How to Angel Invest, Part 2

Hey, this is Nivy. As you might know, Naval and I have another podcast called Spearhead, where we discuss angel investing. A few months ago, I collected all the short little Spearhead episodes and published them here in one big episode. That was part one of the theory of angel investing. What you're listening to now is part two. If you want to subscribe to Spearhead, you can go to spearhead.co. I'll also put a link in the show notes. All right, here we go. We've spent the last few episodes talking about why you should be angel investing. We talked about how to get your own proprietary deal flow. And the short answer on that was build a brand. Now we're going to talk about judgment. How important is it? How to develop it? Long-term judgment is absolutely critical because without judgment, you'll end up with a bad portfolio. You won't have other investors backing you. You'll lose your money and your brand will suffer. Good entrepreneurs won't want to be associated with bad judgment. At the end of the day, judgment is actually the single most important thing. It's more important than access to deals. It's more important than access to capital. The problem with judgment is everybody thinks they already have it. So your own judgment is subject to your own judgment. If you have poor judgment, then you won't know you have poor judgment. This is called the Dunning-Kruger effect. It's also common sense. People who are not that intelligent usually don't know they're not that intelligent. Some of it being an ego defense mechanism, some of it just being intrinsic to the nature of judgment and intelligence. So you don't know if you have good judgment or not. Furthermore, you may have good judgment in certain areas, certain verticals, or you might have good people judgment, but you may not have good market judgment. The only way to tell if you have good judgment is to look over a very long period of time and unfortunately in early stage investing, it takes five to 15 years to figure out if you have good judgment. The first thing to do is to be very honest about where your judgment is and calibrating it. And then there's a longer term plan we can work on to improve our judgment. Step one will be calibrate judgment. Step two will be improve judgment. Does judgment really matter? At the seed stage, it does matter, but it's much more about people judgment and product and market potential than being able to size up a cash flow stream, cost customer acquisition, or virality metrics, because you don't have that much data. As your judgment is lower, not because of some failing on your part, just because you don't have enough data, then you need a more diversified portfolio. In some sense, diversification is a hedge against a lack of knowledge. The less knowledge you have, the more you're going to diversify. At Warren Buffett's level, where you can examine an existing company that's been around for 20 years in great detail, you don't need to have a lot of judgment, you need to have a lot of diligence. Yes, judgment still applies, but you can pick one deal after having done lots of diligence on a whole bunch. At a seed stage startup, you have very little data. You may just be looking at other people's judgment around you. And this is why social proof plays such a big role. But at the end of the day, you're going to have to build a portfolio in early stage investing because nobody has enough data to have very high conviction or foolproof judgment early on. Parker Thompson, who had the startup L. Jackson handle on Twitter, had a funny quote. And I think he was quoting somebody else on Twitter, where he said, everyone who invests after me is a spreadsheet jockey, and everyone who invests before me is a dart-throwing monkey. I thought that was very appropriate. It is the tendency to look at people who come before you as making wild guesses. That's what seed investors look like to later stage investors. and later stage investors look like spreadsheet jockeys to early stage investors. But they're just applying different levels of judgment, different kinds of judgment, because they have different data available to them. And they're going to then have different size portfolios and conviction because of the judgment they can and cannot apply. How important is judgment given the amount of luck involved at the seed stage? Investing at the seed stage is like playing the lottery, except that you can use your access and judgment to get one or two of the winning numbers in advance, which increases the odds, but you still need a portfolio effect. The better your judgment, the more numbers you know in advance. So it's absolutely still worth cultivating and honing judgment. This is a long-term game that will be played out over dozens and eventually hundreds of investments. How much time do I really have to apply my judgment given how quickly deals move? are not going to miss out on a deal if I take time to really think things through? Judgment isn't necessarily diligence or even thinking. Judgment is all the preparation you did. So when the deal arrives, your subconscious can process it very quickly. I don't think the best judgment for early stage investing is done through extensive due diligence. Yes, it's smart to check references, talk to other people in the space and think it through. But we're talking about something that takes days, not weeks. Over time, you will build up your gut instinct enough that you'll need less and less data to make an assessment. You'll know if a founder is speaking such a way that they're credible. You know if the network that they come through means that you don't have to reference check as much. You will already have