📶 Outlier Frameworks: How tier-one investors think

96 mental models used by investors at Sequoia, Benchmark, Accel, and others

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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.

P.S. As our site (and list of offerings grew), it became harder to point visitors in the right direction.

It asks readers three simple questions, and we use the answers to re-route readers to different things we’ve already built to help with their unique situation.

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)

  • 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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QUOTES

“A really great executive is about six to twelve months ahead of the curve. They’re already planning for and acting on things that are going to be important six to twelve months in the future. A decent executive is delivering in real time, now to one to three months in advance.”

“I think network effects are great, but in a sense they’re a little overrated. The problem with network effects is they unwind just as fast. And so they’re great while they last, but when they reverse, they reverse viciously.”

When people set out to build a company they either want the satisfaction of building a well run machine that they can walk away from or they want to build scaffolding around them that lets them do more of what they like. These are pretty divergent but they get lumped together.

“Nothing hurts ambition more than fear of conflict. Ambition must be lowered until we can arrive at a vision we “all can agree on” which isn’t a vision at all. Any organization driven on common agreement will be unable to act on the highest ambitious vision. Must be rule of one.”

“If you’re at all money oriented, you can more than easily outrun the first decade of stock market compounding by using your capital to build something. Time in the market is a dangerous idea for high agency individuals.”

“A pretty much constant paradox is that we expect outlier outcomes from people that we demand act in normal, average ways. We love geniuses after they do the great thing, but we basically loath and harass them if they act in uncouth ways before hand.”

“Revenue from paying customers is by far the best source of capital for a startup. The goal of founders should be to turn VC funding into customer funding as rapidly as possible.”

“I can grade you, or I can teach you, but I can’t do both.”

“People don’t give money to the best returners. They give money to the people they like.”

“The IP of humans is what drives an investment fund. The code drives companies.”

"In the early days, you should be only doing two things: writing code or talking to users."

"You have to be comfortable with ambiguity. If you're the type who likes to very carefully weigh 99% of the data before you make a decision, you're not cut out to run a start-up."

"Psychologically speaking, you’re better off burning the boats, so to speak, and saying that failure is not an option, it’s not acceptable, and we will do whatever we have to do to survive and persevere."

"Ironically, the better the startup is doing, the more chaos there is."

"You have to be willing to risk things; otherwise, somebody else will put you out of business."

"Be incredibly, ruthlessly selfish with your equity."

“Every time you make the hard, correct decision you become a bit more courageous, and every time you make the easy, wrong decision you become a bit more cowardly. If you are CEO, these choices will lead to a courageous or cowardly company.”

"Anything that is more than a degree away from supporting a company or founder feels like misused time."

"It takes a ton of extra time and energy to work productively with people you don’t trust. So I switched my default assumption to trust, and now instead of having to change my position 95 percent of the time, I only have to change it 5 percent of the time."

"Whether we like it or not, there’s some kind of power dynamic in every conversation, and I always try to give that power to the other person. It’s an opportunity for me to learn."

“Being ‘right’ doesn’t lead to superior performance if the consensus forecast is also right.”

“All the great investors I’ve ever studied have felt macroeconomics is one of the silliest wastes of time possible.”

“The minute you set a very hard rule, you might be setting yourself up for a mistake. And venture, I have found, is a world where that happens frequently.”

"A lot of people rely on the same arguments over and over again when negotiating. People who negotiate regularly, including many VCs and lawyers, try to convince the other side to acquiesce by stating, 'That's the way it is because it's market.' We love hearing the market argument because then we know that our negotiating partner is a weak negotiator."

"Good judgement comes from experience, but unfortunately, experience comes from bad judgement."

"One monkey don't make no show."

"The way you make money in venture capital is by backing the truck in and being correct. I’m not looking for validation from other VC firms at all. I’m not interested in marking up a portfolio of companies. I’m interested in these companies being very large and having impact."

"Someone interested in power tends to be better at execution; someone interested in money tends to think more about capital efficiency. Avoid people interested in fame."

“In boring and complex businesses, the spiritual reward of the industry are lower, and so you get fewer entrepreneurs. Therefore, the chances of succeeding in boring and complex businesses is significantly higher.”

"If you are not 'discoverable,' chances for success are dim."

"Features, however, aren’t the product — they’re merely enablers of value propositions: promises of how the product will drastically improve a customer’s life."

"Always put the gun in the other person’s hand. If they shoot you, just don’t work with them anymore."

"You learn more professionally from success. You learn more personally from failure."

"I focus 75-80% of my time evaluating the team. Everything else will take care of itself."

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