E312: The Power Law of Reputation in Venture Capital

18:01David Weisburd:So how do you do it? Well, the answer is, listen, I'm excited to fund your company. Here's a list of everyone I've worked with over the last 25 years. You should call them and understand what it means to work with me. And by the way, you should do the same for the other people who are interested in funding your company and have them give you a list of everybody, right? I dare them to give you a list of everybody. And because the way that my firm wins deals, the way I win deals is we are referred to great opportunities by the people who trust us the most, who believe in us. And then when we are interested in funding a company, that extraordinary network of people who are all doing amazing things then say, if you have the opportunity to work with these people, it would be in your interest.

18:53David Hornik:The founders that are most methodical, they're of course very methodical around who's on their cap table and they do the diligence, they do the hard work and they surface the truth versus those people that are a little bit laissez-faire about it. Oh, he seems nice. She seems nice. They tend not to build enduring franchises. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground.

19:26David Hornik:I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square, they just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups and everything stays synced in real time. You could track sales, manage inventory, book appointments and see reports instantly whether you're in your shop or on the go.

20:00David Hornik:And when you make a sale, you don't have to wait to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing so your best customers keep coming back. And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Let's be honest. Subscriptions out of fast.

20:33David Hornik:Streaming services, apps, memberships you forgot you even signed up for, and canceling them is usually a pain. That's where Experian subscription cancellation comes in. Experian can take the pain out of canceling subscriptions by handling it for you. You just keep the ones you want and put money back in your pocket. Over 200 subscriptions are cancelable. You can also save money by letting Experian negotiate the rates on your bills. They'll keep an eye out for new deals and saving opportunities and negotiate directly with your provider on your behalf. And the best part, you keep 100 % of your savings.

21:10David Hornik:Get started with Experian app today. Results will vary. not all bills or subscriptions are eligible. Savings not guaranteed. Paid memberships with a connected payment account required. See Experian.com for details.

21:23David Weisburd:Yeah, no, I think it's, I gave a term sheet to a founder once and he had six term sheets from very good firms. And he ultimately said, he ultimately said, David, I'm going to take your money. I'm looking forward to it. And I said, well, what was your process? And he said, I literally called references for each of these people and said, tell me about them. And he said, I kept going until I got to a negative reference, until I heard negative things about it. And then I compared the relative firms. And he said, you would not probably be surprised, but there were a couple of these investors. I only needed to make one reference call.

22:06David Weisburd:And I heard really challenging things about them, you know? And so do the work, right? I think venture investors need to do the work. And I think there is a lot of irresponsible investing going on right now where people are, you know, funding things based on reputation and hearsay, et cetera, and haven't done the work themselves. And that will go poorly. And then entrepreneurs should do the work because, you know, Rene Lacerde, who was the very first entrepreneur I backed, I've funded him across two companies and I'm on his board today after 25 years. He has been stuck with me for 25 years. Imagine if I was terrible.

22:45David Weisburd:That'd be a lot of years.

22:48David Hornik:Whenever I look at these incentive mechanisms, I like to take out the morality from them too. Because I think a lot of times morality could cloud thinking and cloud judgment. And I very much like to seek truth and what's actually on the ground happening. And the way that I look at the bad reputation strategy or basically the zero sum strategy or the short term strategy is that it actually could work. It's just highly unlikely to work. Because think of it as every time you invest your chip stack, you get less and less chips. Now, that doesn't mean you can't invest into the next open AI and do really well.

23:26David Hornik:But one is, you know, that's going to be your last bet. so you're not really creating franchise value. But two is you have a pretty, it's a very risky strategy versus the person that invests maybe undersells themselves and gains a reputation. Over time, things would go against them. If they have a 10 % hit rate, that still means you do 20 shots on goal, there's a 50-50 shot that you might not hit anything. But over time, the odds start to probabilistically favor you.

24:00David Weisburd:Luck plays a big role in this business. If you miss the one in 10, then you are a failed venture investor. And if you get two in 10, you're an extraordinary venture investor. That's an absurdity. My brother was on the MIT blackjack team. So they were card counters. They went to play blackjack and you'd sit and count until the count was up. And then you'd sit down and you'd bet big for a period of time. And it shifted the odds. It used to be 51 % in favor of the house. And by counting, it was 51 % in favor of the team. And there were weekends that they lost hundreds of thousands of dollars because there's still luck involved.