established how customers in the space think and behave, so you'll have your own gut feel for what's really possible to sell them. A lot of startups are now trained, especially by accelerators, to run a very tight, fast fundraising process. They can pressure you hard to make a decision. The better investors are absolutely immune to that FOMO effect. If you push them hard, even on a really hot deal and say, you have to decide within 48 hours, they'll always say, well, I don't decide within 48 hours, so it's not a fit for me. Done. Finished. They'll not look at it. FOMO works on many investors up to a point, but it will not work be on a certain point on the absolute best investors. I have had to institute a 24-hour cooling off period rule for myself, which is even after I decide to invest, I force myself to wait 24 hours. Is judgment overrated at the seed stage? Don't a lot of companies do soft and hard pivots? Even when there's a pivot, the judgment about the people matters. And a pivot is really defined as keeping one leg in place and moving the other one around. It's not a jump. It's not a leap into a completely different industry. Oftentimes when there are pivots, they're into adjacent spaces, but you're still operating within the broader market. You will then overweight your team and execution evaluation and overweight that the market that they're operating in has enough room to pivot around and maybe underweight the exact product approach. The valuation has to reflect that the company might go through some pivots and the company's cash burn and cash planning has to reflect that it might go through some pivots. So again, judgment applies. How is the investor supposed to know which companies to invest in given how much they can do a soft pivot or what I'm calling a hard pivot, which is same team, but completely different market? Twitter originally started off as Odeo. Instagram started off as Bourbon. Slack was glitch. Uber started off with just black cars. Lyft was ZenRide. I would argue that Uber's movement from black rides into shared rides wasn't really even a pivot. It was just an extension. Zimride's movement from long-range shared rides to short-range shared rides was also an extension and a very brilliant innovation on their part. So it wasn't much of a pivot. Odeo to Twitter was a pivot, but it was a pivot from podcasting to micro-blogging from a person who had popularized blogging as we know it, F. Williams. So it was really a bet on a great individual staying very much within their space. It was a pivot, but it wasn't a jump. Bourbon to Instagram was barely a pivot. I'm not even sure I'd call it that, more of a step. If you look at Genie to Yammer, that was a jump. But that was David Sachs, who was one of the greatest product designers we've ever seen in the technology space. He was a founder of PayPal. He pivoted Genie into Yammer. He ran Zenefits and he's been an incredible investor early on in some of the greatest hits that are out there. That was a David bet, like an Elon Musk bet. And the people who bet on David would bet on him again all day long. Another big jump was Glitch, which was a game company to Slack. That was Stuart Butterfield. Even Flickr, his previous hit, had also been a jump of sorts. That's a case that I think was very unpredictable. People who invested in his gaming company, invested in Stuart and just hoped for the best. and Stuart delivered, but for every one of those, there's 10 failures. When you want to develop your judgment, the first step is to calibrate it. Do I have good judgment or not? Obviously, it would be great if you could just look at the data and say, was I correct? But you won't know that for 10 years, 15 years. And by that time, the industry will have changed. You may have been correct for the way the industry was 10 years ago, but this is an industry that evolves and adapts very quickly. Another way to do it is you can look at intermediate markups, where Sequoia or Andreessen or Benchmark or whoever are marking up your rounds, and they're coming in after you and paying higher prices. That's an interesting metric, although there it's really your taste in what other tastemakers like. It's a Keynesian beauty contest where each judge is being rewarded based on what the judge in the next round thinks. You're becoming a good arbiter of future taste. This does have some value because if you're good at predicting what the VCs are going to fund, then your companies will get funded. And through the funding, they're likely to have some competitive advantage and to win. But this won't help you when Bitcoin is first starting up and it's incredibly strange and nobody understands it. And there's no subsequent round of VC funding to bet on. You just have to make the decision yourself. That kind of judgment is a people proxy mechanism. It's not really a way to build and calibrate your own judgment. When you invest, you can also look at what other investors are coming into the same round, but right behind you. If they're coming in front of you, then it's not a good proxy for your judgment because you're probably keying off of them. But if you invest in a round and then good investors who have proven good judgment pile into the round after you, then that is a reasonable indication of your judgment. Finally, you can just ask people. Don't ask them if you have good judgment or not because they'll always tell you that you have good judgment if they're polite. But ask them what your weaknesses are. Of course, only ask this of people who themselves have good judgment. I find that people who have good judgment have good judgment in all aspects of life. Judgment is an ability to be humble, think critically, be