It's not about math its about people and contracts

I'll never forget the last conversation I had with my PhD advisor when I told him I was dropping out.

Advisor: "So what kind of job is it?" 

Me: "It's actually an incredible opportunity. I'm joining a venture capital fund."

Advisor: "Ahhhh sounds like a lot of math."

Me ...

Many people assume investing in early-stage tech companies is the same as running a quantitative hedge fund when in truth they couldn't be any less different. Sure every VC, and entrepreneur for that matter, needs to be mathematically competent enough to understand pro forma financials, accounting, cap tables, etc. In my experience however, success in early-stage investing (or entrepreneurial success for that matter) is less about math and more about understanding people and contracts.

I speak with a lot of successful entrepreneurs and investors on a regular basis and frankly, for the longest time I would leave a number of those conversations struggling to understand how that person achieved as much success as they have.  I don't mean for that to sound offensive or arrogant. I simply mean that they often don't give you the impression that they're a master chess player operating in a different stratosphere from everyone else. They're everyday people who have three important skillsets:

  1. a clear understanding of how people behave,
  2. an ability to sell and structure a "contract" that creates a win-win,
  3. and they're absolutely vigilant about where they spend their time.

These people simply don't get side tracked with "too good to be true" deals or wishful thinking. They maintain a constant focus on what will create the most value possible for them in any given moment. They're led by "show me the money" not by "show me the potential". That's not to say they are totally myopic. They fully understand investing in the future and how to realize larger visions. The point is that they're very strategic and only take steps forward where they can see commitment from other people not "maybes" or "one days". If they don't get buy-in, they move on to other people or other opportunities without looking back. 

Intelligent people can actually be their own worst enemy when it comes to understanding human behavior. There's a natural tendency to either 1) over analyze a person's motivations or 2) just assume outright that "of course people will adopt the better technology!" Successful entrepreneurs don't do that. They understand human needs, wants, and motivations without overanalyzing them. As one of my undergraduate engineering professors used to say "You can't make predictions to the nearest thousandth if the data you have is only accurate to the nearest whole number." The simple (often superficial) answer is an accurate enough hypothesis for you to run with. Test it and see if it's true.

Along those same lines successful entrepreneurs also understand contracts. By "contracts" I don't mean they're experts in esoteric legal minutiae. I mean they understand how to offer something people want, and extract the value that it's worth in the open market. They don't look at every deal as a once in a lifetime opportunity. They don't make offers without thinking about what the person on the other side of the table truly values. They have realistic expectations about what they can get out of any one sale and hold steady to it. They understand how to navigate the logistics of compromise and how to manage the complex emotions of deal making. At the end of the day your dealing with people, not trying to beat Deep Blue at chess.

I think the mantra is best understood from a personal example: When my younger brother was in high school I used to marvel at his ability to trade-up to almost anything with his friends. He could start with a video game and work his way up to a trampoline or moped. I asked him how he did it and his explanation was remarkably simple: "I sell shit people want."

James Shomar
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