📶 Outlier frameworks: How tier-one investors think

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Over the past ten months, we’ve gone deep on some of the best investors of all time.

This list includes Doug Leone, Bill Gurley, Ben Horowitz, Alexis Ohanian, and others.

Here are 96 mental models that these investors use to evaluate new opportunities and see the full picture.

Hopefully, something in here is valuable to you.

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LESSONS

• Back “revenge” founders. These are founders who had their previous company taken from them in one form or the other. Chips on shoulders put chips in pockets. (Elad Gil)

• Good ideas are easy to justify. The best deals smack you in the face. His best deals got everybody excited in a few sentences while the worst ones came from multi-week debates and “rigorous” thinking. (Jeremy Giffon)

• One big Idea is all you need. Great entrepreneurs repeat themselves without losing intensity or passion. How many thousands of times has Jeff Bezos told his team to focus on the customer? (Jeremy Giffon)

• Understand your edge. If you don’t know what you bring that makes you better than the next guy, how can you compete with the guys that do know? (Jeremy Giffon)

• Great founders > markets > themes. Especially at the seed, your job is to find and back the best founders. Doing anything else is a losing strategy. (David Frankel)

• Ignore trends. Nobody knows anything. (David Frankel)

• The career risk of an asset owner forces AUM scale. Larger funds bet more on the front end (fees); smaller funds bet more on the back end (carry). (Erik Serrano)

• Most investors underappreciate life experiences. The more you get to know a person, the better you can underwrite them. (Erik Serrano)

• Adversity at an early age is a good indicator of future success. “Chips on shoulders put chips in pockets.” (Erik Serrano)

• Communicating is underrated. Ironically, more communication tools has created fewer great communicators. (Erik Serrano)

• Likability is a proxy for being reliable. Likability works in private markets. (Erik Serrano)

• Great GPs want the freedom to not think about money. Good GPs just want to make money. (Erik Serrano)

• Changing strategies is punished. It’s okay to lose money, but you HAVE to do it the way you said you were going to. (Erik Serrano)

• In the investing world, LPs often buy something more than returns. “Poor people buy entertainment; wealthy people buy information.” (Erik Serrano)

• Your reputation as an investor matters more than anything else. In other words, your current reputation is a proxy for future returns. (Alexis Ohanian)

• You get tunnel vision when you work on a problem 24/7. Seek advice from people who will tell you the hard truths about your work. (Alexis Ohanian)

• CMOs are in charge during boom times; CFOs are in charge during downturns. Especially during economic downturns, people become more aware and sensitive to where and who they support with their money. (Alexis Ohanian)

• Early-stage VC is the only profession where insider trading is legal. If you don't have a structured way to store information and identify opportunities, you have no chance at generating alpha. (Alexis Ohanian)

• High-margin software businesses have made us bad at operational efficiency. This was said five years ago, and it couldn’t be more true today. (David Sacks)

• Define the category so that you can shape category requirements to position yourself and de-position competitors. David believes most software markets are still winner-take-most. (David Sacks)

• You can’t buy some forms of marketing; you have to earn it. This can be done through brand, messaging, press, influencers, content — anything that defines what the business is. (David Sacks)

• Start with a product hook to grab users and a distribution trick to find them, pay attention to the organic use of the product to discover the market insight, then lean into that insight to build the company. Startup marketing distilled down to a sentence. (David Sacks)

• Obsess over engagement and removing friction. There are very few companies that nail these two pieces and don’t ultimately win in the end. (David Sacks)

• Understand intrinsic motivations: Leone was famous for trying to identify what drives a person as early as possible. His go-to line of questioning was figuring out what type of trauma a person had to endure since he believed that that experience shaped their current worldview and motivation. Leone and Sequoia look for humble backgrounds and a need to win. (Doug Leone)

• Culture eats strategy for breakfast. Nothing builds a great culture like winning. (Doug Leone)

• Trust is earned through short-term sacrifice: In the early 2000s, Sequoia was underperforming. The fund was valued at 0.3x, so the Sequoia team did what no other fund would; they cut their carry, fees, and wrote personal checks to LPs. They reinvested all fees and turned a 0.3x fund into a 1.9x fund. It hurt the GPs’ wallets in the short term, but paid back massively in the long run, deepening the trust with their LP base. (Doug Leone)

• Capital is not as commoditized as you think: Not every investor dollar you take is worth the same. The right investors can open doors and see around corners; the wrong investors can blow up your company. If you’re a founder, you should date around before committing to any investors (it is a decade-long partnership after all). (Doug Leone)

• CEOs aren’t born. The most successful CEOs you recognize have been built through more years of decisions, mistakes, and pressure than most people cannot comprehend. (Ben Horowitz)

• Managers have one skill: make things extremely clear. Creating unnecessary complexion is a great way to create internal frustration from your team. (Ben Horowitz)

• Experience and skills are two totally different things. Most VCs sitting on boards have experience. (Ben Horowitz)

• Flowers are cheap; divorce is expensive. Ben got this advice from his father, and the lesson is about tradeoffs we all make in life. For him, it was a wakeup call to delegate more in order to have more time to spend on the things that matter. (Ben Horowitz)

