good artists copy, great artists steal

Q2.23 LP update excerpt

“Ultimately, it comes down to taste. It comes down to trying to expose yourself to the best things that humans have done and then try to bring those things into what you're doing. Picasso had a saying: good artists copy, great artists steal. And we have always been shameless about stealing great ideas, and I think part of what made the Macintosh great was that the people working on it were musicians and poets and artists and zoologists and historians who also happened to be the best computer scientists in the world.”
— Steve Jobs

Below is an excerpt from my quarterly LP update — reflecting on Moth Fund, VC, and me; circa Q2 2023:

I’ve been enamored with the idea of “taste” in early-stage investing this past quarter: What is it? How is it built? Why is it so rare? Is it becoming more valuable? The answers I’ve heard back to these questions from independent investors I admire have been all over the place — the only commonality being how little overlap there is in what each personally believes taste to be. This got me thinking… is there actually something to that? 

True taste in early-stage investing (the kind that proves itself over decades of investment decisions) is embodied by people who are seekers, not followers. They’re the ones reading research papers and then hunting down the right people to make an idea for commercialization real. They’re the ones finding founders before they’ve even considered starting a company. They’re usually the ones you’ve never heard of but who are adored behind closed doors. They’re often insatiably curious singular personalities, are comfortable with the reputational risk of being first check in, and frequently operate as lone wolves. In contrast with “thesis-driven” investors, making taste-driven investment decisions is far less defensible but much more adaptable to market changes. Taste-driven investors have independent conviction and are as rare as unicorn companies.

But has this always been true? Survivorship bias aside, the investors I most admire for their taste all share the aforementioned personality archetype — while also being the people who previously generated huge returns for firms such as Sequoia (Michael Moritz), Benchmark (Bill Gurley), and USV (Fred Wilson). In the 80s and 90s when venture was still in its early days, taste was a prerequisite to being a well-respected VC (back when respect was the main quality needed for good deal flow).

So what changed? If we look around at the landscape of the venture industry today, this strategy seems to no longer be the norm. The more I’ve studied the history of venture capital, the less convinced I am that the role of venture capital allocator in its current form is here to stay. As small firms became more specialized and “thesis-driven” in order to defend their decisions and market their offering, their returns become constrained to the maximal outcome of that thesis — a single bet about the future that they very much hope pays off. Yet the VC model itself isn’t what changed — Tom Nicholas in VC: An American History:

“If one asks how exactly VCs do what they do, it is not clear that the answer today is much different from half a century ago. The dominant form of organization is still the limited partnership with an ephemeral fund life, even though this places constraints on the time scale of investment returns. Although there have been some organizational structure and strategy innovation, these have been paradoxically rare in an industry that finances radical change.”

So if not for the structure, what caused venture’s shift towards such risk-averse investing? As fund sizes grew dramatically and a tech boom spurred a startup surge, the industry's emphasis shifted from discerning selection towards a more diversified 'spray and pray' approach, diluting the value of traditional tasteful investing. When the game of being a VC became one of simply generating high-volume deal flow, mediocrity proliferated and distaste for venture as a whole grew — and rightfully so. Historically, venture was perhaps the closest we’ve ever gotten to a modern meritocracy (only the best funding the best). But the commodification of venture capital has made the industry far more egalitarian in recent years, introducing an influx of risk-averse investors who harbor insecurities about their own skill. As Sebastian Mallaby puts it, “Skeptical observers have sometimes asked whether venture capitalists create innovation or whether they merely show up for it.” When merely showing up can reap similar returns to deploying tastefully, we get the cacophonous state of venture that occurred in 2020-2021.

However, I’d argue that this is all changing. Due in part to the general market slowdown and SaaS reaching oversaturation in many sectors, there are far less home runs to be had by taking a grab-bag approach. While VC is in many ways a random game of chance, where and when those random chances happen is what ultimately dictates your performance. This is when taste comes into play. Picking well is often the product of an investor’s competency, specialized knowledge, and skill — but perhaps not for the seemingly obvious reason of skill leading to better evaluation of the validity of company-shaped ideas. Instead, skill is often more useful for the same reason being respected is useful — it makes people think of you for high-quality things (investors with backgrounds in AI are a good example of this today). Sebastian Mallaby in The Power Law:

