E436: Nnamdi Okike on Billionaires, Founder Psychology & the Venture Capital Bubble

How I Invest with David Weisburd

Nnamdi Okike, Co-Founder of 645 Ventures, explores the transition of venture capital from pure instinct to a data-driven science. He discuss

Key takeaways

• Venture investing is driven by the totality of experience rather than just raw instinct.
• Missionary founders, motivated by solving problems, tend to be more resilient than mercenary ones.

Main topics

• Venture Capital Science
• Founder Psychology

Notable quotes

It's more the totality of experiences that inform how somebody invests.

Conclusion

The episode provides a masterclass on identifying outlier entrepreneur

Transcript preview

Speaker 1 (0:00) Most venture capitalists believe that comes down to instincts, good investing. You disagree. Why? Speaker 2 (0:06) Our belief is that it's really not instinct. It's more the totality of experiences that inform how somebody invests. And so our belief, that's really science at the end of the day. There's information that's going into that. The reason that it's been hard to quantify that is one, there's a lot of data points that can be subjective. When you're thinking about a founder and a founder's ability, it's harder to say, This person is great or not great. You have to kind of go a level deeper. And so our belief is that there is real science behind it, but you need to really unpack the elements and understand the key drivers. And there's a lot of nuance too. It's not purely a ones and zeros game. Speaker 1 (0:42) And before founding 645 Ventures, which is five vintages, and you built out this data insights team at Insight. Tell me about that. Speaker 2 (0:51) Insight Partners was one of the pioneering firms to kind of build this data-driven. sourcing approach insight was started back in the mid 90s a long time ago now And Insight was one of the first firms to say, we can use a outbound sourcing, meaning going to the founders rather than waiting for a referral or inbound deal to come in. And we could use data to inform where we look. Now, Insight was looking at companies that were post-launch with some revenues, right? So my first job out of college, I kind of call it a glorified telemarketer job. It was basically calling up founders every day. I'd call up 15, 20 founders every day. And I'd say, I pick up the phone and... A founder might pick up and I'd say, hey, how many employees do you have and how much revenue and how fast are you growing? And kind of tell me about the product. And some founders would not answer. They'd hang up the phone and not want to talk. But some would say, hey, like, let me tell you about my business. And that those data points inform the quality of the company. We had metrics we would use around customer adoption, kind of how quickly were customers buying the product? What was the ACV, the average customer contract value? How fast was the revenue growing? And those data points really informed where we looked and it enabled us to find deals that nobody else was seeing, right? Most of Insight's best deals in their first decade were deals that were like far off the beaten path. I'll give you one example. So one of the first deals I worked on was a company coming out of Indiana called Exact Target. Exact Target was a founding team that had been working in traditional mail marketing, literally sending out mailers. And they found that email, which at the time was like a new medium for marketing, could be used to market more effectively. And so when we came upon ExactTarget, that company, I think, had probably five million of revenue. It was just growing to 10. It was bootstrapped, never raised venture, never even heard about, you know, kind of what venture was. But they had a really good business, right, in Indianapolis where nobody was looking. And so we ended up investing in that company. And that company ended up getting acquired for almost $2 billion by Salesforce and went public. Back when $2 Speaker 1 (2:53) billion Speaker 2 (2:54) was a lot of money. Now it's not as much, but at the time it was a lot of money. And that was an example of a company that nobody was looking at at the time. It was in a smaller city, way off the beaten path, hadn't raised money, it was bootstrapped. But it had these early metrics to kind of qualify the business as interesting, right? And so that was Insight's DNA and bread and butter for many years. And so when we started our firm, we thought, we started thinking a lot about, okay, how could you take that model and apply it to earlier stage companies? So companies that may not have 5 million revenues, maybe they had a couple hundred K revenues, but there were early signs that there was really something there. And we learned this over time as we built the firm, they had qualities as founders that were predictive of Speaker 1 (3:34) success, which is a more complicated. You take a quantitative approach to the very early stage. What exactly are you looking for? Speaker 2 (3:42) It's an interesting question. As our firm has grown and evolved, we've gotten a lot more precise around that. So when we started the firm, we were taking really a page from the Insight Playbook. So we were looking at things like, you know, this is back when mobile apps were big. We were looking at things like mobile app downloads and early adoption of those apps or rate of growth of web traffic, very traction driven. To Speaker 1 (4:07) your Speaker 2 (4:07) point. What we really learned was what was most important were founder qualities, team qualities, qualities that really got to the ability of a founding team to build and scale a company. And so as we grew the firm, we became much more focused on those elements. Things like. If it's a repeat founder, what business they built before and the result of that, or if it's a first time founder where they worked before and, you know, kind of the insights they developed from those previous experiences. Also, what was motivating the founders? And we have different archetypes that we use. We have something we call purity motivation, which basically describes the why that kind of animates. Mercenary versus