Sunday Reads #132: Stop trying to hit me, and hit me!
The secret of Tiger Global's success.
Welcome to the latest edition of Sunday Reads, where we look for cheat codes to life, business, and careers (sometimes we even find them!).
If you’re new here, don’t forget to check out some of my best articles: The best of Jitha.me. I’m sure you’ll find something you like.
And here’s the last edition of my newsletter, in case you missed it: Sunday Reads #131: Why Warren Buffett's investing principles won't work for you.
This week, let’s talk about how Tiger Global is disrupting VC. It reminded me of Morpheus and Neo from the Matrix (you’ll see why).
And other link love, of course: negotiation lessons from household chores, trajectory of social networks, and Twitter’s fait accompli.
PS. Do subscribe if you haven’t 😊.
1. Stop trying to hit me, and hit me (OR How Tiger Global is devouring VC).
I read an article about Tiger Global by Everett Randle: Playing Different Games.
Starts with this excellent meme:
It's funny. But it’s also true.
The Tenacious Mr. Tiger.
Tiger is devouring every other VC's lunch.
It's tempting to deplore this strategy. "It's causing crazy deal inflation, and making founders less hungry".
You might even predict its decline. "If Tiger is over-paying for everything, then they'll surely receive their comeuppance."
But the reality is: Tiger is playing the game at a level above the others.
To borrow from the Matrix, other VCs are trying to win deals.
Tiger is, instead, winning deals.
In the article, Randle talks about how Tiger is "eating" Venture Capital.
The basic upshot is:
Tiger is not willing to play by "fake rules" or "handicaps" which don't really exist.
Norm: Funds should deploy capital along a pre-defined schedule and then work to maximize MoM.
Reality: When executed well, GPs and LPs can both make more money from a higher-velocity strategy that ignores traditional deployment schedules, even if it comes at the cost of maximum MoM returns.
Norm: VCs generally add value to companies post-investment and VC value-add is a core part of any fund’s pitch to a Founder.
Reality: VCs can cause as much harm as they can help, and they very rarely move the needle for a business after the earliest stages. Therefore, a hands-off investor approach is often more compelling to a Founder than the typical VC offering, especially when paired with a high valuation / low cost of capital.
Norm: Without an in-depth diligence process, investing in startups even at the growth stage is too risky and will end poorly for those that try.
Reality: Diligence in categories like SaaS has never been more commoditized, and with the right amount of investment velocity you can de-risk the negative impacts of individual frauds/blow-ups on your portfolio via diversification.
Don't subject yourself to fake constraints.
Randle presents an analogy from Game of Thrones:
There’s an amazing scene in Game of Thrones’ first season where a mercenary named Bronn fights a knight named Ser Vardis in a “trial by combat”.
...the contrast between their fighting styles is stark. Ser Vardis fights, well… very knightly and proper, while Bronn scraps-and-brawls his way to survival.
In the end, Bronn skewers Ser Vardis and tosses him out of the conveniently located floating-castle-garbage-disposal.
... [Lysa Arryn] scolds Bronn for his fighting style and sets him up for one of the series’ great one-liners:
Lysa Arryn: You don’t fight with honor!
Bronn: No, but he did.
The game is not "Be a VC". The game is "Generate high returns".
At the first level, all VCs have the same insight about returns:
Access to deals is the single biggest source of leverage for a VC.
I've written about this in Exhaust Fumes & Infinite Games:
We already know that VC investment is about "home runs".
Many of your deals will go bust, but the ones that don't, should return big. i.e., a Power Law distribution.
Long-term infinite game + power law → Everyone is really solving for access.
You don't win because of prescience about the future. You don't win due to an uncanny ability to pick winners. You don't win by building a tireless fundraising machine.
You win with access.
Persistent access to the best deals is the most critical leverage point in venture capital.
And so, all the VCs solve for this. They hire successful serial entrepreneurs, people with strong Silicon Valley networks, etc.
But very few jump to the second level of insight:
Once you solve for the biggest constraint, the constraint moves elsewhere.
So what is this new biggest constraint, once you have solved for access?
It's not value add. VC support can do as much harm as good. The biggest value creators are unlikely to be clever hacks / extra sales resources.
It's not strategic input. The founder has a vision, which drove the traction that got your attention in the first place. Makes sense to get out of the way. Don't fix what ain't broken.
It's not expert networks. The best entrepreneurs HUSTLE, in all caps. They will find connects to whoever they need, without your help.
