Listened to this podcast with Andy Rachleff the other day.

While it’s two years old, the full episode is gold - featuring stories both from founding Benchmark and Wealthfront.

In the episode, he has one expression I particularly liked: “put the gun in the other person’s hand”. Meaning: if you are about to enter into a long-term relationships with someone else - you might as well try giving the other person all the power right away. Give them the gun and see if they pull the trigger.

An example of giving someone the gun is to ask them what the believe the valuation of their company should be like. If the other person tries to exploit you - walk away. If not, the test is passed and it might be someone you should work with.

Investing in startups is all about long-term. Without trust nothing will ever work. So it makes sense to put the gun to the other party’s hand immediately.

After I posted last week, a number of better articulated posts emerged on the matter as well (1, 2). The common theme in these posts was that margins matter. It looked to me that some interpreted this as “you can’t build great hardware companies”, and then responded “but look at Apple”.

Obviously, this was as a misinterpretation - building software (where new products have a marginal cost of zero) is one way of getting margins, but that alone is not enough either. You need a moat - something that allow you to capture part of the value created. But you can capture value with both software and hardware companies. Since we’ve invested in a bunch of hardware companies, I wanted to give my top two reasons why building a hardware company can be a good idea (despite a COGS > zero).

The first one is willingness to pay. You’ve probably seen the memes before; how we’re unwilling to part with $2 for a mobile app doing something useful while in the queue at Starbucks for a $7 coffee. You could call it a mental flaw or cognitive bias, either way it’s working in favor of those building “atoms”.

The other one is that products passively market themselves. In order for an app to get widespread organic growth, it needs an NPS score that is through the roof. We rarely look at other people’s phones/computers, so discovery comes through others actively choosing to talk about software they like. It’s different with hardware. People learn passively about your iPhone, AirPods, car and e-scooter when you use these products - without you having to broadcast it. Meaning that when you have a product people use, it can easily spread like crazy.

There are a lot of reasons not to build hardware. Cash flow complications, fewer iteration cycles (you can’t patch a “hardware-bug” that easily once you’ve shipped), each new product has a marginal cost and so on. But that doesn’t mean you can’t build great hardware companies. Be cautious with the associated uncertainties, and take advantage of the obvious strengths.

Recently, I’ve read a few articles around the topic of “what is a tech company”, and I think this is more than just a debate around semantics. Ben Thompson writes in length about this here, and Ben Evans previously introduced his mental framework around questions in this piece on Netflix; “are the important questions tech questions or TV questions?”.

Historically, tech investing has given outsized returns to a lot of skilled/lucky investors. Tech introduced a significantly better way to do a lot of things, and given that most competitors were non-tech companies, just being a tech company was a strong differentiator and a reason to capture part of the value that was created.

Gradually, more and more companies have become tech companies. What was previously a differentiator is now a commodity and table-stakes. From an investment perspective, this means that the question gradually moves from “can this company create and capture value in this market by introducing tech” to “what does this company have to do to create and capture value in this market”.

Tech, in more and more cases, is no longer the differentiator. As this shift is happening, we are starting to see investors evaluating companies differently. As I wrote in my previous newsletter; the question is not whether it’s a tech company, but rather if the company can scale and earn like a tech company?

You can create value by introducing tech, but it’s uncertain whether you can capture enough of it (if any). Network effects has been a very popular moat in the past 15 years, but now I’m seeing an increased focus on other moats too - for example USV’s thesis 3.0 on trusted brands and this from Point9 on branding SaaS-companies.

I predict many of today’s “tech” investors will start to look more and more like miniature Berkshire Hathaways going forward. By that I mean the focus will shift from product and tech to other, more generic fundamentals. There’ll still be the “cutting-edge technology investors”, investing in companies built on top of fresh and unique technological research, and I guess we need a new term to describe such companies as the “prefix” tech soon applies to all companies.

Very often, this is a reflection of a company that hasn’t though enough about their go-to-market strategy. What will their beachhead market be? Who will the company target with their product - who owns the problem? And maybe even more important, who they won’t target?

A problem owner should be a specific type of person or company, and if it’s a company also the specific role(s) within said company. Once the owner(s) of a company’s problem is communicated clearly, it’s a lot easier to further dissect a company’s product and plans - and potentially build confidence around an investment opportunity. Everyone wins.

What makes an entrepreneur great? The short answer is “it depends”. It depends both on the opportunity the entrepreneur is pursuing, but also on who you’re asking. Some say it’s about being relentlessly resourceful. Others say it’s about being good at effectual reasoning. It’s about hard and soft skills. Others again emphasize entrepreneurial experience. The list goes on. Some of these claims are empirically backed, others are more anecdotal. All can be valid arguments for choosing to back a startup. But when talking about why an entrepreneur deserves to be backed, it should not be described simply as “great”.