24:46David Hornik:Through your article in 2012, you became good friends with Adam Grant, who I've heard so many great things about. He wrote this book, Give and Take. Tell me about the main lessons from the book and which part of it do you agree with and which part of it that do you not agree with?

25:00David Weisburd:I agree with all of it, which was lucky because I only, I met Adam because of that article. He read the article. He was working on this book, trying to determine scientifically who were more successful people who were givers or people who were takers. And he had read the article that I had written and he said, do you mind, can we talk about it? And he and I got on the phone. It was supposed to be an hour. We spent a couple of hours. It was a great conversation. We caught up some more. And a story I told him about losing a deal ended up kind of the very first story in the book, Give and Take, which was amazing.

25:38David Weisburd:Now, the reason he chose it is because I looked like an idiot. I had done all the right things. I'd been the good guy. I had a relationship with this founder. And then the founder said, look, my heart says I should go with you, but my head says I should go with this other investor. And so I'm not going to take your money. And then what happened is I said to him, well, that's the wrong answer. You know, that can't be the answer. And you should reconsider it. We had a long conversation. He ultimately decided to let me in the deal because of my reputation as someone who had been a giver, quote unquote, giver.

26:09David Weisburd:And that's been a long relationship. Company's doing great. That's been fine. And that became the story in the book. What Adam discovered as he did the research, Adam is a professor at Wharton. He's a psychologist. he literally has an encyclopedic memory for these studies that have been done to test these various propositions. What he determined was there are sort of three types of people. There are people who are takers. They are trying to extract value from you. There are people who are givers. They are trying to insert value into the system. And there are people who are matchers who say, Like, if you do this thing for me, I'll do this thing for you.

26:49David Weisburd:And what he determined is that the givers are the most successful business people. What he also determined is that the givers are the least successful investment, you know, in business people, right? And the reason for that is that if you just give without any concern for how it's affecting you, then people will take advantage of you, right? takers can spot a giver who is not worried about what they're giving away from a mile away and it'll just take take take until you're you know a shell of this yourself and so adam essentially came to the conclusion that that best you know the best business people work that way that the ones who say how can i help you be successful because they want to see a universe in which the broader community is successful.

27:40David Weisburd:Those people, the Bill Campbells of this world, are astonishingly successful. He's one of my heroes. He gave unendingly and as a result, did better than everybody.

27:54David Hornik:Let's say I'm learning to be an elite giver. And let's say I want to, on the margin, be helpful. Let's say some people-pleasing tendencies, but I also want to be successful, what are some best practices?

28:05David Weisburd:I teach. And so I encountered lots and lots of students over time. And I have many, many students reach out and say, Hey, David, I'm thinking about this thing, or I'm trying to make a choice or whatever. Do you have 15 minutes? Do you have a half hour? Can we catch up, et cetera? And I almost always say yes. Because it turns out that by and large, you know, students are, there may be some takers in that group, but they, you know, but they haven't, they haven't operationalized taking yet. Yesterday, my morning was filled with these conversations, a former student of mine from Harvard Law, a former student of mine from Stanford, the brother of a kid on my daughter's, you know, soccer team, who's now a CS major.

28:53David Weisburd:And And my wife often says like, oh my God, how do you have time? Is that really good use of your time? And my answer is it 100 % is because it makes the planet better. I meet a great bunch of young people and some one of them is going to do something amazing or have a friend who does something amazing, et cetera. I recently heard from a student of mine who said, hey, one of my favorite people at Stanford for business school is this person you should hear about his business. I said, oh, of course, that sounds amazing. Take my favorite student, Transit of Property of Reputation. I meet with this friend of theirs.

29:33David Weisburd:I think the friend is fantastic. I'm a huge fan of the friends, but I couldn't get my arms around the business. I turned down the business, but I said, you should come to my conference. I think you'd enjoy it. That founder came to my conference, was a great participant. People loved having him there. He added a lot to the conversation. And then a few months later, I got an email. This was this week saying, hey, one of my smartest friend has started this new company that I think you'll find interesting. Here's some info. Are you interested? I said, yeah, 100%. And then he introduced me despite having turned him down as David is my favorite venture capitalist.

