Sunday Reads #113: Drunkards and Streetlights

Or why angel investing doesn't work.

Hope you and yours are keeping safe (and sane).

Welcome to the latest edition of Sunday Reads, where we'll look at a topic (or more) in business, strategy, or society, and use them to build our cognitive toolkits for business.

If you’re new here, don’t forget to check out the compilation of my best articles: The best of I’m sure you’ll find something you like.

And here’s my newsletter from last week, in case you missed it: Sunday Reads #112: Oops! I did it again…

This week, we first look at the streetlight effect. Why it doesn’t matter how good you are at executing on opportunities, and what to do instead.

Next, our chart of the week. It’s surprising how divergent the new normal is, depending on who and where you are.

And last, some notes on the mRNA technology that is integral to the upcoming COVID vaccines. Regular readers of this newsletter know how fascinated I am by the speed of bringing these vaccines to market. Turns out, this overnight success was three decades in the making.

Here's the deal - Dive as deep as you want. Read my thoughts first. If you find them intriguing, read the main articles. If you want to learn more, check out the related articles and books.

[PS. If you like what you see, do forward to your friends. They can sign up with the button below.]

Drunkards and Streetlights. Or why angel investing doesn't work.

A short parable, from Wikipedia:

A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together.

After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park.

The policeman asks why he is searching here, and the drunk replies, "this is where the light is".

I remembered this when I saw Evidence from 27 Thousand Economics Journal Articles on Africa on Tyler Cowen's blog. I quote (emphasis mine):

The first two decades of the 21st century have seen an increasing number of peer-reviewed journal articles on the 54 countries of Africa by both African and non-African economists.

I document that the distribution of research across African countries is highly uneven: 45% of all economics journal articles and 65% of articles in the top five economics journals are about five countries accounting for just 16% of the continent’s population.

I show that 91% of the variation in the number of articles across countries can be explained by a peacefulness index, the number of international tourist arrivals, having English as an official language, and population.

The countries that researchers studied, were the ones that were easy to study. Not the ones with the most potential insights available.

Now, we can laugh at the drunkard, and we can laugh at the researchers. But you and I are no better. We do this *ALL* the time.

Some examples:

Angel Investing is strongly subject to the "searching under streetlights" phenomenon.

I've been investing in startups since 2016. I've invested in 15 companies through OperatorVC, a pooled investment vehicle.

My experience has been that it is possible to succeed. But the economics and structure of angel investing are heavily stacked against this success.

Tucker Max sums it up well, in Why I Stopped Angel Investing (And You Should Never Start):

The structure of angel investing works against all but a select few...

Even if you can reliably pick the winners with some degree of certainty, you’re still probably going to lose.

Because you probably can’t get into the winners. It almost always takes the right social connections to get into very early stage companies.

...only a certain type of person can truly be successful angel investing... they have the social clout to not get run over by VCs and literally pushed out of an investment.

Yes, the hardest part is finding the best companies.

Even if you're almost psychic at picking winners, you can only pick winners among the startups you see (i.e., under your streetlight).

And in a power law world (which the world of startups certainly is), one startup makes all the difference. What if it's one you just missed investing in? That one networking dinner you missed. That one week you were on holiday. The unicorn is just 5m away from your streetlight, but completely in the dark.

And it doesn't end there. Even if you do find tomorrow's billion dollar company, so will other, bigger institutional investors. And they will have no remorse muscling you out, as Paige Craig found out with Airbnb:

I discovered Airbnb on August 12, 2008 and six weeks later gave them a term sheet for their entire seed round. But in the (literal) final hour, it fell apart.

At the end of September, we agreed on terms and I flew up to San Francisco to do a closing dinner at a little café next to Brainwash. We had some good food and wine and I thought things were solid. We shook hands and planned to formally close the investment the next day.

I hear back from him later in the day. Initially, he had great news to tell me: Y Combinator had changed their mind and was in fact going to participate in the round. “Awesome,” I thought, “that’s another great investor for the guys to have involved,” and it gave me some appreciated reassurance after all the prior investors had opted out.

And then Brian told me the second part — that only YC would be participating. Talk about good news followed by ugly fucking news. YC was taking the full allocation and I was getting bumped. And that was it — end of story. After 6 weeks of work, I didn’t get to invest.

Rough stuff. But let’s say you clear this hurdle as well. Like Paige says, you "chase the deal until you're dead", and get an allocation. What happens then?

Congratulations. You get muscled out in the next big round.

