The Superpowers of Founders: A VC's Guide to Spotting the Best | James Shecter from Makena Capital

James: [00:00:00] Ultimately, I'm looking at this through the lens of, like you said, alpha generation. Where are people going to have differentiated opinions that give them competitive edge? I studied behavioral economics and psychology both at undergrad and master's level. I think it comes down to asking the right questions and being hyper vigilant, hyper observant in the body language, the tone of the response, those kinds of.

James: You know, very qualitative aspects. We don't want founders who are going to always agree on everything. We don't want founders who are always going to disagree on everything. We look for some sort of

Rahul: Hi, James. Thank you so much for joining me today.

James: Thank you for having me, Rahul. I'm excited to be here. I appreciate you putting in a late night to make this work on my time zone. No problem

Rahul: at all. So, uh, I came across this tweet a while back, um, from, from this person, Kevin G. He tweeted fascinating that how much we see is talk about the importance of team and [00:01:00] founder, but basically no venture investment memo I've ever seen spends more than three lines on founders.

Rahul: That is so true. Why is that?

James: Yeah, I think it's really challenging to, to quantify the qualitative aspects on person, psychological, EQ, empathy based evaluation. So I think the default nature is to spend as much time Bringing to ground the quantitatives, the market size, the business model, the unit economics, things like that.

James: And a lot of times you feel like you can get in trouble for making quick judgments on the character front. So it's really tough to package an assessment, 360 degree personality review that you have gleaned from interacting with founders throughout diligence and put it in memo form. Um, I talk about there's some biases that are present in person, personality evaluations.

James: You know, you're always comparing it to people that you know, to big paradigm examples that are successful or unsuccessful founders for noteworthy reasons. And, um, it's basically a lot of, uh, a lot of [00:02:00] shorthanded personality assessments that lead to that being the case. And we bring a lot of process rigor to our memos.

James: So, uh, you know, the shortest memo that I've worked on is probably about 10 pages. So we still. Take great likes to flesh out the detail where we can.

Rahul: Okay. 10 pages. Okay. I was looking at the good thing is Bessemer Venture Partners have this open memo. Cause I was looking at Shopify memo, the rest of the memo, except for the team is like so many pages.

Rahul: And the team is like a small paragraph. So in your memos, usually what sort of like one page is the team or.

James: We have around one page for team. I think we let the, when we bring things to committee, the founding team is normally there as well. So it's sort of part of the evaluation in the room or over zoom to make some personality assessments or quality of founder EQ assessments, motivational assessments, so.

James: Um, we do what we can [00:03:00] to, I guess, prime the team to be, uh, cognizant of what they should look out for when it comes to the personality side. But we're asking a couple questions like, you know, wrote this, uh, in one of the sections here, but where does this person spike? What is it about their personality that, or skillset that is like 10 x superior, a hundred x superior relative to other people that are, that could be founding a company?

James: So we ask ourselves those types of questions we ask. Are they motivated and diligent and competitive and other aspects of their life beyond just the company building aspect? You know, we, we meet with a lot of endurance athletes we meet with. Some people who have even gone on to be Olympians in their field that, um, having that commitment to a craft could be a hobby, could be an instrument, could be a sport.

James: Um, we look for that sort of competitive drive and differentiation, not just on the company building side. So those are a couple of the ways that we try to. Bring, uh, more material evidence to the table on the people's side.

Rahul: Yeah. So you actually have a very structured eight [00:04:00] factor sort of qualitative framework to assess a founder, right?

Rahul: So I was reading your blog on this, uh, and then you sort of hypothesize that an early stage investor's ability to parse these qualitative intangible aspects is what drives meaningful, uh, outperformance. Oh, why do

James: you say that it's ultimately, I'm looking at this through the lens of alpha generation, where are people going to have differentiated opinions that give them competitive edge?

James: Um, I think ultimately when you're looking at market size, when you're looking at unit economics, when you're looking at a business model, there's only so many different interpretations you can have. There's a lot more convergence on the assessments by the BC ecosystem on those type of quantitative attributes where people defer more is on their reads of the people.

James: So it could be, I believe this person is, uh, you know, some, one of these types that is like, not the most personable, but they have this, this innate competitive drive that is going [00:05:00] to enable them to run through walls, whether or not they're the loudest, most gregarious person. It's mostly like taking that contrarian opinion that the personality assessment level can lead to outperformance because.

James: Everything else is pretty much consensus. So where are you going to find the edge? Where are you going to have a perspective that's different than others? For example, in, in a lot of generative AI app layer markets right now, there's 10, 15, 20 competitors at the seed and series a stage jockeying for position.

James: They all have similar metrics. They all have similar, uh, I guess, infrastructure built on top of some of these bigger models. Sometimes it does come down to making a call about the team. There's an investment that we have in a company called Ivo. That is essentially a contracting co pilot selling to in house general councils, allowing them to speed up their contract review process.

James: It's a very crowded competitive landscape, but we met this founder. His name is Min Q is from New Zealand very early on in their company's journey. Um, we liked his story for a couple of reasons. One, he and his [00:06:00] co founder both took. This burn the boats type of mentality. When they came to San Francisco from New Zealand, Min Q had to convince his wife to quit her job as a fellow practicing lawyer back in New Zealand to come to the U S where she had no licensing at all.

James: So he really. Put the heartfelt sell into convincing his life partner to, to make this journey with him, the co founder and CTO, his name is Jacob. If I have my story, right, he actually had to propose to his then girlfriend to get her to agree to move. So these guys are so all in on the business. They're literally force fitting their whole life to make it work.

James: And those are some of the like intangible attributes that you wouldn't see if you just looked at the business on paper. It's just looked at their profit and loss statement. And not that that. You know, in itself is a right to win, but we've seen in the year and change of working with that company, AIBO, that they've really found a way to differentiate from the competitor pack.

James: They're winning against, you know, 10 competitors in an RFP at once. And it's really been an impressive journey. And. Based on their, their burn the boats approach. I think they're onto something here.

Rahul: You say that [00:07:00] market and product, when it comes to assessment, there's not much differentiation that, uh, a different sort of investors can have.

Rahul: Is that really always true? Like people could get the market assessment or what the product could be wrong, right?

James: Absolutely. Absolutely. I'm not saying that people don't have differing opinions on the product and the market. I think. There's, there's definitely a lot of divergence there as well, but the, the realm of realistic possibilities that you can have based on those attributes, I think is narrower than you can when it comes to the interpersonal side that, you know, we look at like fans of returns, like what is the possible return outcome here?