well-read, have a broad range of ideas, hold conflicting ideas and opinions in your head, to have a relatively low ego so you don't get too attached to your earlier decisions, and be constantly questioning yourself, preferably have scientific training or a technical background, have worked in an industry where you have to deal with the real world consequential feedback and not just what other people think of you, and the willingness to be unpopular. Clear thinkers think from the ground up and they use first principles in a lot of their reasoning, so they end up relying on their own authority. Things that will lead to poor judgment over time are groupthink, oversocialization of judgment, picking things that you know are going to be politically or socially popular. Lots of people lose money in this business chasing things that they wish were true as opposed to what actually turns out to be true. The PayPal mafia is famous for being very insular. They all have good judgment. They're all strange. They're all very politically incorrect. Many of them are extremely unpopular and they're not afraid to hold unpopular viewpoints, but they really respect and value each other's insights and judgment. Whatever people say about Peter Thiel, no one wants to go head to head in a debate with him because he's brilliant and he's contrarian and he's a first principles thinker from the ground up. If you surround yourself with people who are brilliant, contrarian, first principles thinkers over your career, you will develop extremely good judgment. You may not end up being very popular, however. Do great deals even look that normal when they're first getting started? It's the nature of the industry that you want to be non-consensus right. In other words, you want to be right when everybody else is wrong. If you're right when everybody else is right, you won't make enough of a return. And of course, if you're wrong, then you're not going to make any return. So the best deals are either weird or socially unacceptable or not normally considered part of venture, or look far too niche to be interesting, or are brought in by a founder that doesn't fit the normal founder mold, or in a geographic location that doesn't fit the normal geographic mold, or have some cap table problem. But the best deals always have something broken, strange, or different about them. That doesn't mean you're going to make the best investments if you only invest in weird deals. This is a little bit like that old saying that there's a very fine line between a genius and a madman. Both seem like crazy people from the outside until after they're validated. And one out of 100 turns out to be a genius and 99 out of 100 turn out to be crazy. You have to be iconoclastic enough yourself to recognize the genius founders without being so low in judgment or being so strange that you're letting in all the crazy ones too. One could argue that the way portfolios are constructed, you're better off investing in a lot of crazy deals than you are in a lot of decent-looking deals. To give a recent example, there's a fund started by Patry Friedman called Promenos Venture Capital. Patry is going out there and investing in experiments in governance, new city-states or even new towns or localities, how people are taking local government into their own hands or doing experiments in governance. This seems impossibly difficult to do. The history with seasteading in Honduras doesn't look that great. But all you have to do is stumble into the next Singapore or Hong Kong, whether it's virtual or physical, and you have something that can create trillions of dollars in wealth, plus completely change the way that people live their lives. That's an example of a fund that is doing very difficult and strange investments. They benefit from two things. One is they're going to have a unique brand. There's nobody else doing that, so everybody knows to go to them. And second, they're going to bet on the kinds of things where the vast majority of their investment are going to be looked upon as mad investments, but the few genius outliers should return huge returns because they're non-consensus investments. Similarly, Founders Fund and Steve Jurvetson build their brands on being willing to fund weird things long before anybody else. With every deal, you can give it one fatal flaw, one thing that some established traditional venture capitalists will look at and use that as an excuse to not fund the deal. But if there's more than one, then you have to worry. Startups are rewarded for innovating on something new. If they're trying to innovate on things that already exist and work, such as team structure or founder mentality or those kinds of things, they're just taking an additional risk. You have to use your judgment to figure out where they can break the rules and where they have to follow the rules. A startup that follows all the rules is unlikely to be interesting. A startup who breaks all the rules is not going to get anywhere because they have to spend time reinventing everything from scratch. Uber, when it first came along, was strange because at the time, VCs did not invest in offline industries. It was considered the taxi business. Yes, there's an app stitching it all together, but looks like the app is 5% of it, 95% of it is people in cars driving around. And they were correct. But the question is how much that leverage can accrue to the person who owns the app and how much they can expand the market because of the app by creating new products and bringing on new users and creating convenience. Google was strange because everyone thought the search wars had already been won by the time Google showed up. It really helps