founders would say, look, you are our preferred partner. What does it take to get to a yes answer? So that’s our struggle in this market is that we have to figure out how to speed up and condense, you know, the quality of those conversations into a very compressed period of time.

Yeah. It’s interesting because I find this job a very easy job to do poorly and a very difficult job to do well. I think that’s actually the criticism, and it is a just criticism of the VC industry by the founder community. Because everywhere you look, there’s a lot of people doing the job poorly. Now there are tons of people who are doing it well. There are people who I respect immensely in the industry. But the difference between the two, I mean, there’s a chasm between the venture capitalists who do the job well versus do it poorly.

And I think part of it starts with the clarity of thinking. The way I describe clarity of thought is that if you were to ask someone the same question five days in a row or five weeks apart or a year apart from, you know, asking the question originally, would you end up with the same answer from that person? And the only way that you can say yes to having the same answer from the person is if they understood why they made that decision in the first place.

And there’s logic behind. It. So we talk about superpowers all the time. I think clarity of thinking is one of my superpowers, where if you take any of the businesses that I actually underwrote over the past, you know, twelve or thirteen years, and there are hundreds of them that I’ve dug into deeply, And there are probably a few thousand of them that I’ve actually looked at over that period of time. If you gave me a few minutes just to review the last Investor Day, I could tell you precisely why I made a yes or a no decision and probably have a thirty to sixty minute discussion with you on that Right?

And you’re going to get the same answers from me whether you ask me today or a year from now, and it’s gonna be the same answer that it was five years ago. So once you have that clarity of thought, you can now anchor your decisions around frameworks. You can anchor your decisions around, you know, what you believe and didn’t believe in the moment based on the information that you are seeing. Then you can study outcomes. Then you can study what happened within the companies. You can see where you are right and where you are wrong.

You can see whether you ended up with the right risk distribution of what you said yes to and what you said no to. But without that clarity of thought, it’s actually hard to fine tune your own decision making process. So I think it actually starts with knowing why you make every decision that you make.

Yeah. So there are some commonalities. One is there is a survivor’s bias issue in venture capital, where if you have great teams and they really are going after big media opportunities. So, you know, very large TAM with unaddressed opportunities in the ecosystem. If you take talented founders, sometimes there’s a bunch of unknowns that come together that are just mysteriously discovered that you never could underwrite to when you originally underwrote the deal. In retrospect, you know, they are the survivor because they found a path that was not obvious when you were underwriting the company or the founder or the opportunity when it came across your desk.

So a lot of the biggest companies that we passed on, if you actually saw the original thesis behind the company, the original investor deck, the ultimate business didn’t look anything like what the original thesis was. So those are businesses that for someone like myself are very difficult to underwrite because I try to underwrite based on the information that I have available to me. And there are other investors that are team and TAM investors that basically say, look, this is a talented group of people. They’re gonna figure things out.

We don’t know what those things are. It’s a big enough space, big enough opportunity. Just give them capital and let them go. And by the way, there’s nothing wrong with that. I’m just not a team and TAM investor because I wanna be on the journey with them. I wanna have the conversations about what we’re going to do tomorrow to figure things out. And if I can’t see a path based on what you know in the moment to building an interesting business, then it’s just hard for me to get conviction around.

It’s not early in growth. I think it is a way of approaching diligence and conviction. Right? So you gain conviction by having conviction around the people, right, and around just their raw talent and ability when thrown against a big problem. Yeah. For me, you know, that’s a piece of what goes into conviction, but I actually need to understand the problem. Need to understand the industry. Need to understand the backdrop. Need to understand what are the plans tomorrow. If I were running this business, how would I run this business?

So if I can’t put myself in the shoes of the founder, I’m just the wrong investor. Right? If I don’t know as much about the space or close to as much about the space as the founder, if it’s a problem that I don’t want to be thinking about twenty four hours a day, you know, seven days a week for seven years. Like, it’s the wrong company for me to invest in because I’m going to be there helping them solve problems along the way. So it’s it’s not an early late.

It’s more a disposition of what it takes to build conviction. Has your investing

There is an appreciation for the art of the possible that just was not there when we first started. When Nigel and I first founded QED, we were doing it because this was a niche thing that we understood. We were going to do it, whether it was a big ecosystem or a small ecosystem because it’s all we actually understood. Right? We understood banking. We understood financial services. There wasn’t even a name called fintech. There wasn’t a word to describe, you know, this entire ecosystem that’s evolved. But what we knew is we knew payments and we knew lending and we knew investments and we knew, you know, a little bit about capital markets.

And, you know, we ultimately knew about the core tenants of banking. By knowing banking, we knew where there were opportunities in the space. We knew how banks thought. We knew how slow they were to adopt new technology. We knew how the machinery would actually slow down innovation. And we were able to take the battle scars of all of the work that we had done over, you know, a decade and a half of being in the industry before starting QED and hopefully helping founders identify problems that were meaningful and meaty and could build sizable businesses and then help them actually build those businesses.

