Theory of value rEvolution

My theory of where early stage value emanates has evolved over my investing career.

My original belief, fresh out of business school and learning how to invest was that beauty created value--that beautiful, elegant ideas were forces unto themselves resulting in products more evolved than their peers that would naturally win in the marketplace--and that some founders could make beautiful products and others could not. To invest in this way, I would go very deep technically, with every investment and every founder, trying to "see" what the founder saw, and to truly understand the science or technology involved. Was it beautiful? Was is elegant? Was is beautifully made? Therefore, would it necessarily win? I strained to understand new ideas, which were often beyond me. I read text books, I called professors who were expert in specific fields of interest--most of my life was spent trying to see through the eyes of genius--to truly understand a product, and how it was made. This led to investments like Kite Pharma, which was a beautiful idea--curing cancer by reprogramming one's own t-cells to attack cancer cells, negating disease with the body's own self-produced tools. The science itself, was also beautiful and elegant. This approach also engendered a respect for brands as distilled personifications of big thoughts, broken down for general consumption (and sometimes, valued on balance sheets at exit).

I then took a detour and tried to invest in that "beauty" in a top-down way by using culture as a proxy, thinking perhaps beauty as value isn't just technical, and personified by beautiful ideas and elegant proofs, but also evident in beautiful approaches to living, believing and being, which were just as compelling to end customers. Could founders most in-tune or making products in alignment with the dominant form of this kind of beauty outperform? Instead of text books, I read books like Hillbilly Elegy, Labyrinth of Solitude, and Between the World and Me to try gauge where the puck of culture was headed to inform where to look-- It was an audacious idea, and it worked. Admittedly, it was also fueled by tech itself becoming popular culture. This led to investments like Gimlet Media who was creating audio content with the production beauty of a Hollywood studio on topics central to prevailing cultural trends.

Today, I consider micro and macro in investing, and have doubled down on my original theory of value, focusing more on the technical truth of how a thing works, and the hard fought results of elegant ideas. I have also become part of a tribe of technical thought partners who can help me to go deeper than I could otherwise go alone. Beautifully built products tend to create beautiful experiences for customers, though the process of building them can be excruciating. Lately I've been approaching the world with a beginner's mind reading technical manuals, and Github Repositories as there is so much to learn in this new cycle. The random walk to optimal requires experimentation to synthesize the ideal. I've made progress, but there is still a ways to go.

Prejudice and System Dynamics

In grad school, I got one of the rare opportunities to take a class from the "guy that wrote the book" on System Dynamics. System Dynamics is a mathematical modeling methodology that is particularly good at depicting non-linear behavior in complex systems. A key concept in system dynamics (and economics for that matter), is the idea of stocks and flows--Stocks being things already accumulated and measured as units at a point in time, and flows being evolving variables measured as units over time. If you think of an early stage company through the lens of system dynamics, it becomes immediately obvious that flows are the only things that matter. Stocks are irrelevant. It's interesting how that conflicts directly with prejudice. In prejudice, prejudging, classifying people or things based on a presumed value of commonly understood characteristics, stocks are the only thing that matter.

For example--things that matter for an early stage company such as ARR, growth, burn, margin, traction, values, hiring, learning-rate, CAC, margin are all flows. They are rates dependent on time (margin could be debatable, but I would argue margin is highly dependent on marketing actions, which spend over defined time periods).

Conversely, things that matter for prejudice such as accumulated wealth or titles (someone's class), phenotype (how someone looks), address (where someone lives), sex, religion, nationality, accent, perceived pedigree, which LLM is a business is currently utilizing, valuation of a similar company last year, etc., are stocks, they are static measurements at a specific time.

It is not logical for investors to be prejudiced when making investments, because, that would mean making investment decisions based on stocks, not flows. Going further, we should approach each investment, each interaction, each relationship as beginners, blank slates applying the rigor of logic to the possibilities of teams and ideas.

9/10ths

Some things only makes sense at 9/10ths--they only really function properly when you use them at 90% of their envelope, at the edge of their capability.

One example of this is performance vehicles. Track-prepped car's or motorcycles are terrible for picking up your child from school, or grabbing a box of eggs from Whole Foods--they are loud, have hard suspensions crashing over bumps unnoticeable in a Honda Odyssey, the look rakish, have no creature comforts and probably smell of gasoline. However, when one drives a vehicle like this on a track, suddenly the engine noise is less intrusive, the suspension may feel more supple and controllable, the lack of creature comforts directs your attention to going fast around a track-- and the smell of gasoline may be diminished, as there is less unburnt fuel under high load. Same vehicle, totally different experiences of use.

As you settle into the performance envelope of the vehicle, you are able to explore your performance envelope as a driver (or rider)--How well can I stay on the racing line, how late can I break before a turn, how well can I navigate with limited traction through a pair of chicanes. For most people, you quickly find that the vehicle's limits far exceed our limits--the car is able to brake later into a curve than I am brave, or my reflexes allow, not the vehicles suspension, is stopping me form staying on the racing line consistently. Some of us ultimately find some android/psychological synthesis, where we can become a part of the vehicle, exceed our human limits and start to reach those of the machine's, resulting in incredible performance.

There are a million analogies to this and building products, and teams, but I'll note one that seems glaring its ubiquitousness. La Marzocco espresso machines are performance vehicles, and way too few baristas are driving them at 9/10ths. :)