“This book has pushed back against the randomness thesis, emphasizing instead the skill in venture capital. It has done so for four reasons. First, the existence of path dependency does not actually prove that skill is absent. Venture capitalists need skill to enter the game: as the authors of the NBER paper say, path dependency can only influence which among the many skilled players gets to be the winner. Nor is it clear that path dependency explains why some skilled operators beat other ones”

Bickering about whether taste can or can’t be taught is dumb: of course it can, people just don’t like hearing that like any other skill, it takes a ton of work. The more interesting question is identifying what characteristics lead a person to put in the work required to have prolific taste. From what I’ve seen, it’s whatever makes them compulsively refine their craft: limitless curiosity about a subject, a relentless desire to solve a specific problem, or a meticulous mindset that leads them to pursue perfection in all areas of life. For these motivations to be strong enough to yield “taste” is a .1% phenomenon — requiring a healthy dose of the work ethic best exemplified by Michael Moritz’s reflection on what made Sequoia successful: "We've always been afraid of going out of business." In my book, “taste” is just production, refinement, and analysis — with independent conviction as its byproduct. As Rick Rubin advises: start by “paying attention to what you notice that no one else sees.” 

Which is a good reflection prompt for both investors and founders. What an investor sees that others do not could very well become a portfolio of hits (e.g. Vinod Khosla investing early in both Instacart and DoorDash). How a founder sees the world differently from others is exactly what I want to understand in order to evaluate them. For someone to be successful in starting a company and then turning it into a multigenerational business, they need to have good taste in at least these two things: ideas to pursue and people to recruit. These are tastes I’m familiar with — what I look for in startups has mostly been the product of my being around great founders early in my career (Figma and Notion). Seeing the strategic ways that these founders thought and the unique aspects of their personalities that suited the problem at hand trained my internal LLM to pattern-match what excellent leadership, product, and company-building can look like. David Brooks describes this as adhering to the “theory of maximal taste:”

“This theory is based on the idea that exposure to genius has the power to expand your consciousness. If you spend a lot of time with genius, your mind will end up bigger and broader than if you spend your time only with run-of-the-mill stuff. The theory of maximum taste says that each person's mind is defined by its upper limit-the best that it habitually consumes and is capable of consuming.”

Since starting my fund and meeting hundreds more founders, further patterns have emerged: I prefer T-shaped people that possess a core competency paired with a generalist skillset they often gained as the result of an unconventional background.

I like these people because 1) competency and technical proficiency mean a person can stick to something for a long period of time while giving them a more enduring source of confidence, 2) T-shaped founders often bring a more creative approach than those with a single-track background, and 3) I’m often able to instinctually spot and relate to these kinds of people because I am one, to a certain extent. There are not a lot of investors that bring an art background to building a firm — which there are good reasons for! Similarly, there are plenty of reasons for why there aren’t a lot of founders with PhD’s in linguistics (one of the investments I was most excited to make this past quarter). But the few people with weird backgrounds who are savvy and diligent enough to weasel their way into more commercially ambitious spaces are exactly the kind of unique and tenacious personalities I want to back.

Once they’ve cleared my core competency bar, I then shift my focus to figuring out whether they’re the right person to solve their given problem. From learning how prolific incubation machines like Sutter Hill and Atomic pick CEOs to lead their companies, I taught myself to think about founders like this: people fall on a spectrum that ranges from social cohesion to truth-seeking. Those that favor social cohesion are often better suited to infiltrate existing industries (skillsets: relationship-building and worshiping the customer, Jeff Bezos being the best example) while those that favor truth care less about what people think and are better suited to category creation (skillsets: materializing something entirely new, Travis Kalanick of Uber is a good example). If I see founder/market fit, I then shift to evaluating their commercial aptitude and how they frame successfully capturing the value they create. They should have a strong desire to actualize their vision into something more than a small business or research project. I use Moritz’s description of Bezos as my litmus test — I want to see signs of “ferocious competitiveness.”