James: I think the fan of interpretations is narrower on those business market size aspects than it is on the personal aspects, personality aspects. So, um, it's not to say that. All VCs are thinking the same things when it comes to everything, but the people, but I just think that it's, it's, it's sort of an X factor superpower.

James: That's why I called the super preceptors [00:08:00] because everyone needs to think so deeply about the human side of this business building, especially at the earliest of stages. Um, it's a stage mediated answer as well. The later you go, obviously the more the business fundamentals matter, but at the early stages, the founders and the people at the table are really driving the outcomes more meaningfully.

Rahul: Does these qualitative, qualitative aspects become less relevant? As sort of business matures.

James: Yes, I think very much. So, you know, I come from the later stages of investing. I was a private equity investor in my past life in New York. I spent a couple of years doing series B through D work. The later you go, the more the business matters.

James: You live your life much more behind. Microsoft Excel in the VC or private equity investor shoes. So that was part of the appeal for moving upstream for me was to become more interpersonal driven and be able to try to make those really tough to make judgments. It's not entirely stage mediated, you know, series A through B stage.

James: Like [00:09:00] I said, there may not be a clear winner in the market. You need to dig into the cultural aspects of what the company is building internally and the vision beyond what the business is today, what it can become, act two, act three from a feature perspective to understand why one of them will win. So that's a little bit of the color there.

James: I think obviously the metrics become more important, the more mature business gets, but it is always important to be keyed into the culture and human side of things.

Rahul: But, but even at later stages, uh, you know, people again, still matters, right? Like you often see this with founder led companies, which go on to do much better than maybe professional CEOs.

Rahul: Definitely.

James: Definitely. I think it's like PE businesses just have different leadership styles. Same with these mature public companies. And exactly what you said, you look at some of these founder led businesses, you look at. You look at Zuck, you look at Jensen, you look at Reid Hoffman when he was active, you look at Benioff, you look at Bill Gates when he was active, Larry Ellison, even like Coco Chanel, people are [00:10:00] visionary founders that can take their business possibly the entire distance from inception to, you know, household name, but sometimes there's a need to bring in more professional business managers and CEOs, executives that are not that original founder.

James: So, um, it's, it really depends on the nature of the business, whether. You can build around that visionary leader and sustain that into the decades, like you've seen with a meta or a Microsoft, but other times it's useful to professionalize what you can and bring in the adults in the room, which is sometimes a colloquialism that you hear in Silicon Valley.

James: You mentioned

Rahul: about, um, uh, PE leadership. That's different. Uh, how so?

James: So effectively PE businesses are much more stable. You know, when I was looking at businesses in that Stage of my career outlier was growing 20 to 30 percent per year. What we look at in early stage venture outliers are growing 50 percent per month.

James: So it's just so much [00:11:00] different volatility. So many different, I guess, dynamics that you need to be aware of when it comes to scaling early versus like maintaining growth. So it's really just a different aperture of skill sets that you need to bring in when you're. Running a mature, steady growth, cash flowing business and protecting against the downside risk of losing the momentum that you already have where.

James: An early, you know, leader, company, executive founder needs to initiate that momentum to begin with. It takes a totally different skill set to, we know about inertia, objects at rest tend to stay at rest. The founder needs to set that in motion such that the momentum can start to build. And, um, sometimes you see that type of founder who's hung on to the business and still worked on it until they make it to that steady growth stage.

James: Some of the companies we just talked about and founders we just talked about fit that mold. I think you just see a lot more, like I said, adults in the room when it gets to the PE stage, because these businesses are complex, sprawling enterprises, and they've moved on a lot from that initial vision that the founder had.

Rahul: Yeah. [00:12:00] So does this mean that, uh, quantitative assessments are not important? I

James: like to think they're important. I think we bring a lot of process rigor to things. And I think that's why my team valued the skill set that I have coming in, which is late stage priming. I'm still on a PC. Most of my teammates are on max.

James: I do hop into Microsoft Excel whenever I can and try to sensitize through the analytics on unit economics and market size. So it definitely matters. I think. You need to bring that to ground in a sound way for every investment decision that you make. It has to be rational, defensible answers on the quantitative side.

James: It matters a ton, and if you don't clear that hurdle with high confidence, then the human evaluation side doesn't even really matter. So it's effectively that the business fundamentals, the quantitative side, are the first pass. And once you figure all that stuff out, then it can be, okay, we need to think about this founder, whether it's the right person.

James: Sometimes the order is different. Sometimes it's like, okay, this person is so exceptional that we'll back them no matter what the [00:13:00] business fundamentals look like. So, um, we try not, we're typically not in that business. We leave that for. Some of the, some of the other early stage VCs, but we, we bring a lot of process rigor to a cat.

James: So for us, quantitative side matters a lot and it definitely matters as you go later stage.

Rahul: So I, I also came across another interesting quote from your blog. To succeed, uh, we must exhibit a certain prespicacity. I had to look this word up. A level of psychological and motivational discern, discernment, both at the founder and market level.

Rahul: So here, I was not sure like what you meant by psychological and motivational discernment at the market.

James: What do you mean by that? Yes, of course. Well, perspicacity, that's a word that. I learned back when I was taking Latin, which has not served me well other than to learn very random words that my teammates still tease me about some of the things I have in my vocabulary, but perspicacity is effectively to from its literal Latin meaning means to see through.[00:14:00]

James: So do you have that level of insight intuition to be able to understand something such you can see through and around the entire scenario of what you're evaluating? So it's a little bit like soothsayer fortune teller profit elements, but also the intuition analytical side as well. So I think it's a very embodying word for one of the qualities that matters most as a venture investor.

James: But. On the psychological motivational discernment side, that's definitely much more relevant to the founder assessments than to the market level assessments, but there is definitely some element of reading the tea leaves on the market sizing. Um, you know, there's some market dynamics that are like, is the market expanding?

James: Is it contracting? Is it a reshuffling from a value accrual perspective? And a lot of times, yes, there's a quantitative answer to that, but to really bring that to ground in a high confidence way, you need to. Get at the motivational psychological sides of things. So, um, the psychological discernment applies most to founders motivational as well, but there is some [00:15:00] qualitative things that you can bring to the market size business fundamentals evaluations as well.

