Originally published on Substack — March 10th, 2022
Talk of "The Great Resignation" is everywhere. 70 million people changed jobs in 2021 and 70% of that was voluntary. People choosing to quit. "Two out of every five office workers are planning to resign within the next year, alluding to growing disillusionment among employees." Think about your own company. How many flight risks do you know of? Something is changing in the world of talent.
I've written before about talent as the final frontier in tech:
"Open source software, GTM playbooks, and thousands of experienced advisors have decreased the need to reinvent the wheel. Talent, on the other hand, is a zero sum game. If Candidate A goes to work for Company B then they can't go work for Company C."
Many VCs pride themselves on their pattern recognition. They've seen so many different companies come and go that they've honed their sense of what "good" looks like. But the vast majority of investors have some fundamental weaknesses when it comes to identifying and appreciating high quality talent.
Every venture fund is in the hot seat right now to clearly articulate their "product.” Many of them have the same laundry list of "unique differentiating factors." But notice how talent is often one of many pillars, and typically seen as an afterthought by the average venture fund.
The reality is talent is becoming one of the most critical and potentially limiting factors in a company's success. As useful as VCs believe themselves to be the most significant thing anyone can do to make a company successful is to get the smartest people to tackle the right problems in the right way.
Right In Front Of Your Face
There is a whole conversation that could be had on "founder-investor fit." Every VC has an answer to what kind of founders they like to back. As strongly as they stand by their definition of founder-fit for themselves I guarantee you can find an exception in their portfolio to any rule.
But beyond just identifying what founders to back there is a larger fundamental struggle that investors have in effectively recognizing talent. Whether it be founders or operators across sales, engineering, or anything.
VCs talk about identifying talent like the baseball scouts in Moneyball. "They've got attitude. They're killers. Rockstars. Hustlers." And VCs imagine their ability to recognize high quality talent as a God-given gift.
"This isn't science. If it was then anyone could do it but they can't because they don't know what we know. They don't have our experience and they don't have our intuition."
I’m not about to propose a unified theory of tech talent economics that would get Jonah Hill jazzed. But there are some fundamental things that make it hard for investors to effectively recognize high quality talent even when it's right in front of their face. I would argue the differentiating characteristic of the very best investors are the ones who have addressed one if not all of these problems. Their unchecked gut. Their misplaced analysis. And their lack of practice.
The Unchecked Gut
I have a secret for you. Very few investors have a good framework for what good talent looks like. The problem with unchecked "gut-trusting" is that you leave yourself exposed to a whole host of psychological bias' and disconnected feedback loops. When you don't have a framework for how you invest or what "good" talent looks like you can't effectively learn from your own experience.
"How can smart people so often be wrong? They don't do what I'm telling you to do: use a checklist to be sure you get all the main models and use them together in a multimodular way". (Charlie Munger)
I haven't been able to put my finger on why, but venture investors are, on average, dramatically less systematic than public market investors. Public investors love frameworks, mental models, checklists, and processes for evaluating different stocks. Venture investors feel almost allergic to them.
Take something as simple as having a CRM. That's pretty new in venture. In 2016 I was still convincing my partners why we even needed one. The common sense reason for keeping close track of a company is so you can systematically see a company's progress overtime and understand what they expected and what they delivered.
What has always confused me is how rarely venture investors evaluate their own decision making mechanisms. So much is made on gut. If you ask a typical VC why they passed on some of the biggest companies of the last decade most of them couldn't give you a good answer. And they likely couldn't point to how their processes have changed to avoid similar mistakes.
Because there is no reconsideration there is no feedback loop. Most VCs make a judgement call about someone. If they decide a founder is underwhelming they move on. And if they’re not a multi-stage firm they never have to reevaluate that decision. And for most multi-stage firms that is a ridiculously hard initial bias to overcome later. Very few VCs can admit they were wrong about a founder.
The same goes for talent. VCs may meet a VP of Sales or a Head of Engineering and if they don't get a good "gut" for that person they'll deprioritize them. Regardless of what they've done before or how they evolve over time. Without a framework in place to make and then evaluate their decisions there is a lot that slips through the cracks.
“If one could open the lid, and see what was in the head of the experienced decision maker, one would find that [they] had at [their] disposal repertoires of possible actions; that [they] had checklists of things to think about before [they] acted.” (Herbert Simon)
Every framework is not created equal so there is always going to be a good, better, and best way to evaluate talent. But not having any kind of framework is the easiest way to make bad decisions.
The Trough of Analysis
You have to be careful with this one. Every company should be diligenced and vetted. Understanding fundamental mechanics of how a business works, how they acquire customers, how they go-to-market are all important. No one can accuse me of telling any investor not to do their homework.
But when it comes to identifying the best early stage companies there is a leap of faith that has to be taken. No matter what. The odds of startup success are ridiculously low. The best founders look for every opportunity to improve their odds. But eventually the best way to improve the odds of success is to hire the best people.