• Specializing will give you tunnel vision. If Sequoia had a checklist of things they needed new investments to answer, they would have missed most of their winners. (Bryan Schreier)

• Internal apps have become the lifeblood of business operations. Hosting and managing these apps has become a growing issue that can be solved with low-code tools. (Bryan Schreier)

• Expansion isn’t always a good thing. Especially on the investing side, we have seen more and more funds build out international expansion while Benchmark has stayed consistent. During the bull run, people thought they were dumb for leaving money on the table; during the current bear market, people saw their brilliance for not copying what everybody else was doing. (Bill Gurley)

• If you can’t learn from your mistakes, you can’t make it as an investor. Investing is a game that should get easier with age, but that only applies if you are able to learn from the errors you made when you were younger. (Bill Gurley)

• The problem with more dollars in private markets: more VCs = more venture-backed competitors = more cutthroat behavior = suppressed returns for companies and shareholders. (Bill Gurley)

• Truly great products are bought, not sold. If you want to look for companies with this phenomenon, look at their top-line revenue and compare it to their marketing budget. (Bill Gurley)

• Flying under the radar > always being in the spotlight. Focus is a competitive advantage for founders, and focus is hard to come by when you are the center of attention. (Brad Field)

• Markets reward growth until they don’t. Then they reward profitability. The trick is to be in a position to make the switch when you need to. (Brad Field)

• Emotions are the enemy of good decision-making. The best investors are able to remove the emotion completely from the decision. (Brad Field)

• Fund size consistency matters. All of Foundry Group’s funds have been the same size. Feld found that growing like crazy as a fund meant that more time would go towards training inexperienced entrepreneurs and less time towards working closely with the more experienced ones. (Brad Field)

• Equal work, equal pay. The idea of anything other than an equal partnership disgusted him. All of the partners at Benchmark have equal carry, and all GPs own the management company without paying for it; it is given to them from the previous GP class. If you get anything from this piece, this is it. (Bob Kagle)

• The winning formula: name brand founders create name brand funds which attract capital and talent. Once this flywheel gets going, it is hard to stop. Winners keep winning. (Bob Kagle)

• The venture capital industry does not scale well. This is part of the reason Benchmark deliberately stays small. In Bob’s view, VCs are supposed to bring support and be steady; it is not their role to bring on dozens of platform people. (Bob Kagle)

• You have to invest in the world’s most important companies in order to generate the best returns. Nobody in the world is smart enough to know where those companies will come from. This is why Brian is a generalist. (Brian Singerman)

• If we were going to maximize returns, we would do it over a longer timeline. The compromise is a typical fund cycle (10 years + 2 years of extensions). (Brian Singerman)

• Good moats should be obvious. Good software will get cloned; you need something else. (Brian Singerman)

• The angle of decline between productivity-per-person is what separates good startups from great startups. Great startups are all A+ players; good startups still have some fat to cut. (Charlie Songhurst)

• It’s hard to be smarter than everyone else. It’s easier and better to have a unique insight because you inhabit a unique position. (Charlie Songhurst)

• Talented people have more options than ever. To increase your chances of hiring well, the best thing you can do is compete on variables. (Charlie Songhurst)

• Interesting and complex ideas attract the smartest people. If you hate competition (which all investors claim they do), you should avoid the interesting and complex. (Charlie Songhurst)

• The most mis-valued asset in the world are entrepreneurs in markets that are non-obvious. If you’re looking to beat the market, you won’t find a better bet. (Charlie Songhurst)

• Engineering serendipity is one of the roles of good investors. The better connected you are, the easier it is to connect the right people in your network at the right time. (Aydin Senkut)

• In early-stage venture, there is a capacity problem (too much money chasing too few quality deals). Capacity problems create adverse selection, and adverse selection creates underperformance. (Arthur Patterson)

• The more you spray-and-pray, the less you protect your franchise. In other words, your brand becomes diluted, and your capital becomes worth less. (Arthur Patterson)

• The best founders are usually controversial individuals. Trying to draw conclusions on what makes a good founder is an impossible exercise. (Arthur Patterson)

• Invest in people who are genetically wired differently. Some of the best teams look like an island of misfit toys to outsiders. You want to hire people that are capable of thinking outside the box. (Ann Miura-Ko)

• In order to recruit the best candidates, you need to create fear that if they say “no”, they are going to lose the chance the chance to join. This is a part of good storytelling that isn’t talked about enough. If you want to influence people, you have to make them scared of the idea of missing out. (Andy Rachleff)

• Your personal risk profile is a byproduct of your first market cycle. Those that start their career in bull markets have a different perspective than those who start during a downturn. (Amish Jani)

• In the fight for user attention, engineering social proof is the most important thing that marketing teams can do. Study the startups that build a cult-like following without spending a fortune on marketing. (Aileen Lee)

• Question conventional wisdom before you accept it. The source is often more important than the message. (Aileen Lee)

• You can’t pay your way to product-market fit. You’re burning money on fire if you try to scale before deeply understanding the pain points of your customer. (Aileen Lee)

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- Clay