But the outcomes that we were looking at were very different than they are today. I mean, if we actually just look at the difference of the fintech industry when we first started in today, back then, less than $1,000,000,000 of capital was deployed globally in fintech in a year. And now you’re looking at 30 plus billion a quarter being deployed into fintech. So the outcomes are different. The number of founders are different. The art of the possible has now been discovered so that you can see what a fintech at scale could look like and what the patterns are for what it took to succeed and how they broke through.

So I think my investing style has changed just by seeing what’s possible and understanding it and then having a new playbook, you know, to work with the v2.o and v3.o companies now that you’ve seen the first wave come through.

So I’m actually more bullish on the next ten years than I have been on the last ten years, and it’s been a pretty extraordinary, actually, us, I guess, a twelve or thirteen year run. And part of that is fintech now has the building blocks that are necessary to tackle some of the more profound problems in banking. If you think about v1.o of fintech, a lot of it was really the movement to mobile. It was about UX UI. It was about APIs. It was about some very basic blocking and tackling to saying consumers and small businesses are now used to applying for products and managing the products in a very different way using mobile phones or using, you know, online technology.

And the banks hadn’t invested in that for decades. And in the 2008, 2009 period, they were distracted with lots of other problems, right? Capital adequacy problems. We were in a housing crisis. Like the whole banking system was really retrenching, just trying to solidify a lot of the pillars of of what it took to be a solid bank. But lo and behold, everyone, you know, now had smartphones in their wallets, and they had a different way of interacting with products. And the v1.o wave of fintech really was, you know, UX, UI, and APIs and different ways of interacting with the product.

But the fundamental products hadn’t changed. And I think now that we’re looking at v2.o and in some parts of fintech, you know, v3.o, we’re now getting down to the atomic units of banking and thinking about manufacturing the products, not just putting a layer on top of it about how you interact with the product. And by changing out all of these fundamental building blocks, you can assemble them in ways that we don’t even know what they’re going to look like. Right? But now you have a different set of atomic units that you can assemble, which means you have different value propositions that you can create and you can start to address some of the more durable problems within banking.

So I actually think we’re going to see bigger companies built in this next wave than you saw in the first wave.

I’m with you.

So I’m a huge reader, so I don’t like choosing a favorite book. So I’ll I’ll actually choose a favorite author. So Tom Robbins, I just think he’s a lot of fun. And if you ever want to take your mind into a completely different realm, just read some Tom Robbins.

So it is a little bit of an odd couple, but it works. So Nigel has this immense amount of energy. He is expansive in his thinking. He’s very pluralist. I think of him as having intellectual ADD or anything that is interesting he finds interesting. And I’m very much a reductionist. Right? I actually like doing very few things, but doing those things extraordinarily well. In fact, I don’t like doing things if I don’t think I can be the best at it of anyone out there. So putting the two of us together is really interesting because he expands my thinking, and I tend to shrink some of the things into a smaller number of things that we can actually bite off and make work.

And you’ve met him. He’s actually very charming and everyone’s best friend quickly, and I’m actually really good at being boring and holding up the wall at parties. So, I mean, we balance each other there too.

Yeah. I feel like I’m gonna betray some of my favorite people by picking a favorite. So I will say there are many, many firms that I respect the people at. But, you know, one of the firms that I’ve been watching closely and I’m friends with all of the VCs at is Ribbit. And Ribbit has professionalized the art of a specialist fintech VC and really paved the way for understanding what an at scale specialty player, you know, could look like in the space.

I mean, we’ve talked about it, but ten year cycle times. Like, if I knew that going in, I’m not sure I would have gone into the industry. I’ve grown to get used to it. But the feedback loop of being an operator, it really just warms the soul in a in a way that’s very difficult to get, you know, out of venture.

So for almost my entire adult life, I would sleep somewhere around four hours a night. I’m about to turn 51, and a few years ago, something shifted and I need more sleep. So I am getting a bit more than I did for most of my adult life, but it’s just how I’m built. You know, when I was 12, 13, 14 years old, my parents would try to put me to sleep, and I would be in bed with a book and a flashlight till 02:00 in the morning, and I was perfectly fine.

We talked about that also. I wish it were more collaborative. You know, my favorite show on TV is American Ninja Warrior. And, you know, it’s a world where people are helping each other because the challenge is just so immensely great that working with others is the best way to take on the challenge instead of take on each other. So I wish that the venture community were much more collaborative in the same way that American Ninja Warrior is.

Yeah. So the most recent one that I personally invested in is Hello Alice. The mission of the company is really about helping overlooked small business owners get access to the resources and kink the curve on the outcomes of their small businesses. So it’s a mission that I really align with. It’s something that I wanna spend the next seven to ten years working on. I actually do wanna see what their vision is willed into existence. And I think the team is amazing and the potential for the business is amazing.

Pleasure being here.