Rahul: Okay. So it's essentially, uh, to figure out whether the market is expanding and what could this ideally be in, in future.

James: Maybe one operative word is like, what are the incentives for all of the different stakeholders in this ecosystem? A lot of times it's tough to. understand incentives at the market level without asking the questions about motivation and psychological discernment.

James: For example, we're looking at a lot of these. layer, like I said, gen AI companies, we're also looking at a lot of the infrastructure layer. Um, you have to understand and ask the questions of where will value accrue in the whole operating stack here from infrastructure to application, um, debates, you know, waged by folks much smarter than me about where that will accrue, whether it's all the biggest large language model providers that are closed source, whether it's the open source folks, whether it's.

James: The infrastructure and pipes between the foundational models and the application layers, and whether [00:16:00] there's any durable moats at the application layer, if they're all built on the same fundamental infrastructure. So those types of questions are where you're getting at the market. Contraction, market expansion, value accrual discussion.

James: And the numbers themselves don't always tell the whole story there. So you need to have conversations with operators, with founders, with potential buyers of these types of tools to glean the real insight there.

Rahul: Okay. Okay. While we're on the topic, where do you think value will accrue?

James: It's a great question. You know, we're asking ourselves this damn near every day. We orient around mission critical hair on fire problems for The people that these companies are serving. So that's the first thing that we're asking when we're doing a reference note on a company, sending it to someone who might be a potential buyer.

James: First question is, is this a top three organizational priority for your company? And if the answer is no, then we'll probably pass on that business because we're really solving for that acute pain point, a today problem, not a tomorrow [00:17:00] problem, something that they need support with like immediately. So that's the first layer.

James: The second layer is. Where's the durable mode potential here, which is what we talked about with a lot of these application layer companies that are built on the same. Foundational model infrastructure, open source model infrastructure. I think the phrase that we use is like, is there a data as a moat play at the application layer?

James: But you know, new sources of record, new data capture methodologies, new ways of synthesizing insight and infusing it into this central pane of glass as a command and control center for. Whatever the functional workflow is that this company is building in. That I think is something that we still up for debate where the value will accrue and those types of things.

James: But we do look for the data as a moat potential and how, you know, there's going to be lock in for this type of platform on the infrastructure side. Um, it's a lot harder to say, I mean, quintessentially picks and shovels investing has worked for most people over the past two decades and different business cycles, different technological cycles, because.

James: It's the [00:18:00] proverbially picks and shovels in a gold rush. You want to be arming the infrastructure providers and tethered to them rather than to any asset, like a gold, you could, you know, route out the metaphor, but it's much harder to bring those to ground because the infrastructure changes every four to six months.

James: Like what's best practices, whether it's rag, whether it's doing our LHF, whatever the protocols de facto today are like, they may not be the same six months from now because. We're going through this huge technological paradigm shift. So we're, our guard is more up at the infrastructure layer than usual, but we're looking at the full stack and just trying to see where those mission critical hair on fire problems are.

Rahul: Yeah. I think that's the thing to do, right? Like I was speaking to another VC on the podcast. So you were saying that if everybody just. Take the easiest thing to do, which is like you said, the pigs and shall infrastructure layer. Then if there is no application layer built on top, then what is the point of all this?

Rahul: Well

James: said and, and at the infrastructure layer, you know, there's, I was [00:19:00] looking at recently and if end to end sort of data ops, ML ops platform for version control, data marketplace, data diffs, effectively, like. And, and we used to be called ML ops, but it's now LLM ops at the infrastructure layer, we're asking questions like, why do you guys have a right to be a standalone platform doing this type of function relative to a Databricks or a snowflake or something that's much more.

James: Data warehouse adjacent that offers these ML type of services on top of their data lake or data warehouse itself. So there is again, not a unique perspective, but the incumbents have a huge distribution advantage and already have so many people immersed in their product ecosystems that. They could launch a feature that could effectively obviate the entire mission of what this new company's building in the age of LLM.

James: So that's, uh, it's so fun to be investing at this time. Like I, I couldn't have asked for a better environment to be investing in because there is this huge technological paradigm shift going on. If we [00:20:00] were. Obviously it would have been fun to be investing in the bull run of 2014 to COVID era, but I think it was a lot harder to, to separate who was actually good at this job during that time, because everything was going up and to the right now with this new paradigm, there's a lot more discernment, a lot more evaluation, a whole new sort of model of what could work in this.

James: Venture scale outcome vision. Um, so, so we're going to know who's, as Warren Buffett says, swimming with their trunks on or swimming naked when the tide goes out.

Rahul: Yeah. So you have a framework, um, eight factors to assess founders. Can you tell me like, how did you come up with this? Yeah.

James: So I. Chatted about it with a few teammates, you know, one of the endeavors that I have at FICA is to head up our content initiative, which is really fun for me because I love writing.

James: I love talking to journalists. I love, you know, running podcasts, things like that. So I was [00:21:00] thinking, what can we do that is going to break through the noise of another VC publishing a market map. I studied behavioral economics and psychology, both at undergrad and master's level. I always love trying to bring these types of things to the table.

James: You know, a concrete list of sorts and to bring signal to the noise of what's happening from a founder evaluation perspective. So ultimately, it was a independent exercise that I, you know, triage with my teammates. Once I had this framework and we ultimately landed on this. That's the answer to that question.

James: It was a teamwork, but sort of spearheaded by me.

Rahul: But often startups have multiple founders, right? And yes, for me, it looked like assessing an individual person. So, uh, how does this work? How do you apply this? Especially when there are multiple members in a team? I think that's

James: a really interesting question.

James: I hadn't thought about that as like a composite mechanism before. Like I originally could see it, this as. Individual [00:22:00] mapping, but we do always look for like complementarity or some sort of harmony that exists between the co founders. So. We could very easily zoom out and do a sort of composite mapping.

James: What is this two or three co founding team have across this, you know, eight metric evaluation system? Um, we look for one other thing specifically there is we look for some sort of healthy friction is what we call it. We don't want founders who are going to always agree on everything. We don't want founders who are always going to disagree on everything.

James: We want some sort of balance where. They're intellectually sparring with each other to drive towards conclusions in a, in a quick but productive way. So there's a lot to be said about the co founder dynamic as well. It's a, that we can overlay this paradigm onto evaluating a co founding team.

Rahul: Yeah. So, um, here in Singapore, at least I have, I know two VC firms who use, uh, uh, a product called fingerprint for success.