to understand technology, to understand which rules to break. The best position to be in as an investor is when somebody shows up and the technology is too difficult for other people to calibrate or understand. So therefore they pass on it because they don't think the technology is feasible, but you have enough technical insight that you know that it is feasible. Then you just have to make sure that you can get it funded to the point where it's obvious to everybody. The value there comes in breaking a rule that you know is not really a rule to be broken, but everybody else thinks it is. It's very easy to overestimate your own judgment. It's perfectly okay to say, I don't know. Most of the times, your answer should be, I don't know. There's only a few times where you should say, I have conviction. And even there, you want to be very careful about how much conviction you have. At the seed stage, if you are putting a lot of money into one company and very little into another company, that begs the question, do you really have conviction in the one? Or do you just have a lot of access in one deal and therefore you're putting in more capital there? Generally, the better the deal, the less access you're going to have. If you end up putting a lot of money into a few deals and then very little money into many other deals, you'll find that your winners tend to come disproportionately out of the deals where you have very little money, which hurts your portfolio return. once you have conviction, always try to get your standard bite size into that deal. If a deal has too much space for you, then that either means you should be investing more in the other deals, or you should be investing less in this one, or you should be getting rewarded through a lower valuation because you're creating the signal than the company is actually going to use to raise the bulk of the money. Anyone in this business who's chasing hot markets gets killed. There was a time when consumer social was the hot market. If you started investing in seed stage when that market was hot, by the time your companies matured, that market was done. Same way, once it became obvious what Uber was and was winning, if you started investing in the masses of food delivery companies that showed up, numbers 5 through 50, and there were a lot of them, you lost your money. Today, SaaS is the proven moneymaker and very hot. Let's see how it plays out. probably 5-10 years from now, when your current seed stage SaaS investments hit the market, you'll find the returns are a lot lower. It's good to be at the beginning of a market, not the tail end of a market. By the time there are conferences about it and TechCrunch is writing about it, it's probably a little late. Same with crypto. If you got in in 2017, you were actually the tail end of the market. The early side of the market was in 2009 to 2015. One common trap, especially for former entrepreneurs, is you'll look at a company, you won't really listen to the founder pitching it. Rather, you'll be fantasizing about all the things that you could do with this company. And you'll be taught the painful lesson that no, it's actually not you who's running the company, it's the entrepreneur running the company. It's important to listen very carefully and take the founder at their word as to what they're saying and what they want to do and not get caught up in this idea that somebody else is going to run the company. This is the exact opposite of value investing. Buffett says, invest in a company that even a fool can run because eventually a fool will run the company. That's not the case with startups. Almost all the value creation happens while the founder is intimately involved in most of these companies. So you're betting on the founder. If you bet on a founder that you're not that excited about with a market or product that you are excited about, the founder will often fumble the company. Or often you will have just invested in this company and then a competitor will come along with a much better founder. And now you're blocked out or conflicted out from investing in the new company. Or the new founder doesn't even want to talk to you because they know you invested in the competitor. There are multiple ways to build judgment. The timeless kind of judgment, good decision making and sizing people up, a lot of that comes through experience. or reading great works and books that intersect science, business, philosophy, and cover how very smart people think, building up so-called mental models, understanding microeconomics, game theory, etc. Within a field, you can build specific knowledge that's timely. The way to do that is to dive into that field and learn everything as quickly as possible. You're not going to become a great tech investor by reading TechCrunch or Bloomberg News. you're going to have to go to the source, and the source is often research papers. You have to genuinely enjoy the act of learning science and technology. Technology is applied science, so you shouldn't hesitate to read scientific papers, brush up on your mathematics, and make sure you understand what's going on in the scientific journals. Similarly, you can start out by investing in the smartest scientists in the space, knowing that even if they don't necessarily make you money, these are the people that will perform due diligence for you, and perhaps you'll make them advisors to your fund or give them a small piece or let them co-invest if they have the means, they'll actually validate and calibrate things for you and they will also send the best scientists your way. For example, early on when I was investing into cryptocurrency companies, I became friends with Zuko Wilcox-Hearn