30:14David Weisburd:despite the fact that I didn't fund my company. You can't, there's no version where you can get to that outcome other than saying, how can I be helpful?

30:25David Hornik:Does that work for you because you're in this pool of Stanford Business School students? And how could others apply this strategy? Yeah, I don't think that it's a unique pool.

30:39David Weisburd:And I think that you make your pool, right? There are entrepreneurs who've come out of all sorts of spaces, who have built all sorts of amazing things. And so I think the answer is, you know, you have to get in the pool.

30:55David Hornik:When I think about value add or helping, I think very much in compounding within a certain form factor. So I've learned this from many mentors. With you, obviously, you have this conference. Every year you have these 250 people that are happy. They're introducing other people. You have a reputation and has its own brand, the conference itself. With me, I obviously have the podcast. To me, that's a much smarter way to give than to give one-to-one.

31:22David Weisburd:I was the very first venture capital blogger. And my partner, Andrew, at the time said, you know, nobody's blogging about venture. Why is that? You know, it's not like we have these secrets. Why shouldn't we? The venture police aren't going to arrest you. Yeah, exactly. And we started this blog. It was called Venture Blog. Initially, it was written by me, Andrew Anker, and Naval Ravikant, who were all at August Capital. We started this blog. Ultimately, Naval and Andrew sort of fell off. They were like, oh, that's a lot of work. And we've got other things to focus on. And I wrote it for 10 years.

32:01David Weisburd:And it was extraordinarily valuable because people really wanted to understand the venture world in a way that nobody was sharing. If I were today that 33-year-old kid entering the venture business, I would be on TikTok. You know, like I keep thinking like maybe I should be the TikTok VC. That's the platform that someone should be owning because it's, you know, from a media perspective, it gives you a huge amount of leverage and opportunity. So I agree with you. You have to figure out what is going to be multiplicative, right? Because additive is too hard. So find that thing.

32:40David Hornik:And you've gone through thousands of startups, it's not over 10 ,000 to make those 50 investments. And there's this age old question about EQ and IQ in the general business world. In the venture capital world, it seems to be settled that you want IQ over EQ. But is that really what you see in these$10 billion outcomes in terms of high IQ and EQs way down?

33:02David Weisburd:It's funny that you say it's well settled. I would absolutely not agree with that. And I do not invest that way. Well, just I think there are lots of very high clock rate people who could never convince someone to give them money, right? I mean, we see lots of entrepreneurs. You say I've seen 10 ,000 businesses. I see about 1 ,000 business plans a year. So 25 ,000 businesses. I meet with about 100 of them a year. So 2 ,500 companies. It got serious with 250 of them funded 50 of them. That's loosely. So I've seen an unimaginable number of people. And what you learn over time is there are a bunch of characteristics that help make you a successful entrepreneur.

33:49David Weisburd:If you can't articulate the opportunity that you're building, if you can't articulate the reasons in which the problem you're solving, how are you going to convince people to give you money? How are you going to convince entrepreneurs to join you? How are you going to come? There's just a huge range of things that you need to be able to do.

34:08David Hornik:But is it one of those things that's necessary on some level? You can't be completely oblivious to it, but IQ is where you get your lift.

34:17David Weisburd:If I look at the great companies I've funded and the amazing companies I've turned down, the vast majority of them have not been built on IQ. I mean, it's certainly, you know, Bill Gates and Microsoft is a very good example of what you're describing. My partner, Dave Marquardt, who founded August Capital, and he hired me to be a venture investor, was the only private investor in Microsoft. And when I asked him, so why did you fund Microsoft? He said, well, Bill Gates was like a 19-year-old. But when I asked him about everybody else's business, he was smarter on their business than they were. He knew, you know, I was looking at all these companies.