Rahul: Uh, it's an Australian startup. And I think they [00:23:00] rebranded it to Marley or something like that. So the interesting thing is that it allows you to assess how you might work as a team. And then the VCs that I know who does this, what they do is that they also assign who's going to possibly work with this team.

Rahul: And see what is the score that comes up with all the startup team as well as the, the, the,

James: so yeah, we've, we haven't done anything like that to map who works with who at Vika versus our portfolio company level we have. An internal pod system. As we call it, we have different folks covering different verticals.

James: We have a dedicated commerce enablement and marketplaces team, a dedicated FinTech prop tech and insure tech team. And I cover all things enterprise within another partner here. So. Developer data infrastructure tooling all the way up to the application layer of some exciting vertical markets that we end up pressing the gas on.

James: We did do at one of our off sites, this very interesting sort [00:24:00] of skills inventory, the self perception versus team perception. Sometimes it was aligned, but sometimes it was quite discrepant. And that happened within my first few weeks of work. So I'm not sure my teammates evaluations were. As high fidelity as they would have been if we did that now, but it was very interesting exercise and I learned a lot about how people see me, even if it's a first impression perspective.

Rahul: Yeah. This happens with me as well. So if I were to do a personality assessment, I often ask my wife also to do it and then she has a completely different assessment of me. Yeah. Okay. Now we can go through the framework. I think the first one is the ability of a founder to. Tell stories and narrative. So, uh, with an example, if you could explain what would be like in a great sort of founder in this aspect.

Rahul: And someone who is not very ideal.

James: Absolutely. So there's a company that we work with that I helped bring in for FICA. That's called [00:25:00] Ciro, S I R O dot AI. They effectively do gong for field sales. So call recording and coaching with AI for folks who are out there selling door to door, whether it's home security, pest control, roofing installations, or very sort of blue collar field sales workforce, the founders of this Jake and Joe.

James: Both worked for an American company called Cutco knives when they were in high school and college selling knives door to door. And in America, if you live in suburbia, it's probably more likely than not that you've been approached by someone from Cutco in your existence. So when you hear that those founders work for that, uh, company, you just know that they have that earned insight right away.

James: And they were able to weave together this narrative about. Why the field sales force is significantly under coach and under resource when it comes to maximizing their potential driving higher close rates, um, when it comes to what it actually takes to be a successful field sales rep, there's a big gap between what people perceive and what the reality is in terms of how you need to structure the conversations.

James: So they were able to [00:26:00] weave this into a very tactful story because they have that earned insight. You see, sometimes, and this happened even in the business school context, because I wrapped that a couple years ago. Some people are what we call tourist founders, where they're contriving a story to make their perspective on a market become, seem more cohesive than it is.

James: So it's not like they're actually intrinsically aware of those problems. They're just having done research or having believed that this is the right thing to be saying. They can weave together the storytelling. So it's more like, do you have an authentic narrative versus are you, you know, deriving this storytelling aspect?

James: So that's the first example that I think is important to bring to ground, differentiate between the forced narratives versus what's actually authentic.

Rahul: Many years ago when I was building a startup, yeah, I, I made up a story because everybody says, um, that story narrative is important. Yeah. I made up a believable story, but yeah.

Rahul: Um, so, so the second factor that you have in your framework is [00:27:00] about a vision. Um, yes. And what would be an example? And then you also talk about how optimism is at the core of a vision.

James: Yes, definitely. I think that's a. There's a long list of folks who embody that optimism, this elixir like force that can pull progress forward.

James: I think that's why the early stage of investing is particularly exciting because you're meeting these people who think that they can change the world or have the right to leave their mark on the world in a new and novel and overall improving the world way. Um, founders that I could reference here.

James: There's another team that I work with. The company called stiff stack that is building tagline is data dog for hardware. Um, so essentially doing data ingestion and analysis for distributed hardware assets. The co founding duo, Austin and Karthik here, they both worked at SpaceX before doing flight software engineering, load testing for some of the biggest [00:28:00] satellites and spacecraft and engines and materials that SpaceX was working on internally.

James: The tool that eventually became SIFT, they worked on building the internal version of it at SpaceX. So they have this vision, SpaceX is an incredibly successful company. We're probably doing things in a way that other aerospace defense hardware manufacturing companies should do because we're, you know, SpaceX is built from the ground up in this novel, unique, first principles oriented way.

James: We can change the paradigm of how other people do distributed asset monitoring because we've done it this way. We know we can commercialize it outwardly. So that vision. Is one unique and differentiated because they were the only people to have built this system internally, and they know exactly what it takes to do so, but it's also a level of optimism to believe that legacy aerospace companies like a Boeing or an Airbus are going to change the way that they've done this sort of workflow for the past, like, you know, however many years.

James: So you have to will, will the world to your vision of it and drive sort of [00:29:00] adoption of your new product in that way. And that's what I think the vision and optimism captures.

Rahul: Yeah. Yeah. It's, um, it's impossible not to, uh, be up to, I mean, yeah, to have a great vision and be not optimistic and you can pull it off.

Rahul: Yeah. What would be a not so ideal case of a founder with this sort of fact?

James: Yeah, that's a good question. There's with jobs, there is this reality distortion field that people talked about where he was. So optimistic that he would contrive in a Machiavellian way, the way to get to a certain output outcome.

James: One tangible example more recently is this, you know, this company called Nikola that was an electric vehicles company. They literally rolled their non functioning truck prototype down a hill and filmed it in a commercial and said that here's our working product. So that level of optimism is like, yeah, sure.

James: Maybe they'll get to a working product someday, but it's a little bit of a. Not the right ethical approach [00:30:00] to say our truck that's rolling down a hill is a fully functioning prototype that founder ended up getting caught and sued. So it's that type of thing. It's the Elizabeth Holmes type of argument where, you know, you're talking about a future product, you're talking about something, a future state that you want to get to.

James: And a lot of VC is forward looking. You want to be able to talk about the future in a tangible way. But sometimes the gap between where you are and where you're going is too big. And it's easy to conflate those two from a, you know, state of product today versus future state of product perspective.

Rahul: Yeah, this is not easy, right?

Rahul: I remember having a conversation on the podcast with another VC. She basically told me that up until 2015, the carbon footprint of an EV. Was still higher than internal combustion engine car. So what Tesla was sort of having a narrative up until that point that this is better when technically it was not better.