who started Zcash and Juan Binet who started Filecoin and Ryan Shea and Munib Ali who started Blockstack and also Eli Ben Sassoon and Andrew Miller, Bram Cohen, creator of BitTorrent. These became my go-to people for vetting and validating deals. They would tell me which technologies were real and which ones weren't, which scientists were credible and which ones weren't. Being surrounded by good technologists and scientists is a secret weapon because you'll get referred in through their networks and these people tend to be no bullshit. They'll tell you exactly what they think of a new technology. You do have to use your own judgment to calibrate when they are being unnecessarily negative or when they're being jealous because it's just human nature. But usually very technical people tend to be extremely objective because they're used to corresponding with the real world and scientific results and not necessarily with other people who are more influenced by subjectivity. If you can find a group of painfully honest and distinguished scientists and technologies to connect with, that will be a secret weapon throughout your investing career. Why don't we break down judgment and talk about how it applies to investing in teams, evaluating the product and the market, looking at their traction, and also evaluating any social proof around the deal. So we're going to break up judgment into team, product and market, traction, and social proof. This is a technology business and you want to be investing in technology teams. That means every great team is highly likely to have a great technologist as part of the core founding team. If not as the most important member, that person has to be sufficiently compensated and motivated and has to have their name and accountability involved in the project. If that strong technical person isn't there, either you're not investing in a tech business or that function has been outsourced and the company doesn't consider it core, which is not just a yellow flag, it is a red flag. It's not to say you can't make money investing in non-tech businesses, things like Dollar Shave Club, but I don't consider these to be technology companies. There are plenty of great non-technology investments. Chipotle is an example of a great non-technology investment, but that's not what we're talking about here. So you want to invest in great technical teams. People who aren't highly technical but on the founding team should be incredibly good at selling. If you're not building something, you're selling it. And you're not necessarily selling the product to the end users, although that's the common case. You're also selling to investors to raise money and you're selling to potential employees to recruit them. So there's building and there's selling. There is a potential third kind of character who can be incredibly useful and that is a community builder. But a community builder is actually just a seller. They're good at mass sales instead of one-on-one sales. Great community builders are incredibly rare. They're probably the rarest thing right now. They're very high leverage but they're extremely difficult to find. Everyone claims that they're good at it, but you want to see the results. If they haven't already built a great community, then you have no evidence that they are a great community builder. I use the Warren Buffett three-part test of who you want to work with. High energy, high intelligence, and high integrity. High energy is obvious. You have to work hard because startups are the Olympics of business. You're competing against the best in the world. First prize gets a Cadillac Eldorado. Second prize gets the steak knives. and third place gets fired, to paraphrase Glenn Gary, Glenn Ross. And if you're going to win, you need people who are putting in everything, and that includes working hard. There's this meme on Twitter that you should just work nine to five all the time, and that's work-life balance. That's perfectly fine. Not everybody should kill themselves at work, but I would argue that you should not be an Olympic athlete, nor should you be a founder of a winner-take-all technology startup. Avoid the virtue signalers and status seekers, and realize that if you're doing a startup, you're going to have to work your tail off. And everyone around you in that core team is going to have to work their tails off. You need very high intelligence people because intelligence isn't just about broad judgment. It's about moment to moment judgment. If they're making decisions and they're high intellect, then they'll make the right decisions. And you have to have a high bar for intelligence. You want to be a snob. Don't invest in people that you don't think are in your intellectual caliber. Otherwise, you're investing down, talking down, thinking down, you're picking the wrong people. High integrity is critical because if you don't have that, then what you have is a smart and hardworking crook who can easily cheat you. And there's so many ways to get cheated in this business. That said, integrity is something that takes a long time to figure out. It's very hard to tell who is high integrity and who isn't unless you've worked with them a lot before, which you will not have for most founders. But you can see how they treat the other people around them right now. You can see how they treat other prospective investors. you can see how they think about their co-founders and their employees. Someone who is already self dealing is going to eventually cross you. They don't necessarily need to be nice people because niceness is a signal that's easily faked. A lot of highly technical people tend to know that and so they don't overemphasize