No, it's none of the above.
The new constraint, once you have the access you need, is: Deal Velocity.
None of the others matter.
And Tiger grokked this new constraint well before anyone else.
Tiger's entire infrastructure is geared towards deal velocity.
Very limited / no due diligence (one meeting; you see the term sheet the next day).
No time spent on negotiation. "What valuation do you want?"... "Great, we'll give you 20% more".
No negotiation for board seats. "We don't want any, let's move on."
Are you playing to win?
Tiger Global’s story reminded me of Cedric Chin’s Are You Playing to Play, or Playing to Win?
As per Cedric, there are two types of people who play any game.
Players: who play to win
Scrubs: who don't play to win
Who are these "scrubs"?
Well. Warren Buffett loves to say, “I don't look to jump over seven-foot bars; I look around for one-foot bars that I can step over.”
A scrub is the opposite.
He's the one looking for a seven-foot bar to jump over and bow to the audience. Even if he loses the race because he's making it harder for himself.
Cedric cites an example from Street Fighter, the game:
Scrubs are likely to label a wide variety of moves and tactics as "cheap." For example, performing a throw in fighting games is often called cheap. A throw is a move that grabs an opponent and damages them even while they're defending against all other kinds of attacks. Throws exist specifically to allow you to damage opponents who block and don't attack.
One time I played a scrub who was pretty good at many aspects of Street Fighter, but he cried cheap as I beat him with "no skill moves" while he performed many difficult dragon punches. He cried cheap when I threw him 5 times in a row asking, "is that all you know how to do? throw?" I told him, "Play to win, not to do 'difficult moves.'" He would never reach the next level of play without shedding those extra rules in his head (emphasis mine).
It's a helpful reminder to observe the different ways we constrain ourselves. Even when we don't have to.
"Oh, I won't raise venture capital. Don't want to shackle myself." (In case you're wondering who I'm sub-tweeting, it's myself).
"Let's delay the ship-date by a month. The app isn't 100% perfect yet."
"Let me re-read the 100 page internal deck to make sure there are no spelling mistakes."
And of course:
Don't "try to win". Win.
2. Golden nugget of the week.
My wife and I were speaking to a couple at the gym a few days ago.
They mentioned how there was some food going stale in their fridge. Both of them noticed it independently, but neither of them threw it out. They were each waiting for the other person to do so.
While speaking to them, I realized this never happens to me and my wife.
I never notice when food is going stale. It's like, I don't have a clue! So by default, my wife is the one to throw it out.
Similarly, I know my wife *hates* to do the dishes. So it's on me.
There's no malice intended on both sides, of course.
Still, it reminded me that pre-commitment is an underrated but powerful negotiation strategy.
As Thomas Schelling (he of "schelling points" fame) says about negotiations:
Bargaining Power = the power to bind oneself.
Make a public statement of your stance in a negotiation.
Make a large bet that you won't change your mind. Announce that publicly too.
If your commitment is believed, the opposite party has lost ALL leverage.
It's like the game of chicken.
As you and your opponent race your cars towards each other, rip off your steering wheel and hold it out the window.
Game over. You've won.
3. Chart of the week: Social Networks and their growth trajectory.
I saw this chart from the FT, via Tanay Jaipuria.
You have the obvious takes, of course:
Fascinating how Facebook has held its trajectory. For 15 years!!
Tiktok, the newest kid on the block, is leaving everyone else in the dust. Will be much faster to 2.5B users than even Facebook.
But the chart also shows the importance of path dependence.
Take a look at Twitter. Started off well, but has pretty much hit its limit.
Twitter is a victim of its own success. After its early rise fuelled by its novel user experience, it's now locked in to its form factor. Twitter is about short posts, 140-280 characters.
No matter what it does, it can't break the ceiling on users that this format imposes.
Aside: this is what makes Twitter a good stock to buy.
A loyal set of consumers, just waiting to be monetized better. Regular Twitter users won't leave. There is no other social network like it.
The market overvalues growth, so Twitter is cheap.
[Disclaimer: I own Twitter stock, this is not financial advice, just for entertainment, yada yada yada.]
That's it for this week! Hope you liked today’s edition. Drop me a line (just hit reply or leave a comment through the button below) and let me know what you think.
Would love if you could also share it on Twitter so more people can see it. Thanks a lot!
Until next time, wish you good health, safety, and sanity.
Jitha