Silicon Valley is characterized by both partnership and antagonism between founders and investors. This duality creates a push-and-pull dynamic which, in aggregate, enables innovation. Each party has its own set of incentives, which have been well explored in economic 1 2, historical 3, and business literature 4. In aggregate, these incentives create a functioning capital market that allocates capital to the most promising founders and ideas, enabling them to flourish and bring new, world-changing technologies to bear.
In contributing to this body of literature, my goal here is less economic and more epistemological: it is meant to comment on what operators know versus what investors know. To this end, I am necessarily biased, since I am writing primarily from an investor’s perspective (having worked in private equity, macro investing, and now in venture capital), though I’ve also had some experience as an operator and technologist, having studied artificial intelligence at Stanford and worked as a chief of staff at a startup.
We could characterize the difference between what founders know and what investors know with a series of (admittedly simplistic and ham-handed) distinctions and metaphors:
As an investor myself, I am more equipped to comment on what investors know, so I’ll start there.
Because investors are “foxes” engaged in theory, what they know is inherently less real than what a founder knows. Founders are in the thick of it. They witness the world firsthand, and see it as it is changing. Investors learn, with a delay, what is happening in the world, after founders tell them (in their pitches to them). As such, an investor’s view of the world is always slightly artificial.
For this reason, the investor’s position is mixed. On the one hand, much, perhaps undue, status is assigned to investors. Because investors are responsible for deploying (gatekeeping) capital that founders need to run their businesses, they take on a priestly role, and their approval can itself be a coveted validation of an idea’s worth: if there is (smart) money behind something, it must mean that it’s legitimate. But the pedestal that investors occupy is precarious: they are constantly at the whim of the market for their information about the world. Are they seeing all the deals available at the moment? What deals are they missing? Are founders choosing other investors? And because venture capital is a profession whose returns are, mathematically, determined by outliers, there is a constant paranoia among investors that they might be missing the next big company or trend.
But an investor’s knowledge is broader and more wide-ranging. A consumer social founder might only be faintly aware of the latest developments in artificial intelligence (unless it somehow contributes to their product) or biologic research. Further, (good) investors will have built a mental database of successful (and non-successful) founders. They will know, by virtue of the information they receive and research, the broad strokes of what kinds of businesses, what sorts of technologies, and what archetypes of founders work and what don’t. They will know, from historical data, what sorts of logical fallacies and business traps will end businesses before they even start, even before many (naive) founders. This is the investor’s informational advantage over the founder.
It’s a double-edged sword. If everyone viewed the world through the lens of what is historically possible, nothing new would ever get done. And it’s precisely the folly of philosophizing from the armchair (or the sleek, South Park VC office) that ultimately renders the investor a reactive, passive agent. Investors can shoot down 100 out of 100 ideas on the basis of historical data, and they would be right 99 out of 100 times. The one time they’re wrong makes all the difference. Saying no to Uber in 2009 under the logic that consumers wouldn’t be comfortable getting in a stranger’s car would have been a costly pass. Indeed, Ford once said “if I had asked people what they wanted, they would have said faster horses”, another testament to the fact that you can’t simply reason about the future using the past.
What characterizes the (hedgehog) founder is conviction in a single idea (or set of ideas). That conviction drives them to discover or construct a deterministic narrative that wills a new future into existence. They may not know everything about how the future will pan out, especially at the founding of their business, but the conviction is itself enough to drive them to figure things out as they go, and to learn new facts about the world that no one else knows.
In this way, founders are generating new knowledge. For instance, when founders do a survey of sales conversations with prospective customers, they learn about the preferences of those customers. This is information that couldn’t be unearthed in a Google search, and certainly isn’t written about in any books or articles yet. They are new facts about the world that, on their own, are not useful information, but in the context of a business, may inform future business or product strategy. The founder’s job is to find, synthesize, and act on such new information.
Herein lies the conflict. The investor’s instinct is to pattern match to the past. The founder’s instinct is to create the future. A good investor will know when (and when not) to be led by a founder’s vision of the future, and which learned rules of his or hers should be broken, when. A good founder will develop a defiantly optimistic stance of the future, but one that is tempered and regularized by an understanding of the reality of the past and the physics of business.
Among investors, I often see smug dismissal of ideas based on theoretical concerns. Among founders, I often see an unqualified, religious faith in any one of: the spirit of innovation, their own ability and intelligence, or the prospects of success of their particular endeavor. They will discard past scenarios as irrelevant to their mission or goals.
What they don’t know, which investors do, is that every founder must be defiantly optimistic enough to have that sort of religious faith in themselves, or else they would not have become a founder. So, to the investor, their optimism is mostly moot. What they do not see, which investors do, is that their ignorance of history and basic economics is not a sign of the spirit or willpower that will enable their success, but a sign that they are flying blind.
The cultural stereotype of a brash, bull-in-a-china-shop CEO building a successful moonshot company is just a meme, and a dangerous one for founders to fashion themselves from. And it’s easy to tell who is getting memed into being a founder: those who are ignorant to history because of a zealous belief that the spirit of innovation drives them.
The best founders have a combination of revelational vision and a realistic understanding of economics, technology, relevant history, etc. They will be able to think and communicate at all levels of granularity: they’ll have line-item level understanding of the unit economics of their business now and in the future. They will be even more knowledgeable than the investors that they pitch to. In this way, the distinctions break down, because the best founders will be able to bridge theory and practice, be both hedgehogs and foxes, become philosopher-politicians, reconcile reason and faith, and make indeterministic processes deterministic.
“Technological Revolutions and Financial Capital”, Carlota Perez. ↩
“Doing Capitalism in the Innovation Economy”, William Janeway. ↩
“Venture Capital: An American History”, Tom Nichols. ↩
“Secrets of Sand Hill Road”, Scott Kupor. ↩
A natural criticism of theoreticians is that you can’t be good at company-building if you’ve never built a company before. There are a few replies to this. First, you don’t necessarily need to be the best basketball player to be a good basketball coach or talent spotter. A cognitive analogy: you might say that it is easier for the brain to recognize something than to recall or produce a representation of it. ↩
“The Will to Believe”, William James. “A social organism of any sort whatever, large or small, is what it is because each member proceeds to his own duty with a trust that the other members will simultaneously do theirs. Wherever a desired result is achieved by the co-operation of many independent persons, its existence as a fact is a pure consequence of the precursive faith in one another of those immediately concerned. A government, an army, a commercial system, a ship, a college, an athletic team, all exist on this condition…” ↩