niceness. Niceness is everywhere. It's not enough of a filter. It is important in the sense that maybe you don't want to work with somebody who's not nice because it's just less enjoyable. But there are plenty of people in this business who are not nice and have been successful. High integrity is what you want. Integrity means having some sort of an internal moral code of ethics and living up to it, being reliable and being honest. Whereas niceness is often just politeness or sending off small signals of being high integrity when there's no actual consequences or when the stakes are very low. Integrity gets tested when the stakes are high. There's this meme among venture capitalists that a good founder should be coachable. I think this is a meme among amateur venture capitalists. They're relying too much on their own abilities because they think they're right and the other person's wrong. And they're also relying too much on this idea that people can be changed in the short term. Great founders are actually not that coachable. They listen to lots and lots of advice, but they actually follow very little of it. Most great entrepreneurs have their own internal compass. So I believe that coachability is an overrated metric. The default scenario for an angel when they start investing is that they tend to be on the tough side, especially when it's their own money involved and they're investing a lot of it. Generally, you don't want to put in money into any deal that you will care about if you lose it. If you have so much money in a deal that it will really bother you if you lose it, it will cause you to engage in bad behavior with the founder if things get rough. and your reputation gets built in those moments. Your returns get built by the companies that are doing well. Your reputation gets built in the companies that are doing poorly. Your long-term returns, which are also based on your access, have as an input, how did you behave with the founders when they were doing poorly? As a consequence, you'd never want to have too much at risk. If you have too much at risk when the company is doing poorly, you will behave poorly emotionally. You won't be able to help it and it'll damage your reputation. So don't put down so much that you care. There's a set of angels who insist on checking references on founders. This can be good if you know what you're doing, but reference checking is an art. It is something that most people do not know how to do well. Founding is an act of creativity. If you were to reference creative people in history, great writers, great philosophers, or great artists, most of the references would tell you that the person is crazy. The honest ones would. Founders are non-fungible. They're not replaceable. A founder that may be great for one business may be terrible for another business. The founder who's really good at building a Craigslist where they have to be very community-oriented, extremely patient, and almost anti-capitalist would be an inappropriate founder for a financial startup that's on a race and has to raise and deploy lots of capital and pitch banks and regulators. So it's the right founder for the job. References tend to be more generic in their nature. They tend not to work as well on the founder side as they might on the employee side, where you're looking at someone to scale up some process that's already working. I passed on Twilio in the seed round because of a reference. Big mistake. It was a reference from somebody I trusted who was well-intentioned. It was probably even accurate, but it didn't matter for Twilio. I should have just gone with my own gut feel that Jeff Lawson seemed like the right founder for the right job. Also, I passed on Ethereum very early on because of a negative reference. I did clue into that later, but early on, I had a venture capitalist who was very active in the space, give me a reference on some of the Ethereum founders that dissuaded me in a way that it shouldn't have. References from VCs are among the worst references because for every deal that a VC ends up doing, there are other VC firms who have passed on that very same deal. So there are a lot of deals that Sequoia will do that Andreessen passed on and vice versa, and this goes up and down the chain. It's not even the case that the best deals are always chased by the best VCs. Everyone has their own unique point of view in this market, and the good players have very independent points of view. So you have to develop your independent point of view. And references either devolve into checklists where, okay, I better just check the box that I've done all these references, or they end up in groupthink, where if you're actually listening to them, then your point of view is being diluted by what these other people think into a smeared average. One strongly negative indicator in this business is if a team hints, signals, or just appears like they would sell the company early. If they're overly financially motivated, it's very common for a team to sell a company for $100 million or $200 million, which is a great life-changing outcome for them. But for you as an investor, it doesn't matter much because you own so little and it's going to not move the needle on your net worth. This is a game of exceptional outcomes. It's not a game of averages. You're better off with a portfolio where nine out of your 10 investments go to zero and the 10th one goes 1,000x than a portfolio where all of them are 2x, 3x. This is why VCs tend to look for not just home runs, but grand slams. As Bill Gurley famously said, this is not even a home run business. This is a grand slam business. People are always looking for the extreme outliers. The smart VCs know