The Many Influences of Equal
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Every investment firm (regardless of whether it’s in VC or another asset class) has to find the practices, frameworks, and ethos that define them uniquely from the rest. While some are more distinctive than others, the process for identifying those guiding principles defines the culture and ultimately determines its ability to succeed.
For many, those guiding principles are defined by places they’ve worked with in the past – the learned and earned lessons of their experience. As I’ve searched for our own, I’ve tried to find inspiration from the broadest pallet of investors I can. I spend a tremendous amount of time reading about other firms, I get the privilege of interviewing some of the VC industry’s best firm builders as part of EMC and I participate in “peer circles” with other firm leaders (including those where its exclusively VCs and those where I’m the only VC amongst peers in real estate, PE and HF). While there are elements of what we do that are wholly original, much of what we practice is borrowed from others. Their distinctiveness only comes with the layering of them together into a single lattice.
Given how grateful I am for these lessons, I felt it was only appropriate for us to give credit where credit is due, so below is a brief overview of a few of our sacred practices informed by the greatness of others.
Prepared Mind – Perhaps no concept is more central to our firm than the premise of the Prepared Mind. While thesis-driven investing has always been central to my approach to investing, the “Prepared Mind” was something that I stumbled upon. Over the years, I began reading books about investing from Value Investors and none of those has influenced me as much as an investor as the works of Charlie Munger of Berkshire Hathaway. There is so much written about Charlie and truthfully, I recommend all of it. Charlie and the Berkshire enterprise are famously disciplined in investing in businesses that they fundamentally understand, deferring from trends. This has resulted in incredible compounding performance. Along the journey with Charlie, I realize that early Accel implemented this same “Prepared Mind” approach via the book “The Power Law”, believing that an uncanny understanding of the technologies they invested in would allow them to see around the corners of the market, find/attract the best founders and serve them best. Accel and Berkshire are VERY different, but the fact that “prepared mind” worked for both of them shows how powerful and applicable this concept it.
Moats – My obsession with moats has become so pervasive that someone sent me a bottle of Moet Chandon champagne rebranded as “Moats Chandon” (for future reference, this worked REALLY well in grabbing my attention). As the industry has largely focused on growth at all costs, we’ve been hyper focused on the durability and sustainability of our businesses with an acute focus on studying their propensity for moats. Amidst that, we’ve learned from the works of Columbia Business School professor Michael Mauboussin and his seminal paper “Measuring the Moat” to gauge whether potential companies we invest in have the ability to develop moats within their value chain. As we’ve asserted in the past, this is NOT a purely qualitative, subjective exercise, but one that can be done with objective analysis if the operating characteristics of industry incumbents and the value chain’s profit pools are properly understood. As the companies we invest in continue extend beyond traditional SaaS, we believe it’s increasingly important to understand a company’s ability to generate moats, how meaningful those moats could be, and how they impact the profits and motivations of other players. Truthfully, none of that would be possible without the amazing work of Michael Mauboussin.
Capabilities – Capabilities is a home-grown adaptation of a concept formalized by another Columbia Business School Professor, Bruce Greenwald. Bruce is regarded as "a guru to Wall Street's gurus” and maintains close ties to Berkshire. His book “Competition Demystified” is largely recognized as one of the most influential business books of all time and brings forward a “radically simplified” approach to strategy around the concept of captivity. Captivity is effectively thinking about the power/leverage a company has over market participants based on the innate characteristics of a company. Bruce centered much of this approach around how companies could apply the benefits of economies of scale to take advantage of certain market characteristics, but we have expanded upon those to focus on digital market dynamics. With that, we outlined dozens of “capabilities” (means to establish captivity over markets and/or customers) that we think provide perpetual advantage to a business. Bruce’s work was one of the first pieces of literature I ever read that helped me think beyond the existing numbers of a company and how its competitive positioning could shed light on their future performance. Given where we invest (as early as possible), learning how to think about a company’s value ahead of its metrics is paramount to investing in and working with the portfolio of companies we work with.
Research Briefing Books – Once upon a time when I was a consultant, I remember preparing giant research briefing books for our teams whenever we were about to take on a client engagement. These books contained summarizations of key facts, filings, news, and insights on the companies we worked with to help our teams properly understand the client’s needs when we arrived. At the same time, I saw my peers working at Wall Street firms preparing periodical “briefings” for their clients on the latest news on their markets. I found these to be really interesting and started having them forward me what they could. As we attempted to develop our own prepared mind as a team at Equal, I realized this could not be done in isolation. Having 1 person who understood the nuances of insurance didn’t seize the benefits of a firm-based approach if they were the only person who understood what was going on in the market. With that, we implemented bi-weekly research briefings as a way to enable knowledge transfer from our industry leads (called Product Owners) to the rest of the team. These briefings are a great way for our POs to stay on top of industry trends and to disseminate the insights they glean to the rest of the team and (fortunately) pulling them together is a lot easier than the printed binders I had to make back in the day 😊
3 Hats – Partnerships take many forms. Much of the VC model has been predicated on the relationship of a company to a single firm representative. This is how firms have operated for almost the entirety of venture capital’s history and it largely worked. Over the last decade, we saw firms amount an offensive with platform capabilities that enabled a partner to serve a greater quantity of companies (or presumably to do so anyway). Over my decade plus in venture, I’ve always been proud of my commitment level to companies, but admittedly had concerns about my own bandwidth as I accumulated a larger stable of portfolio companies I represented. I studied platform based firms and ultimately didn’t see that model working for us and our companies. With that, we looked to another source for inspiration – private equity. The first firm I worked at was a small shop called Lightview Capital. The composition of the firm was simple – 1) a seasoned growth equity / private equity investor, 2) an equally experienced tech-operator with a deep background in sales / growth and 3) me, a grunt associate for sourcing/screening lots of deals and building models. This worked really well for us. As I looked across other PE firms, this profile was fairly universally shared. You had deal partners, operating partners and others that were combining those two disciplines (investing and operating) in a more general lens. In studying some of the decision making science of Michael Mauboussin and Annie Duke, it became 3 “hats” was the optimal number to put around the table for a founder, providing diverse, yet informed perspective. While we didn’t arrive at “3 Hats” overnight, the structure works incredibly well for us and we likely wouldn’t have had the confidence to try a new operating model like this without the inspiration of seeing it work elsewhere.