Rahul: So yes, it's a very [00:31:00] fine line, right? Whether it's a lie or a. Yes,

James: for sure. And you know, there's, there's the fine line, like you said, between explaining a grand not yet existent future and showing the interim steps to get there. So people very rarely talk about those interim steps. You hear Bezos say the overnight success of Amazon took 20 years and people only look at that before and after state today and forget about those two decades where they were losing money, where people weren't as excited about their future.

James: And as a founder, you have to be sure not to conflate. The current state, the future state, the interim steps when you're explaining your progress.

Rahul: Yeah. Okay. So the, the next factor in our line of factors is, uh, inquisition and curiosity. How would you describe a founder?

James: Yes. I'll go back to. The company Ivo that I talked about before, which is the legal contracting co pilot using AI to help a general counsel's review their documents faster.

James: How can I do this better is the [00:32:00] fundamental question that these founders embodying the right kind of inquisition are asking. And in Minkyu and Aibo's context, they're competing with these legacy contract lifecycle management tools, the ironclads and Isurtices of the world that are bulky and clunky and 10 plus years old from a build perspective and just not the most nimble from Uh, from the GC's functional needs perspective.

James: So he's asking the question of how can I do this better? We have this new tech paradigm of LLMs that understand natural language and contracts, understand tone, understand if you want to be particularly aggressive on a certain negotiating point, you can slide this scale and the output will be reflected in a more aggressive way versus if you want to be more conciliatory, you can slide the scale back in the other direction for the contract revision.

James: So the inquisition of what is the. New first principles, right? Approach to, to build a contract and co pilot. Minkyu is asking those types of questions. You have to be introspective and explorative, going back to his own earned insight as [00:33:00] a corporate lawyer in New Zealand to be asking these questions in the first place.

James: And really, it's about the iteration, the testing and the tweaking and the refining that is the subterraneous motor that drives all the progress of startups. So how quickly is that feedback loop? How quickly can you iterate and learn from all of the testing that you're doing?

Rahul: Yeah, but then you also need to quickly make a decision, right?

Rahul: Rather than just be curious and ponder and waste, waste a lot of time.

James: I think, yeah, unchecked curiosity can lead to over pondering and indecision. So you need to be balanced in your inquisition and your decisiveness, because if you're just asking questions all day, you won't get anything done. Yeah. Um,

Rahul: so the next, uh, sort of factor here is grit and drive.

Rahul: I mean, this is a very common thing. I think it's impossible to do a startup without a lot of resilience, but there, is there a founder that has really [00:34:00] come across an exceptional when it comes to this factor?

James: I think all of the ones in the FICA portfolio, frankly, exhibit this. We look for this as soon as we can evaluate motivation, evaluate grit, evaluate someone's sort of personal history.

James: Like we said, talked about competitive sports playing. We talked about hobbies and other pursuits. Did that bring. The same kind of intensity to, to other aspects of their life as they do the business. So, um, this real kicker is, is someone going to be so gritty that they sacrifice their health? Are they going to be working not just 24 seven, but 25, eight around the clock?

James: nonstop sacrificing their personal relationships, sacrificing their health, sacrificing their sleep. So it's about the grit and the drive, but it's also about being able to cultivate resilience and some sort of equanimity. How are they balancing themselves back out such that they can hit it hard again the next day?

James: So, um, that that's the harder side to assess because. In the diligence process, founders are doing what they can to [00:35:00] accentuate their work ethic, their motivation, et cetera. So it takes some face to face time, some dinners, some coffees, some drinks, some walks or hikes to understand how someone unwinds. And I think that's really important as well to assess and bring to ground before you make an investment decision.

Rahul: I think you should probably ask the founder about sleep. Yes,

James: I asked two of the questions I ask a lot are how many coffees do you drink a day? And how's your sleep? And a lot of times the sleep question people aren't as honest about, but the coffee question, people aren't going to lie on the sleep side.

James: People are like, Oh yeah, I'm sleeping fine. Fine. Could be four hours a night, but you know, we want, we want some more durability than that in some cases.

Rahul: And also another thing that I've heard one of our, one of the VC, VCs, um, at the firm that I work with says that some founders are really need sort of external validation.

Rahul: So that could be like, um, a fundraising news or something that's not [00:36:00] inherently. Um, right for the business, but it could be something else because everybody needs some sort of validation when things might take a long time, right? So yes, that is probably a bad thing, right?

James: Yes. Yes. You want to internalize the source of motivation.

James: You don't want to be reliant on external proxies, external validation. I think motivation should be this intrinsic force in the sense that it's a vital source that resides within the founder. They're driven by the mission, they're driven by their desire and curiosity to solve a problem. And like you said, some founders rely too much on that extrinsic motivation.

James: They're looking for social media likes, they're looking for, you know, the next dopamine hit from a tech crunch article that picks them up. And that can be detracting from their very precious time and energy to be seeking those surface level dopamine hits versus being intrinsically motivated to bring a new solution to the world.

James: So, um, it's a good thing to differentiate. That's a good point you brought up. Yeah. And how do you personally assess [00:37:00] this? I think it's very tough to do on short timespans. The typical diligence process is call it one to three weeks, three weeks if we're lucky, because the more time, the better, but, um, I think it's, it's some intangible feeling that you get when you're in the room with someone or on zoom for the 10th hour with someone where you can see that they're just so passionate and curious and intrinsically motivated about a problem versus.

James: Someone who's maybe a small indicator is like someone who's distracted in a meeting versus focused on the task at hand. Because I think that's like someone who's searching for the next dopamine hit will not be able to focus as well. And I think that could be a little indicator of whether they're motivated in the right way.

James: Sure. Founders are very busy. They could be getting a call from a customer and that's important too. But being able to focus on the task at hand is a big indicator of that motivational level.

Rahul: Okay. Yeah. And another factor, factor number five is irrelevance for status quo. [00:38:00] Travis Kalanick comes to mind when, when you describe such a founder.

Rahul: Yeah,

James: definitely. I think. You know, I used the word Machiavellian before, which is ends justify the means, doesn't matter how we get there. We can break whatever rules as long as we get to the outcome that we want. We saw that happen with Sam Beckman Freed in a way as well. We saw that happen with Elizabeth Holmes.

