Good morning 👋
Most LPs think about "skin in the game" through the simple lens of "how much of fund is made up of the GP commit?" This is generally a good proxy, but it doesn't capture what's really on the line most of the time.
If you have enough to conviction to not pay yourself for months (maybe years) while fundraising, what does that count for?
If you convince family / friends / others to commit with the risk of burning a relationship if things go south, what does that count for?
If you get your professional network to stick their necks out and vouch for you through intros, what does that count for?
If you are risking your reputation (and future earnings) on a strategy, what does that count for?
If you are figuratively burning the boats and putting all of your eggs into the basket that this is going to work out, what does that count for?
Some more thoughts below …
Big breakdown
Skin in the game
“What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.”
Especially in venture world, asymmetry is rewarded. The pursuit of the upside is the meta game all venture investors are playing, but what is the downside risk for each player in the game?
What is the biggest fear of different personas in venture?
Junior VC (analyst / associate): Losing their job
Mid-level VC (principal / VP): Losing their chance to become a partner
Partner: Losing their chance to get more carry
GP: Not raising another fund and losing the firm
How much did you have to bleed to get into the seat you're sitting in?
One lesson from the 2020 - 2021 cycle was that a lower cost of capital = easier to raise new funds = less attachment to the capital = worse fiduciary. The reverse is also true, and there are countless examples of fund managers who went through a gauntlet to get their first fund raised who are now some of the best in the business.
“If you do not take risks for your opinion, you are nothing.”
At least in financial markets, your opinion means nothing without dollars attached to them.
You work in this asset class because you believe in this asset class. Why are you putting post-tax dollars into anything other than this asset class?
Is your income tied to the success of your work? If it is not, you are wasting your time.
“Don’t tell me what you think, tell me what you have in your portfolio.”
Almost my entire net worth is tied up with assets I own. I have zero reason to care about moves in the S&P right now. If Outlaw does not work out, I do not have a plan B.
“How much you truly “believe” in something can be manifested only through what you are willing to risk for it.”
You say you want to work in venture. You say you want to call the shots. You're frustrated by your lack of carry. What are you willing to do to get out of your current position?
“Scars signal skin in the game.”
Pain is a moat.
The GPs that you respect the most have all been under pressure that would cause 99% of others to fold years ago.
“What you learn from the intensity and the focus you had when under the influence of risk stays with you. You may lose the sharpness, but nobody can take away what you’ve learned.”
Maybe the biggest lesson from becoming a GP is that anecdotal evidence and real-world experience is underpriced.
There is zero playbook to building your own firm. The best proxy for a playbook can be found through the stories told by those who have done it before you.
This applies to all fields, but I think it’s especially true in startups.
More from me
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