Being an "N of 1" firm
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When I was starting off in venture, a more senior investor told me that ‘you need to be one of the first 5 investors a founder calls to have a shot at winning that deal…if you’re not a top 5 investor for at least some portion of founders, you’ll likely not make it in this business’. This really stuck with me. I was at a VC firm in Chicago trying to build my career and left myself asking “how could I possibly be a top 5 investor for some hot SaaS company in the valley?” The reality is that I couldn’t and that realization laid the foundation for what is now Equal Ventures - an ardent focus on prepared mind investing in areas that I/we feel we can be a top 5 investor.
Several years later, my friend Jake Saper of Emergence Capital told me to be “king of my island”. I wrote about this last year and it has further amplified my ardent focus on differentiation, making sure we can confidently claim the throne for the limited surface area where we invest.
Over the last few months, I’ve discussed some of my concerns about the overall competitive landscape for venture and the challenges I’ve seen in the seed market. I assure you, this is not coming from a place of excuses (I’d argue that we’ve done some of our best investing as a firm over this time period), but it’s further propelled my thoughts on minimal viable differentiation for a fund in an environment where mega funds can rightfully claim that they are a top 5 investor for virtually anything.
The other night I was having a conversation with another manager who has been immensely successful in traditional venture and is now trying something entirely different in a way that truly no one else is. We got to talking and I told him how much I admire his boldness - ‘win or lose, you’ll know that you left it all on the field playing YOUR game. You may achieve greatness or you may fail, but what point is there in chasing merely goodness when you’ve already accomplished as much as you have?’.
We started talking about other firms that were doing things incredibly differently, firms that weren’t trying to be a top 5 investor for that company, but the ONLY investor for that company - an “N of 1” investor.
That thought has been plaguing my mind since. I think of Arthur Rock when he was the only VC there was. I think of First Round when they were the first institutional seed firm and later when they were the first platform firm. I think of A16Z and the tremendous impact they had on the venture market with the talent agency model. When SoftBank (and later Tiger) bombarded the growth market with the capital cannon, they could dictate terms for fear that they might back a competitor instead. I think of the immense power that YC wields over the valley seed-stage valley ecosystem. The rewards of being an “N of 1” are undeniable.
Other firms become “N of 1” firms because they have “N of 1” people. I think this can be said of early Kleiner Perkins (as well as the most recent iteration with Mamoon’s arrival), Benchmark, USV, Emergence and IA. Each of those firms had one or more “N of 1” investors - folks who were/are the next level of talent above everyone else.
Not every one of these firms or investors started as an “N of 1”, but they evolved there. These firms compete ruthlessly against themselves to build their monopolies, making the competition against the rest of the market comparatively easy. Simply put, you don’t want to be an investor competing against these firms for a deal and you are likely terrified if they back a competing company. If I were a LP, I’d be spending my time exclusively focused on finding these “N of 1” firms. We often say “competition is bad for business” and these firms did some pretty damn good business by avoiding the competition and their LPs have benefitted handsomely. Even if/when one of these strategies fails, the gains are offset by the incredible returns of those that succeed. Success as an “N of 1” doesn’t yield a 3x outcome…it’s more likely to lead to 10 bagger outliers that simply can’t be achieved with consensus strategies. That might be a volatile portfolio, but I’d wager that it’s also one that drives above market yield for investors who enter these funds before the market wises up and copies these strategies (which inevitably happens).
At Equal, I’m hopeful we can build an “N of 1” firm. Our hypothesis is that with the combination of 1) rigorous research at the seed stage and 2) keiretsu systems within our industries that we can be an “N of 1” partner to founders in our sectors. Amidst this, we’re going to be non-consensus, whether we like it or not. We were the only term sheet at seed for every company we’ve partnered with over the last few years, we go laughably early into companies (4 of our last 5 deals were prior to the first line of code), we swing incredibly hard (we’re averaging >$3m invested prior to the A in our latest fund) and are extremely concentrated (our last fund had 15 total investment - all of which we entered at the seed stage). For better or worse, our companies, portfolio construction and strategy share very little overlap with other firms.
We’ll see if it works out, but if nothing else, I know we will leave it all on the field, playing OUR game, not that of the broader market. We may fail or (better yet) we may achieve something pretty special, but we will never chase merely goodness amongst the sea of other competing firms.