This happened to me and OperatorVC. One of our startups hit a strong tailwind of growth, and we were super excited.

Guess what - we were forced to sell at 10x, because the bulge-bracket VC investing in their Series B wanted to "clear the cap table" as a precondition to invest.

Yes, 10x is not a bad return. But it's not good enough.

Given the number of failures you'll invariably see, you need your wins to be "home runs". You need them to be 30x, not 10x.

We also search under streetlights daily in our working lives.

How often is it that, in an important meeting, you discuss trivial but simple questions, while procrastinating on the existentially important, but complex problem?

Answer: Very often.

You discuss whether you should reduce travel per diems, when you in fact need to discuss the key strategic choices to navigate a recession.

From David Perell,

Instead of approving plans for a complicated spaceship, the team would argue over the color of the astronaut's uniforms.

And the canonical example, from Northcote Parkinson:

Parkinson provides the example of a fictional committee whose job was to approve the plans for a nuclear power plant.

[It spent] the majority of its time on discussions about relatively minor but easy-to-grasp issues, such as what materials to use for the staff bike shed, while neglecting the proposed design of the plant itself.

Marketers and Product Managers do it too.

We brainstorm and build cool new features for our apps, when the onboarding funnel itself is leaky. Andrew Chen calls this the next feature fallacy.

Why is this a fallacy?

Because, for most of a startup's life (after Product/market fit, but before it becomes a Facebook), the top of the funnel (i.e., how you get new users) is the biggest constraint.

And any improvement not at the biggest constraint is an illusion. For the same reason there’s no way to strengthen a chain without strengthening its weakest link.


  1. If your career is focused on value expansion (like investing, or business development, or product development), be aware of the streetlight effect. The value you create is constrained, first and foremost, by the opportunities you can access. Grow the span of your streetlight. Focus on the top of your funnel. Get more opportunities.

  2. Always prioritize decisions and tasks based on importance, not on ease of completion. What is the biggest constraint you face? Focus on that first. Remember the Eisenhower Matrix.

  3. If you want to angel invest, focus on expanding your deal flow. But you're still at the mercy of the streetlight effect, so only invest money you don't need.

Chart of the week.

This chart, from Opportunity Insights Economic Tracker, shows in stark relief the divergence of economic outcomes from the pandemic (data is for the US, but I think it's generally true).

High wage earners are actually slightly better off now (+0.2%) vs. before the pandemic! Able to work remote, and now maybe more productive without a commute.

Low wage earners, on the other hand, have seen a drop of 20% in their incomes (and nearly 40% in May, when lockdowns were in full effect).

What has been a gentle bump in the road for the fortunate, has been an economic disaster with no end in sight for the less so.

V Shaped recovery for me, L Shaped recovery for you. 😞

There are details at a deep granular level at the Opportunity Insights website. Do check it out.

The World of COVID-19 and Vaccines.

I read a great profile of mRNA technology (used for the first time ever in vaccines - by Pfizer-BioNTech and Moderna), and the scientists who've been working on it.

Whether mRNA vaccines succeed or not, their path from a gleam in a scientist’s eye to the brink of government approval has been a tale of personal perseverance, eureka moments in the lab, soaring expectations — and an unprecedented flow of cash into the biotech industry.

It is a story that began three decades ago, with a little-known scientist who refused to quit.

Whatever happens with the vaccine, I do hope Katalin Kariko and Drew Weissman get a Nobel Prize.

It's an inspiring story of speed. As Patrick Collison notes in Fast:

On January 10 2020, the SARS-CoV-2 genome was published.

3 days later, Moderna finalized the sequence for mRNA-1273, its mRNA vaccine candidate; the first batch was manufactured on February 7.

On February 24 (45 days after genome publication), Moderna shipped the first batch of mRNA-1273 to the NIH for use in their Phase 1 clinical study. 266 days of clinical trials and regulatory coordination followed.

On November 16, Moderna announced that the vaccine's efficacy was 94.5%. 

And in another amazing example of scientific progress, new CRISPR-based COVID-19 test uses smartphone cameras to spot virus RNA.

Remember the Tricorder from Star Trek? We're a little closer to it 🤩.

And for some fun…

Check out this startup pitch for a brand new personal mobility device. This will surely disrupt Bird, Lime and all the other dockless scooter companies.

Thanks to Rajesh Gouri for sending this to me.

That's it for this week! Hope you liked the articles. Drop me a line (just hit reply or leave a comment through the button below) and let me know what you think.

Leave a comment

See you next week!