that. When you invest in companies where the founder is going to sell early, you miss out on the benefit of compounding interest. Also, other VCs downstream will be very good about reading that signal. So they will pass on that deal and will be unable to raise the cash to become a big company. There's not much of a way to pull that signal out of founders, but sometimes they offer it. This is also why really great VCs these days will let founders sell some secondary early on, take some money off the table in exchange for going for the gold. There's a constant running debate between first-time founders versus repeat founders. There's no hard and fast answer to this question. Probably most of the value in the industry is created by first-time founders. Larry Page and Sergey Brin, Mark Zuckerberg, Jeff Bezos, lightning strikes, thing catches fire, off it goes. Even some of these so-called first-time founders, though, aren't necessarily first-time founders, because Mark Zuckerberg had other projects that didn't work before Facebook took off. Similarly, Bill Gates, I believe his first company was TrafoData, measuring traffic going down the street and selling that data to municipalities. He was doing that with Paul Allen long before he did Microsoft. So very often, even what looks like a first-time founder is a person who's been tinkering for quite a while. Repeat founders can also be extremely successful. If you look at companies like Zoom and WhatsApp, these companies are founded by repeat founders. Uber was founded by repeat founders. Repeat founders tend to be much better at execution. They tend to be better at recruiting teams. They're generally more careful about what markets they enter. They tend to be a little less passionate about whatever they're working on because they have surveyed the market and picked what they think is going to work, not necessarily what they're super excited about. They tend to have less specific knowledge about the field because they haven't necessarily been buried in it for the last 10 or 20 years. Although sometimes you do get that effect with people coming out of a bigger company where they've incubated some technology that they really like. The deals tend to be higher priced, so your returns are lower. They have better connections, so they can raise money more easily. The integrity test tends to work better because you're more likely to have a longitudinal relationship with this person. There's just a different set of trade-offs. I don't have a hard and fast rule about don't back repeat founders or don't back first-time founders. I found both can work and both cannot work. The thing you really have to check with a first-time founder is, are they going to adapt and grow on the things that they don't know? Are they going to be able to lead a company? Are they going to figure out how to be a CEO? This doesn't necessarily mean, are they coachable? It's more, are they motivated to learn those things? And are they fast learners? On repeat founders, what you have to test much more for is passion, which is, do they really want to see this thing all the way through? When the going gets tough, are they going to just drop it and go start the next thing? Or are they going to stick with it? Do they have conviction is what it boils down to. And do they have the humility to go through the beginning all over again? Many times repeat founders don't really want to start over. They don't want to start with a team of four or five people in small wooden desks huddled in a small space. They want to start with a lot of money. They want to start with a big bang, with a big office and a big team. And that can work where the risk is more execution risk, like it often is in enterprise sales and software, but it may not work where it's invention risk, which is what you get much more with consumer social networks or with deep technology development. It seems like the first time founders are taking out the market risk, which is why they tend to have the biggest outcomes, but also most of them fail because they have a market insight that they're attacking. And the repeat founders are taking out the execution risk, which is why they're probably much more consistent in the results, but the results aren't huge because they're not betting on a market insight. That's a very deep point and a good way of summarizing it. First time founders take on market risk and create new markets as a result or own entire markets. And repeat founders take on execution risk. And then there's some blends, for example, when you're developing a new technology, that technology can create a new market, it requires deep expertise, tends to favor first time founders in that regard. But technological development also requires raising lots of money and addressing things like manufacturability and distribution of brand new things. And sometimes that takes a repeat founders resources. There's a sweet spot, which sometimes shows up, which is a repeat founder who had a success before, but not so large that they lost the first time founder mentalities. For example, let's say that you have a team of people that was building robots, and they failed because they were too early. They made a really good attempt at it. They had very little money. They couldn't really get over the hurdle and the market wasn't quite ready. If you see that team come back and they still want to build robots, but now they say the timing is right. They've brought on a few younger people who have access to the new technology. Now they can raise more money and they've got a big chip on their shoulder and they're determined to prove that this space can work. Those kinds of bets can be very interesting.