Picking games carefully
Choosing games has a huge impact on performance
Back when I was in high school, I swam and played water polo. To say I was bad at both sports, relative to the other players on my high school teams, might actually be an understatement.
On some level, that was almost certainly a function of the competitiveness of my high school — neither team was my top priority, and for good players in either sport, it very much was.
On another level, this might speak to my lack of skill at the time in picking the games I played.
Mike Annunziata, the General Partner at Also Capital and prolific Substacker, has a saying framing venture investing as a game that he seems to really like. He used it as the name of his fund’s master plan: “Have Fun, Play To Win”. One of the things I admire so much about Mike, and his plan really shows this, is his clarity about what winning means in the games he’s playing. This clearly drives his approach to playing, and winning, those games.
Mike is not the only person I’ve seen show interest in understanding the type of game he’s playing. Steve Kaplan, whose Entrepreneurial Finance & Private Equity course I took this fall, considers this in his OUTSIDE IMPACTS framework, which he discussed in an article in the Chicago Booth Review. My understanding of his perspective is that the P in the acronym, which stands for “Proprietary”, really addresses the nature of the game a startup is playing — and why they might be the ones to be big winners in it. He certainly used this element of the acronym to encourage us to think about why we (as investors in the cases he wrote and assigned) might be the right financiers to potentially back the opportunities.
My takeaway is that identifying the game and its characteristics is not just important, but potentially the most critical part of the job — for both founders and investors.
This drives founder-market fit, which essentially is the claim that a particular team is the ideal one to be building for their market.
Founder-market fit plays an important role in many early-stage investors’ decision-making processes, especially before there’s meaningful traction (because at the earliest stages, lots of startups are told to “do things that don’t scale”).
It also drives what I call “investor-market fit”. I want to be clear about my value proposition to founders, which I see as a function of my knowledge of the markets, passion for the industries, network, and professional experience.
By defining my personal investor-market fit, my intention is to focus my efforts on the spaces where I’m most likely to encounter and identify great startups early.
Playing games I can win
I want to write for a moment about my framing of engagements between VCs and founders as a game.
I do think this accurately describes how VCs should think about these interactions — there are defined players, there are rules, and there are constrained options in each turn.
But that doesn’t mean I don’t take it incredibly seriously. I am very sensitive to the fact that I may play multiple games of this type in the course of a week, and founders may play only one in their entire life.
I owe it to founders and to Limited Partners to treat entrepreneurs and the process with all the respect I can muster, and to play the game as well as I possibly can.
Furthermore, my goal isn’t to beat them at the game. I do not see this as the sort of game like Catan where somebody wins to the exclusion of everybody else. This is a cooperative game, where founders and investors succeed or fail together. I’m looking to anticipate and participate in an outcome where at the end of the game, everybody is a winner — the VC funds who invest, the founders, the employees they hire, and their customers as well.
Ultimately, my objective in engaging with founders is to build conviction that a win-win outcome for my fund and the founder is sufficiently likely to be a good investment — or to identify that such an outcome is so unlikely that it’d be better to play a game with a different founder.
Stephen Covey discusses this at length, and calls it the “Win/Win or No Deal” paradigm.
Picking games as a student
One of the things that I learned from my time as a student athlete in high school is that while losing is somewhat inevitable (the best VC funds have a “win” rate of less than 30%), I much prefer winning games to losing them.
I’ve worked on setting myself up to focus on playing games I believe I am more likely to win. A great example of this happened to me when I was an undergraduate student at Columbia.
My sophomore year, I scored below what I’d anticipated on a midterm, so I went to office hours and saw the professor about it. We discussed the concepts underlying the questions I’d answered incorrectly, and at the end of it, I asked him frankly whether or not I was smart enough study computer science at Columbia. While I don’t recall the precise verbiage of his answer, I remember that it was not just encouraging, but also insightful.
The substance of his response was that based on my grade on the midterm and the prior class I’d taken, I was about an average student in the major at the school. In his view, that meant I’d basically not be competitive for slots in computer science PhD programs, but should have no issue finding a good entry-level role as a software developer at some company.
At this point, I was already enamored with spaceflight, and wanted to go into that industry after graduating — so I wasn’t troubled by his response. I stuck with computer science and ultimately earned a BA with a major in the subject.
Then I went into the industry of moonshots.
Picking games as an investor
I’m really, truly happy to talk to anybody who’s started or looking to start a company, with a view towards helping them.
But as a result of my experiences working on moonshots, I do think there are some types of founders and startups I’m better-positioned to help than others.
Furthermore, since I’m not an angel investor, I am constrained in my ability to allocate capital by the thesis and process of any fund I’m affiliated with.
In particular, and in the specific context of what I do at Dorm Room Fund, I think I can be most helpful to founders who check at least two of the following boxes:
Student founders
Highly technical founders
Founders building in “deep tech”
Early-stage founders (at or before pre-seed)
Consequently, I focus the majority of my outbound sourcing for Dorm Room Fund on them.
Playing games I want to win
The next level of this is that there are certain games where I might be able to win, but I’m not sure that I want to.
My view is that I shouldn’t spend time on these games.
Games I don’t want to win
Some easy examples of this are the cannabis industry and gambling. Ultimately. I want to make the world a better place by backing awesome entrepreneurs, and am not at all convinced that investing in these fields — even if they drive great returns for Limited Partners — would accomplish this. Many, but not all, large funds have Limited Partners which impose similar restrictions, often in what’s called a “vice clause” in the Limited Partnership Agreement.
I’m also opposed to investing in fields that steal other peoples’ data in ways that might violate the rights of the people who created the data. To the extent that data is ownable (and the consensus is very much that it is), I’m opposed to investing in things that appropriate it without compensation to the owners. I only saw one investment like this in the past year, and argued strongly against it.
I also don’t want to invest in unregulated securities. My view is that one of the most critical roles of the Securities and Exchange Commission is to protect retail investors. I’m happy to invest in privately held securities that are illiquid and the public doesn’t have access to, but I really don’t feel good about the idea of what it means to win as an institutional investor in unregulated securities.
Games others don’t want to win
On the other hand, some venture capitalists eschew investing in any technology with dual-use or defense applications — either on their own initiative, or because their Limited Partners prohibit it in their funds’ vice clause. I personally don’t have a problem with this particular industry, and see my colleagues’ hesitance here as my potential opportunity.
This set of industries is really interesting to me, and I’m always excited to understand why certain investors avoid specific sectors more deeply. Sometimes I agree, and I always learn something new!
Wrapping up 2024
If I had to express what I’ve spent the past year doing, I’d say it’s been three things:
Refining my understanding of the subset of games in VC where I can win
Identifying the subset of games in VC where I both can win and also want to win
Building the skillset that will enable me to win the VC games that I find compelling after I graduate in June 2025