Keiretsu – This is another one of our practices that bleeds between Private Equity and Venture Capital origins. Keiretsu is the shared practice across a set of companies with interlocking business relationships to enable mutual benefit. I wasn’t aware of what Keiretsu was until Ali sent me an article on it from Aashay from Haystack, where he discussed John Doerr’s “California Keiretsu”. I had always thought of it as vertical integration between our portfolio companies, much in the way that individual companies within conglomerates cooperated with each other to unlock shared advantages, such as in the late 20th century Japanese conglomerates that gave this practice its namesake. Upon studying Doerr’s mastery of this in the venture landscape, we’ve doubled down on this practice, seeking companies that address gaps between our companies. We now open up our Keiretsu’s to companies outside of our fund to further expand and amplify their influence.
Hatching – As many know, company formation has become a bit of a specialty of ours. More than 1/3 of Equal’s companies are investments we made at the inception stage, including some of our most exciting ones such as Leap, Starday, Ghost, Stand, and Texture (as well as 3 more that we have yet to announce). Each of these takes on a slightly different profile, but the core objective is to partner with world-class founders around a shared idea at the inception of the company. Many firms approach this stage of investing in different ways (some churning out lots of companies with an accelerator approach, others taking very stage stakes in a more concentrated model, others with EIRs who build companies under the firm’s umbrella with full autonomy and others just simply invest). I think all of these models can work, but what we’ve chosen is the “hatching” approach popularized by General Catalyst. I’ve had the chance to talk to Joel Cutler about the approach a few times and it really focuses on three things: 1) only backing founders that you would follow into fire and back at any price, 2) only on ideas that you are so insanely passionate about that you would start the company yourself and 3) creating a deal structure that works for everyone, rather than trying to seize disproportionately outsized economics upfront (risking adverse selection of founders or lop-sided cap tables). We aim with intention when we “hatch” and hope to have anywhere near the success that GC has had.
Intensity – This one might be a little surprising given the laissez-faire nature of today’s venture capital environment, but we have progressively leaned in on the operational intensity of Sequoia as we have matured as a firm. While not for everyone, I would argue that we are amongst the most intense seed investors in the venture industry. We play to win when it comes to deals and do the same when working with founders to help them build amazing companies. That’s been my style from Day One and I’ll happily go down with the ship on any company that fails, provided that we leave it all out on the field. Sequoia operates with that same intensity. I’ve seen its partners be incredibly aggressive to win deals and they are famously forward in providing their feedback to founders. Again, this pitch isn’t for everyone. I know founders who wouldn’t take capital from Sequoia for fear of the pressure and expectations it has (and perhaps their fear of being replaced for not meeting those expectations), but the firm has undeniably had incredible success in attracting, backing and supporting some of the world’s most valuable companies. While I’ve never worked for or with Sequoia, my understanding is that its culture is equally as intense. As one of my LPs put it “Everyone at Sequoia knows there are no days off…if you relent for one second, there are a thousand other VCs behind you that would do anything to take your spot.” I believe in treating our mission at Equal with the same intensity. Many firms operate very differently and that’s fine for them, but we’re not one to take the “random walk” of venture returns – we’re going to leave it all on the field knowing that every percentile point you can push yourself up the power law curve has a disproportionately higher benefit.
There are endless other influences to how we operate at Equal and how I operate as an investor and firm builder, but these are some of the ones that I feel most prepared to share. There are aspects of what we do that are wholly original, but so much of what we do is by landscaping what we see in the market and determining what can be applied to the specific circumstances and conditions we see in front of us. This practice itself is inspired by William Duggan’s book “Napoleon’s Glance” which archives Napoleon’s incredibly deep study of past battles to inform nuanced, bespoke strategies for impending battles (and his historic success in those battles). The point is that inspiration can come in many forms and from many places, but only if you have the proper mindset to go find it. Myself and our firm religiously study the practices of others to learn best practices that we can apply to our firm and our companies. While several of the influences cited here were from my business school alma mater, this practice doesn’t require a MBA (in truth, I didn’t even know about Michael Mauboussin or Bruce Greenwald until several years after I graduated).
Seek inspiration from everywhere you can and as long as you are still living, there are still opportunities to be learning.