One important note. Venture investing and growth-stage investing are two different jobs. The recent pull back we've seen in late stage rounds is largely because people haven’t been doing as good a job in growth and have effectively mispriced some businesses.
Over time companies are supposed to be held more and more accountable. They have time to pressure test their engine and eventually markets begin to hold those engines accountable. Analysis becomes an increasingly important part of the decision making process.
But at the earlier stages an over-emphasis on analysis will almost always lead you to pass on the very best companies. Because early on it's much more about the people than the metrics. Venture investors should be focused on identifying world class leaders and surrounding them with world class talent.
I think about this over-emphasis on metrics as the "trough of analysis" because it's a phase a lot of investors go through. They think if they can just look through one more quarter of data or cut the cohorts in a certain way the mysteries of the universe will unravel before them. But over time VCs wake up to the criticality of finding the very best people and letting them solve the problems.
And even when investors do find those generational talents they fail to back them maniacally because of price or traction. Like Austen's tweet above. He’s not saying, "I would back them if they were starting a lemonade stand. But obviously we want the lemonade stand to have at least 115% net retention." The trough of analysis does not mean ignore the numbers. But in the earliest days put your emphasis on the people and their ability to solve hard problems.
Lack of Practice
The final obstacle to identifying high quality talent will be unsurprising to anyone who grew up working in the venture industry. You'll often hear this idea that "investing is an apprenticeship business." It's not. Don't get me wrong. There are some phenomenal investors out there who feel a responsibility to mentor the rising generation (I've worked for several of them).
But there is no real tangible incentive for venture investors to mentor anyone. As a result you have a lot of VCs who turn out to be pretty terrible managers and mentors.
Venture is a performance business. Doug Leone says it himself. The two most important things are (1) performance, and (2) teamwork. But if you don't have number 1 then nothing else matters.
One extremely tenured GP who has raised billions of dollars and generated larger billions of dollars in returns put it this way:
"No one trusts each other and you don't know how to sort through people. So you let these people prove themselves until you trust them. And you usually don't really trust them until you've already established your own career. Trust is a luxury."
The difference between private and public market investing is that public investors can look like a genius or an idiot much more quickly. Professional VCs, on the other hand, can see their careers take 10+ years before they're even starting to be seen as good at their job. So everyone is taking a lot longer to prove themselves. The average VC doesn't have the luxury to worry about the career of a junior VC.
And by the time they've proven themselves? It's a learned behavior. You've been a "lone-wolf" hunting to source the best deals and demonstrate the best returns. You need to take as much credit along the way to bolster your own career. You never learned how to be a good manager of people. So why would you wake up one day 10 years later and be a good mentor?
Something you learn as you manage people is to understand potential. To see people for what they could be capable of, not what their Stanford / Harvard / Facebook / Google resume tells you they've already done. And VCs don't get much practice doing that in their own day-to-day firms. Which means they don't have as much practice doing it when they're looking for other kinds of talent, be it founders or operators.
That doesn't mean that VCs are incapable of recognizing potential. They still have to try and do it a lot. But when you have a limited pool of frameworks for what "good" looks like, an over-trusted gut, and a tendency to use numbers as a crutch? You're not going to be at your very best.
BONUS: Talent Frameworks
So what are some interesting frameworks for understanding high quality talent? The majority of what has been written or posted has revolved around identifying founders. Here’s just a few examples I came across:
Does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?
- Identify who is great before they are
- Is the person improving at a noticeable rate?
- Would you work for the founder?
- Can you imagine the founder taking over the industry?
- Is the founder fast-moving and certain to be successful?
- Are the founders scrappy and formidable at the same time (a rarer combination than it sounds); mission-oriented, obsessed with their companies, relentless, and determined; extremely smart (necessary but certainly not sufficient); decisive, fast-moving, and willful; courageous, high-conviction, and willing to be misunderstood; strong communicators and infectious evangelists; and capable of becoming tough and ambitious?
- Q: What's your thesis?
- A: I invest in the best product founders I can find.
- Q: How do you know if someone is good at product?
- A: How does an artist know what a good painting looks like?
- Q: How?
- A: They paint for a really long time.
- Foundation: KPI disciplined, fires well, and is self-aware
- Work Experience
- Direction: Craft vision and strategy
- Dollars: Deliver capital to pursue and ensure there's always cash in the bank
- Diamonds: Recruit and retain best in class talent
- Decibels: Constantly communicate internally and externally
- Delivery: Build the right culture and hold people accountable to outcomes
Request For Frameworks
I asked a lot of people to point me to the best frameworks for identifying the most talented people. Not just good founders. Obviously every role will have a different framework, so it's a difficult ask. But it's something I want to pursue. What are the best models for identifying and understanding high quality talent?