James: We saw Travis Kalanick. Sometimes it works. Uber is now tens of billions, hundreds of billions of dollars of market value. Theranos is non existent. FTX is trying to get out of bankruptcy. So maybe one out of three times the Machiavellian approach based on those three companies. But, uh, ultimately you need to infuse more ethics and rule bending rather than outright rule breaking when it comes to the irreverence for the status quo.

James: But founders. I have to believe that they can change the world. They have to have some sort of irreverence, but it's just about discerning the right levels of that, which is why each of these qualities has that adverse manifestation and the [00:39:00] maladaptive manifestation like for this one in particular, we talk about the irreverence for the status quo.

James: As the good side Machiavellian is the bad side. So where are they in that gradient is what we're trying to figure out.

Rahul: I mean, this is very important, right? Like with the way regulations are multiple industries, it's very difficult to do something. And people historically, like the right, even the Wright brothers or.

Rahul: Anyone else, if you look at, they've all broken the rules and not cared about anything while they were actually trying to do something.

James: It's going back to that quick iteration cycles. Like maybe you test something for a day, maybe you test something for a week, clean as much possible data from you can, whether it works or whether it doesn't, and then refine and adjust the strategy appropriately.

James: So, um, as long as you're not breaking any rules in a major way during those testing cycles, I think it's a very sound approach to building and scaling a business.

Rahul: Okay. The next factor is resourcefulness. This, I think I can think of two things, resourcefulness in terms of [00:40:00] both time and money. And I was listening to some of the podcast a couple of days back.

Rahul: And then I was thinking, this is the only thing that you have in control, right?

James: Yes, absolutely. We are very scrappy in a word at our firm, you know, we're flying in coach. We're not staying at the nicest hotels. We're just trying to show that we care about this resource resourcefulness aspect, uh, by the way that we conduct our business and travel and appear places.

James: There's a story that my partner likes telling about when we were meeting with the Ciro team in Vegas during crunch time, when it came time to try to earn our allocation in this deal, they happened to be there for a conference. We flew in from Los Angeles. We met them for dinner at a nice restaurant because it was, you know, wine and dine type of occasion.

James: But we asked them where they were staying at the co founders of Ciro. They were staying at this place called the circus, which is a 50 a night hotel that is like where fun goes to die in [00:41:00] Las Vegas. And It's only senior citizens or very non optimal, non ideal crowd. So my teammates were very excited about that because that was a good indication of their frugality that they don't need to stay at a nice hotel.

James: Would hope that they get a good night's sleep and the rooms are not uncomfortable because I do want them to be able to be durable, like we talked about in the grit point, but they're controlling for the costs and you're controlling the outcomes in a much more meaningful way than just hoping the revenues will come in.

James: So that was a good character indication on that front.

Rahul: I think you'll see all great companies, uh, do this really well. I think the Amazon, Amazon, uh, tables were actually made out of the, some warehouse doors or something. Oh, is that true? I didn't know that. That's great. Yeah. Okay. So the next factor is magnetism.

Rahul: If you could describe a founder who's magnetic, I don't know whether that's it, right?

James: Yes. Magnetic. No, I think there, there's so many who are magnetic in different ways and. It's not [00:42:00] always a social grace or charisma. It's not this extroverted concept because a lot of elite founders skew introverted or engineers where the gregariousness, the socializing is not a key thing that they spike on.

James: So, um, it's really just about how do you lead a group or if you lead from behind as someone who's like very sort of vocal and motivating and say, Hey, you can do this. If you got this, you just lead out from in front as. Lead by example, don't even care about the communication side. You just know that your work quality will speak for itself.

James: If you're a 10 X engineer, people will be so impressed that they obviously flock to you and follow you with whatever project you're taking on. So how do you inspire your team is the real question. If you're not authentically resonant with your work, I think that's another thing where this can get really challenging to contrive this magnetism.

James: So the earned insights, the perspective from. Having been in the core functional problem space for a long time can go a long way for this type of motivation, but yeah, it's really, uh, this is a tough one to unpack because you [00:43:00] meet so many different cast of characters in this world, you meet the, like I said, high EQ, charismatic sales leaders who do nothing but wine and dine with people all day and are high on the charisma front.

James: Then you. Go down to the VP of engineer, CTO type of archetype. And there's obviously nuance to each of these archetypes, but that archetype skews much more introspective, not the most gregarious. So, um, you have to bring those types of people together. And as a VC, you have to be able to relate to both of those types of people.

James: So it's very fun to, to be a social chameleon, if you will, and have to drive connectivity and empathy with whatever. Type of crowd you find yourself in.

Rahul: Yeah. I used to work with an engineering leader and I observed the way he hired and how highly everyone he hired looked up to him really well for his work and the way he did things.

Rahul: And, uh, that makes a big difference. A lot. He's able to attract a lot of good talent because a lot of people want to work with him. Definitely. And work

James: speaks for itself, right? Like good work

Rahul: [00:44:00] will attract a following. Yeah, a more famous example, uh, that I've read from the book Power Law is because of Steve Wastniak.

Rahul: Um, uh, the way he have designed the circuit board, uh, Mike Makula, I think from Fairchild Semiconductors, he was very impressed with the design and that's how he wanted to work with these guys. Not because of Steve Jobs, but because of the engineering work of Steve

James: Wastniak. Absolutely. You look at something like the Bitcoin white paper, Satoshi Nakamoto, we don't even know who that is.

James: But this paradigm that he's put forth for this decentralized blockchain ledger was so powerful that the idea was what was magnetic. It wasn't even the person. And sometimes it's the work product that can be that type of effect.

Rahul: So what is a not so ideal or a bad case? Yeah,

James: I talked about that chameleoning as, as a positive characteristic where you're able to assimilate into different groups and build connectivity.

James: But there [00:45:00] is a downside to that where sometimes founders can overly contort themselves. In an attempt to generate connectivity with a particular audience. Um, and this goes back to that storytelling element that we talked about at the top, where if you're not authentically resonant with the work that you're doing and solving a familiar pain point, everything you do after that will feel contrived.

James: Um, think about if you're trying to recruit and experience technical co founder, if you're a newcomer to a problem space. Technical person will probably laugh at you and definitely not take a job working with you as a co founder. Um, and then think about it on the customer facing side, like you're selling to someone.

James: Do you know exactly what their problems are? Do you know what the function is end to end? Do you know what the workflows are that they're mired in? If you don't, then you're not going to be able to build empathy and you won't be able to make that sale. So those, uh, you don't want to contrive and force fit the magnet magnetism side and you want it to be authentic.