Evaluating founders in this way is how I practice developing (hopefully) good investing taste. Tactically, this is done by asking a mix of carefully-planned and ad hoc questions, taking meticulous notes on the higher-level people patterns that are emerging (which I synthesize in these quarterly updates), and observing myself develop instincts (or as Steve Jobs liked to call it, “experiential wisdom”) that lend themselves to a specific style of decision-making. Don Valentine says that venture capital “is all about figuring out which questions are the right questions to ask. And since we don’t have a clue what the right answer is, we’re very interested in the process by which the entrepreneur gets to the conclusion.” What I’m really asking is: Do I feel like I “get” you and your worldview enough to say why you chose this idea out of countless other options? Is the way you think the right fit to tackle this problem and industry? Can I predict the way you’d figure things out when everything inevitably hits the fan? 

In many ways, asking really good questions is a cornerstone of how I’ve resolved to set Moth Fund apart. Surprisingly, thoughtfulness is still very much not a commodity. At the core of both my investing and my writing is a strong desire to understand human beings — especially those that are excellent at what they do. Investing often feels like applied anthropological research on exceptionalism; the job rewards me for fine-tuning my internal LLM to quickly identify the people with the best taste in ideas. Writing helps me pick apart and reevaluate the patterns that are emerging. John Doerr: “We do not learn from experience… we learn from reflecting on experience.”

But how does that scale? The answer: it doesn’t. This is the beauty of small funds: you don’t necessarily have to “market” money if your extended network continues to contain enough investable opportunities to deploy the full fund. Raising a fund is an informative exercise in putting a precise number on exactly how much your network is worth. Anything you raise beyond that is a product of your fame among well-connected friends (will they help you find more LPs outside of your existing network?), charisma, and (crucially) your ability to convince people that your taste in people/ideas will reap huge financial returns.

The best “marketing” for an individual investor deploying a small fund is being respected enough for your taste that you are frequently thought of and mentioned in glowing terms, no matter what those terms may be. As Moritz put it: “VC is the business of staying relevant.” Yet the proliferation of funds and companies in the past decade has made it increasingly harder to guarantee anything more than private equity-level returns (2-3x in comparison to VC’s 100x return profile), muddying the waters on what “value” venture even provides (to both LPs and founders) past the earliest stages. The one area investors haven’t yet been commoditized is at a startup’s inception — as YC proves, the best early-stage VCs are humans first and foremost: serving founders as staunch supporters, mentors, dot-connectors, and friends to lean on and learn from.

All of which are personal, small-scale acts that you probably won’t hear tweeted about. While I’m not convinced that shouting into the void is particularly effective at helping you refine your taste, I do think that being stubborn within small subcultures can create a magnetic resonant force that helps you find people with similar values, ideas, and perspectives. For me, this takes the form of producing artifacts that exemplify my taste (writing, curating, interviewing) and act as bat signals for what I believe in — just like Moritz did with his op-eds and books, Gurley did by being an outspoken voice on startup financing, and Wilson did with his now iconic blog. 

My understanding of taste: cycling through production, refinement, and analysis is the only process by which you get independent conviction. If production is sharing my taste and refinement is taking notes on what I’m learning, what does analysis look like? Brooks has ideas — noting that good discernment requires ingesting a diet high in excellence. As Bill Gurley commended of the prolific restauranteur Danny Meyer: “He made a list of 12 icons in the restaurant industry. These were new people that were doing innovative things around opening new high-end restaurants… He started studying them. He created a notebook for each and every one of them, what makes them special, what do they do that’s unique? He started looking at their recipes.” The same strategy applies to any industry: attempting to understand what the greats of venture (like Gurley) looked for and why they were successful is an essential ingredient to building investing taste. 

Stealing a page from the books of the investors I most admire, I’ll plant a stake in the ground: I don’t think taste-driven early-stage investing is some floaty thing. It’s a skill to understand, evaluate, and have taste in human beings — and improving upon that skill is much easier if you’re actually obsessed with the craft you’re refining. As an investor, your decisions are all that you’re left with at the end of the day. Whether you choose to make defensible bets or pick things you inexplicably believe in is up to you. Like many things, your capacity for risk and tolerance for being misunderstood will set the upper limit of your potential for reward.

---

Thank you to Finn Murphy, Aashay Sanghvi, Terrence Rohan, Luke Byrne, Grace Isford, Jeremy Giffon, Josh Schlisserman, Kevin Chen, Michael Grinich, Ada Yeo, Shrey Jain, Tom McCarthy, and Louisa Morris for many an insightful chat and draft read.