35:02David Weisburd:I'd say, what do you think of this company? And say, well, if they did this and this and this, they'd be successful. But they're not doing that because they're idiots. So clearly, and I think people viewed Gates as having more IQ than EQ, right? But like Twitter, like the founders of Twitter, they were perfectly smart. But I don't think that was an IQ thing. I'm not sure it was an EQ thing either. Sometimes you find the zeitgeist and you get to ride the wave, right? Dylan Field, who I'm a huge fan of, I think is an amazing young guy, created Figma, has had this astonishing outcome. And Dylan came to a class I taught and he was chatting about it.

35:43David Weisburd:And there was a near implosion of the company because his engineers were so mad at him at one point because he had not exercised sufficient EQ to understand what would motivate them and keep them engaged. And his board member, John Lilly, had to sort of come in and say like, hey, here's some EQ to rent. I'm going to help you work through this. I do that all the time with my companies. I spend a lot of time. I literally just had lunch with an astonishing founder, but he is working his team too hard. Like I said to him, the engine is running too hot. And even though you've had extraordinary outcome to date, at some point, the engine blows.

36:32David Weisburd:And so I think it's always a balancing act, but I would choose EQ before I choose IQ.

36:41David Hornik:If you could go back 25 years ago and you could give a younger David advice on what to avoid or what to do in order to accelerate his career, what piece of advice would you give him?

36:55David Weisburd:To me, it is all about the people, right? I have said no to some of the bigger companies in the world. And of course, I regret that because from an economic standpoint, that was a bad decision. But there's nothing I could have told myself in year one that would have gotten me to say yes to those companies that I think would have been good advice. The reason I didn't fund those companies was I had good reasons. I turned out to be that those things were not determinative, but it wouldn't have changed how I'd behave.

37:30David Hornik:This people relationship-based style of investing, is it something that took a while to really prove itself? Did you ever have doubts that it might be the wrong strategy?

37:40David Weisburd:I didn't care because it was the only way I was going to engage in the business. So I think every young venture investor, first early venture investor has doubts. If you don't, you're crazy. You know, I had a moment at five years into the venture business. I came home. We had four kids, put the kids to bed, sat down with my wife. And I said to her, you know, I came to a realization today that five years into the venture business, it's not obvious that I'm a good VC, but it is obvious that I'm no longer qualified to be an attorney. And she said, well, shouldn't you have thought about that? And I said, yeah, I probably should have thought about that.

38:22David Weisburd:And she said, well, that's not my problem. Go be a good VC. I was like, on it. But, you know, I think you're the venture business. When my partners hired me into the venture business, they said, David, this is an extremely individualistic business. We are a partnership. We'll help you make good decisions. But in the end, you're going to live and die by your capacity to be successful and by the decisions you make and the information you bring us and the things you do. And so are you comfortable with that? Can you get comfortable with that? And I was a cocky young guy. And I said to this one particular investor, look, you've been wildly successful.

39:00David Weisburd:And so and I don't mean any offense by this. But if I had to choose between betting on you or betting on me, I'd bet on me. And he laughed and was like, okay, whatever. And then he hired me. I have made a few mistakes where I have invested in people that I should have known to not invest in. And I did not show the discipline I should have to get to process to make sure I understood in whom I was investing. And that's the biggest thing I would change. And I change it today.

39:34David Hornik:Double click on that.

39:35David Weisburd:But I can tell you now that I will never fund entrepreneurs until I have had dinner with them. I won't. I can be as excited about your business. I can think you're a smartest human alive. I can think you're building great stuff. But until I have spent a couple or three hours with you just having some food with you and your co-founder or co-founders or whatever, and understand you as a human, I may make a mistake about who you actually are, and I have. And I don't intend to do that again. Now, I could still be duped. I could still like make, but by and large, if you spend enough time with people, they reveal who they are, and you can determine whether you want to spend time with them.

40:21David Hornik:I like to say somebody that pretends to be an honest person for 20 years, eventually they become an honest person. So taken to the extreme, you become who you pretend to be.

40:30David Weisburd:I mean, look, if that's the case, great. By all means, if you want to pretend to be a giver.

40:35David Hornik:Somebody that pretends to be a bad person for 20 years, at some point, you have to call them a bad person. On that note, David, it's been 14 years since I read that article about nice people. I do consider myself a nice person. It's an honor to have you on the podcast. And thanks so much for making time.

40:54David Weisburd:Really fun conversation. Thanks so much.