Rahul: Yeah. Okay. So the last one is, um, super bad. [00:46:00] I think you talked about it previously. Super bad. I think. My, at least my understanding, somebody who's exceptionally good at something. Yes. Some aspect, either it's technical or maybe like a particular road or a function or something like that.

James: Yes. I think you're nailing the definition.

James: It could be a, a technical or functional superiority. It could be a prior set of experiences or connections or network that connotes an unfair advantage. It could be like we said at the magnetism point, some sort of interpersonal dynamism. Or like raw mental processing power or any sort of number of those things.

James: But the question that we asked to distill this in our diligence processes is where does this founder spike, where are they showing that superiority and why are they the one person in the world who could bring this product to life and build this company? So that's what the 10 X or a hundred X or a thousand X superiority means.

James: It's like. Why is this person the best to do this? What do they know that others don't know? And how are they going to [00:47:00] infuse that into the company?

Rahul: Okay. So what would such a founder? What would be like an adverse scenario with such a factor? I think

James: there's some introspective awareness that founders have to varying degrees.

James: Like maybe they know they're best in class in a certain thing. Without that introspection though, founders may think that their superpower can extend to other areas. So if they're a killer engineer, they probably aren't a killer at sales based on my observations, but they may think that they are. So.

James: They'll say, Oh, I don't need someone to run sales. I can run sales. I'm running engineering. I can also run sales because no one knows the product better than me. Then he would fail the factor number three, which is low inquisition

Rahul: and curiosity. Correct.

James: He's correct. So we're using the scorecard, but the real way to get around this is to delegate and know what your gaps are as a founder and say, I need to be supplemented on XYZ function because that's not my domain specialty.

James: So it's the founders who, who under [00:48:00] delegate that wind up underperforming. So bringing in other people with superpowers, you can have this. League of Legends, Guardians of the Galaxy, pick your superhero gang type of thing. And that's what you want to have around the early executive team and early, I guess, like ideally as you, as you scale it the whole time, you want to have nothing but superpowers on the team, but definitely important in the first five or 10 hires above all else.

Rahul: So, uh, we've gone through your eight factors. How often do you come across a founder who sort of is ideal in all these eight? Well,

James: in the two years and four months that I've been on this job, I've completed six investments on just the pod that I work in FICA as a whole is probably completed. 15 to 20 investments in that time span, we've looked at, I would guess somewhere on the order of 2 to 3, 000 companies.

James: So it's a single digit percentage, and even sometimes we get it wrong where we're making these [00:49:00] assessments based on incomplete information. The processes are very fast, so we can't get as much certainty on some of these aspects as we want, but then we'll live and learn for next time. So. The ultimate question is it's extremely rare for a founder to spike on all of these attributes and be on the right side.

James: But it's really then about, like I said, figuring out where they spike and whether that spike is going to be enough of a durable advantage or superpower to carry that for the next race of next round of financing.

Rahul: So people can also grow over time, right? So when you're making an assessment, it's at one point of time.

Rahul: Yes. And so have you come across anyone who has not maybe. Uh, not great, ideal in all these factors, but then have gone on to be like successful or at least is showing promise.

James: I think the answer is yes. You know, it's a, it's a game of very long feedback cycles when you're focusing on the seed and series a stage.

James: So I'm sure some number of the probably several hundred founders that I passed [00:50:00] on now will prove me wrong. And I look forward to. rooting for them from the sidelines and learning for myself what I got wrong about assessing them in the first place. Uh, trying to think if there's any concrete examples. I think I, I pass mostly due to business models than I do on people.

James: Like I think most of the people that I encounter are very top quality founders. There's obviously gradients and degrees in that, but sometimes there's just a business that I don't like, even if it is a fantastic founder. So, um, that, that I think leads to more passes than the interpersonal side.

Rahul: So let's say you come across a founder who's maybe not ideal in all the eight factors, how would you then assess whether this person can.

Rahul: Let's call this person a B player and then maybe become a player over time.

James: Oh, that is a great question. I don't know if I have an answer to that. I think sometimes the proof is in the business scaling, you know, if it's something that I passed on a year ago when they were pre revenue and I found out they're at a million revenue now, then.[00:51:00]

James: Something's got to be going right. I must have mischaracterized my assessment in some way. So sometimes I'll have an opportunity to revisit those other times the business has blown way past our strike zone. So I won't even get a chance to be up close and personal to them and see what I got wrong in that initial assessment.

James: But. I think the biggest learning that I've seen from those teams that may not have it at the start, but do have it at some point is that quick tested iteration cycle, like whether it's a full fundamental business pivot, whether it's slight tweaks to the approach, to the product, to the UI, whatever it is that can bring a better full stack product to reality, like it's really all about the iteration and feedback cycles and how quickly people can learn.

James: So. Adoptive adaptive learning is a critical factor in improving from a B player to an A player.

Rahul: Yeah. I think, uh, I always think of curiosity as a sign of intelligence.

James: Definitely. Definitely. How many new skills have you learned? How many different domains have you thrown yourself into without having any exposure there before?

James: Um, there's a [00:52:00] framework from Charlie Munger who passed away earlier this year. One of the co founders of Berkshire Hathaway. He talks about the latticework framework, which is. Effectively, this interwoven series of Venn diagrams of different functional areas, different skill sets, and ideally you represent as a person, the intersection point of this large web of Venn diagrams.

James: If you're coming from different practices, different stages, different functions, then. You can glean the insights from all of those and infuse it into whatever you're evaluating in front of you. So sometimes you're switching out a lens. Sometimes do I need to think about this as a, in my case, a venture investor or a later stage investor?

James: Do I need to think about it through the lens of a personal evaluation or a business unit economic evaluation? So there's all these different. You know, if you remember those things when you were a kid where you could change the lens of a little thing in the picture, sometimes you just need to have a new color or a new framework when you're looking at something.

James: And I think that can be very powerful and unlocking those insights over time.

Rahul: [00:53:00] Yeah. And you also make a point that these factors are inherently based on availability. Yes. Pattern matching and simplistic distillations. Um, actually, what do you

James: mean by that? Yeah, this is getting into some of the cognitive biases and behavioral economics sides of things, which I think are very fun to, to talk about.