Rather, an entrepreneur could be described as hard-working. Or relentlessly resourceful. Intelligent. Charismatic. Fast-moving. Likeable. Coachable. As having relevant industry experience. Having built a startup before. Having recruitment power. Having unique insight. Or none or all of the above.

If you describe an entrepreneur as “great” it’s because s/he has certain characteristics. But it’s really stupid to stop at “great” instead of elaborating on why any given entrepreneur actually is great. Going into details around what characteristics you value improves the discussion, also it makes it a lot easier to learn about startups port-morten when “great” entrepreneurs turn out to be not so great.

Words matter. To paraphrase Confucius; when words lose their meaning progress stalls. This is something that is becoming increasingly clear to me. Don’t use synonyms, but communicate clearly and precisely. In order to improve, you need to be deliberate about how you communicate. This is the only way to learn and progress.

Next time I talk about an entrepreneur that I think is great, I won’t stop at great. I’ll elaborate with which of the entrepreneurs characteristics that makes me form that opinion.

I am currently making my way through Poor Charlie’s Almanack - the unofficial biography of Charlie Munger.

There is a lot of gold so far, and I’ll probably write more about things from the book in the weeks to come. Today, I wanted to cover one topic which is so simple and fundamental it’s surprising not more people talk about it. Inversion.

According to Munger, it is most often wise to invert when faced with a challenge. As he says, “tell me where I will die so I shall never go there”. Basically, instead of focusing what to do spend your energy on what not to do.

Most people think about how to win, but if you’re playing long-term games (which he does, and which startups definitely are), the key is not to lose. Given enough time, those focused on winning will make mistakes and end up losing. If you focus on not losing for long enough you’ll end up winning.

While this is not 100% applicable to startups (sometimes you have take a risk and focus on upside maximization in order to get to the next level), I see lots of areas where it makes sense to apply this mental model.

One thing that immediately comes to mind is controlling burn rate and runway. Startups die (lose) because founders give up or the company runs out of money. If you’re obsessed with your runway, you’re probably less likely to scale prematurely. The inverted perspective reduces the chances you’ll go bankrupt.

Bringing an inverted perspective along when making decisions can add a lot of value. I will definitely try to do it more going forward.

Vi har ikke mange årene på å gjøre noe med den menneskeskapte klimakrisen. Ting går for sakte, i år brukte vi opp jordens ressurser for i år før utgangen av juli.

Jeg tror vi lenger fremme vil snakke om “de som var på feil og de som var på riktig side av historien”. Og jeg er overbevist om at det i så tilfelle vil være de unge som streiker i dag som vil være på riktig side. Det å ikke gjøre noe er i økende grad å plassere seg på feil side av historien, og derfor streiker jeg også i dag.

Hvis du også bryr deg om denne saken, er noe av det absolutt viktigste du faktisk kan gjøre å bruke stemmen din ved valget søndag 9. september og alle valg deretter.

Jeg kommer tilbake til deg over helgen. Ring meg om det haster.

//

I’m not replying to emails today, as I’m on strike for climate.

We don’t have many years left to do something about the man-made climate crisis. Things are moving to slow; this year we spent this years resources before end of July.

I believe we’ll talk about those who were “on the right or wrong side of history” in the future. And I’m convinced that if that’s the case, it’ll be those on strike today who’ll be on the right side. Not doing anything is increasingly the same as placing yourself on the wrong side of history, and that’s why I’m on strike today.

If you care about this issue, probably the most important thing you can do is to vote at the upcoming elections this Sunday - and every election thereafter.

I’ll get back to you with a reply over the weekend. Call me if it’s urgent.

//Kjetil

Today, I’m thinking about intentions. Related to my post a few weeks back on bounded rationality, as well as this quote from WSJ’s Charlie Munger interview from a few months ago:

More harm is done by people believing they do the right thing than by people with bad intentions. Fully agree. pic.twitter.com/2AKKOp4f4L

— Kjetil Holmefjord (@kjetil1) May 8, 2019

I don’t believe people are born evil. Further I don’t believe most people try to do evil. Still, a lot of actions done by people end up doing more bad than good.

I believe this has to do with bounded rationality. People believe they do good - their intentions are good, but the outcome is not good - because their view of the world is imperfect, flawed.

I find this whole concept extremely fascinating. We have people all over the world disagreeing with and reacting to other people’s actions as if others have bad, or at least different intentions.

What we really should spend our energy on is understanding in what ways their worldview is bounded or different - then educate them and ourselves to reach a common understanding of the world. At that point we can start discussing actions. Jumping straight to actions is not constructive in any way.

Reading about Uber’s difficulties with driver retention (or, how they don’t disclose any information about this) is another data point. I can see them partnering with taxi companies (professionals) or offering more employment-like agreements (guaranteed salary, benefits etc) as a way to address (potential) driver churn issues.

These are only anecdotal observations, as mentioned initially. I could be completely off. But currently I’m more bear than bull on p2p marketplaces’ plans to continue scaling as before.