James: But we've talked about many success cases here for every success case. That's just the tip of the iceberg relative to all the people who failed to trying to do something similar beneath that. It's pattern matching. It's availability heuristics. Availability heuristics is like, what do I recall more vividly in my mind?

James: And then I'm going to think that recall represents the broader sample size at large, even if it's just the tail end of a distribution. So it's really important to zoom out and no talking about power law. We are in a game of outliers. So the outliers are what drive all of the success here. But there's also the rest of the normal distribution or whatever distribution it looks like [00:54:00] on each of these attributes.

James: And there's no reason to force fit yourself to this mold. There's no right way to do things. I think that's been a huge learning for me the past two years. There's so many different. Approaches that work. And it's really about being adaptive and understanding that there's many paths to success.

Rahul: Yeah.

Rahul: Maybe the way to do this, maybe look at the adverse sort of scenarios for all the factors more often than the other one.

James: I think it's easy to, easier to rule out against the adverse side than it is to put a pin on where they are on the positive side. So. Definitely process of elimination, focusing on those adverse manifestations can help triage, but then you need to figure out where they are on the gradient of positives.

Rahul: Earlier you were saying that more time, the better, but then sometime depending on the market conditions and also whether the startups have themselves have leverage in terms of multiple sort of interests. You might not have [00:55:00] the time, right? So then how do you do this?

James: Yeah, I think the time aspect is one of the things that I wish I could change most about venture.

James: There's another blog post that I've been percolating on of the whole list of other things that I'd want to change about venture if I had a magic wand. But the timelines are, are particularly challenging. Uh, feels like there's no real way to. Change the incentive structure here because people who move fast end up being better positioned to do the deals that they want.

James: So when we're sprinting on something, it's like part the C's, we're going to be monolithically focused on this, spend as much time with the team, with buyers, with competitors that we possibly can to understand this exact problem person and market. Um, so that it's, it's ineffective sometimes because the timelines are too short.

James: I wish they were longer, but that's just the nature of the game, unfortunately.

Rahul: Yeah. I mean, uh, there's this survey on [00:56:00] what founders value the most versus what VCs value the most. Okay. One of the thing that is a top priority for a founder is the time to do a deal. But it's, it's low VC. That is the only one that is so

James: mismatched.

James: Definitely. I think the way that we try to bridge that gap, cause it's a very real gap is. We don't burden the founders with the bulk of the diligence. What we do after an initial meeting or two, which hopefully there's no more than 20 or 30 minutes is take inventory of a data room, do our market research and try to distill what we call the, what you have to believe questions to get to ground on a decision, which is.

James: Not a list of 20 or 30 things. It's like three to five or four to six points. Like what are the core outcome drivers here that we need to bring to ground? And sometimes you can bring them to ground. Sometimes they're in leap of faith category where it's just something that you're going to have to hope happens and be confident that could come to pass.

James: But, uh, so for example, [00:57:00] one other aspect in diligence that we find really high signal is brokering customer intros, people in our network that are relevant buyers. We'll say, Hey founder, we're evaluating. Why don't you come meet operator that we know who might be a potential buyer of your product. We'll sit as flies on the wall for this conversation.

James: You get to pitch for 20 or 30 minutes. Founder gets a new sales qualified lead. Relevant operator has a new tool that they could potentially infuse into their stack and help with their workflows. We get to see how the founder pitches, how the buyer reacts. And then we debrief with the buyer prospect afterwards.

James: So it's a win win for everyone. And that's, that's, I think, one way to, to get out that gap in timeline, uh, frustration.

Rahul: And as a VC, how do you get really good at this? Assessing the qualitative aspects. I've also, um, read from your blog on this, another way to really differentiate as a VC is also dispensing your insights and earn wisdom to the founders you support.

Rahul: So yeah, both of them, like, how do you get really good at [00:58:00] both of those?

James: Definitely. I think it's a part pattern matching part, natural intuition side on how you get really good at it. And like we've talked about the whole time, it comes down to asking the right questions and being hyper vigilant, hyper observant in the body language, the tone of the response, those kinds of very qualitative aspects, um, dispensing wisdom as a whole other battle that takes even more time to do with high potency and high efficacy.

James: For example, in what I still view as the early phase of my career, it's a lot more about hustle and willingness to work long hours and work shoulder to shoulder with the founders. I'm still in that phase because I know it goes a very long way in earning the trust of the teams that I work with. Over time, I hope that I'll come up with sort of higher leverage paradigms to just say, Hey, this is what you should do.

James: And it becomes, you know, something that is requires less legwork on my end, but the legwork goes a long way. And that's, I [00:59:00] think something that we say we're the end plus one co founder to our founders that we back, you know, we only do six to eight investments per year. So we're really concentrated and set that up.

James: So we can focus on the post investment value creation side with as much. Concreteness as possible. There's so much fluff in that value, add language in the VC ecosystem these days. And we try to make it tangible by having that concentrated portfolio approach, having an in house operating team that focuses on.

James: Recruitment business development, I'm sometimes doing outsource BD for these folks. I'm slinging LinkedIn DMs. I'm slinging cold emails. I love doing that on behalf of my founders. Sometimes I'm interviewing candidates that they're bringing in for new executives or for other ICs on the team. And I think it's great.

James: It's a continuous learning journey. Joy in that process. Is this the hardest part of a job as a VC? I think it is, but it's also the most fun because [01:00:00] sometimes, like I said, in the later stages, you're living life behind Microsoft Excel numbers have no personality. They may tell you a lot about a business, but.

James: Staring at numbers all day, at least that's not how I like to operate. I want to get out into the world and be face to face with people who are orders of magnitude smarter than I am in any given practice area. I get to learn from them. I get to observe how they've crafted their journeys and how they are building the foundations for success.

James: So. It's so fun for me, it's very challenging to do these level of personal assessments, but it's very rewarding and fun.

Rahul: I guess, I don't know, at least the way I think about it, the way to get good is only over time with reps and going back to the point number three factor, which is be curious and inquisitive on, yeah, not just do the reps, but also reflect.

James: Definitely. Curiosity is the most fundamental attribute that I think leads to success, both as a [01:01:00] founder and as a VC. So if you don't have innate curiosity, you're not a continuous learner. This is not the world for you.

Rahul: Yeah, that's a great note to end. Thank you so much, James, for taking the time to do this.

James: Thank you, Rahul. This has been a fantastic conversation. You're an excellent host and you ask very insightful, incisive questions. So hope to be back sometime soon and take care.