Speaker 1 (4:47) missionary. Speaker 2 (4:48) Exactly. We probably tend to like the missionaries a bit more in terms of like having a. deep motivation to build something and change we found that tends to be a more lasting motivation especially in markets where things don't go right at the beginning or takes a long time we find that The purity motivation is something that kind of makes you stick with it. I think one of the biggest failure modes in tech is just like the founders give up. They don't care enough about the problem. What's interesting is like that applies across talent levels. So you see very talented founders who could do anything that sometimes have trouble doing one thing, either because they don't care about it enough. There's not a natural fit to the market. They're more optionistic. Maybe they're more missionary. I want to make a bunch of money versus like. I really care about solving this problem. So we find that the more missionary approach can create a longer founder market fit that's more lasting. I Speaker 1 (5:43) found this. I've now interviewed 14 billionaires and there's very few similarities between them. Billionaires a lot of times are extremely eccentric, have very different styles. But the one thing that you find in common with them is that oftentimes they have a very different view of the world. They're going in the opposite direction of the world. But perhaps even more shockingly is that they're running in the opposite direction. So they're investing billions of dollars in a contrarian thesis that nobody else believes. And what's underpinning that is oftentimes this missionary view. It's not purely economic because if it was purely economic, they wouldn't be the only ones doing it. Speaker 2 (6:19) It's a really fascinating kind of how you describe that. I think it takes some time to develop that muscle. And if you look at those billionaires when they were younger, they were doing that with smaller dollars, right? But the kind of the conviction was there. So maybe they're doing a bigger dollars now because they can afford to spend it. But at the end of the day, like you have to kind of build that muscle. And I find that it's partly just how somebody is wired. But I do think if you do that enough and you see the results of it, it can kind of make it more deep seated, right? So we love to find founders that have really strong convictions and beliefs. They're oftentimes non-consensus. They're not going after the market that's really hot. They're going after a market that a lot of VCs might not even like. They might think it's too small. They might think it's too hard to build a company in that. And they're willing to persist over time, even when people, they generally get no's. And these companies, oftentimes they don't look great at the beginning. They're not like the first round draft pick. I have this concept of central casting and non-central casting. Central casting is like, today it's like the, AI founder in Palo Alto who went to Stanford and studied some element of AI and now is building a... Ideally dropped out. Yes, didn't graduate, dropped out. But like was smart enough to get in, right? That's like a central casting founder or the repeat founder who's in the valley that everybody knows and wants to put money in their next company, grows what they're doing. The non-central casting founder is somebody like Scott Dorsey from ExactTarget many years ago, who's in a smaller city. Nobody knows who they are. He's building a company in a market that a lot of folks don't care about, but has... a real deep-seated conviction, usually that hopefully comes from experience and some insights that over time will just kind of compound. This episode is presented by Juniper Square, the operations partner for private markets. Speaker 1 (8:03) Do you know the story of how Scott Dorsey raised capital for ExactTarget? This just is a perfect example of going into non-sexy business. So in the beginning, ExactTarget was a software for laundromats. And he couldn't raise money from any venture capitals. Interesting. Being in the Midwest, also just being in this marketing tech. I don't even think it was a space at that point. No, it was great. So Speaker 2 (8:25) he Speaker 1 (8:25) went around his neighborhood, door to door, literally door to door sales, and raised. 5K, 10K from his entire neighborhood. And now when you go into his neighborhood in Indianapolis, you'll see that a lot of the homes now have pools. They all made a lot of money. Speaker 2 (8:41) $10 Speaker 1 (8:41) million a lot of money stayed in the neighborhood. Distillation of how contrarian and how unsexy of a space you have to be in order to have these power outlets. So much so that smart VCs that are paid to really find contrarian bets still can't see it. It has to literally be a place. That's Speaker 2 (8:56) a Speaker 1 (8:56) great point. So we Speaker 2 (8:57) love those kind of stories. It gets us excited to kind of partner with those founders and Speaker 1 (9:02) be a part of their journeys. One of the tricky things about the early stage we were talking about before we started recording is you're really underwriting the team's ability to go fast and iterate. It's not necessarily where they are today. It's about their speed of implementation, their speed of iteration. How do you quantify that? Speaker 2 (9:20) If we've gotten better at one thing over time in the 12 years we've been in business, it's getting a lot better at understanding what makes founders tick and understanding qualities that are very separate from what you see from the outside looking in, right? I'll describe how we think about founders. So we have analytics that we use to flag or surface founders. We call this candidates and we can do it for a bunch of different types of companies, but it will flag. founders for specific reasons. It could be, again, where they worked before, what companies they've worked at. It could be specific experiences they've had, skill sets, their title, things like that, right? That gives you a sense of what the founder... might be doing. But you have to actually sit down with the founding team and really go very deep to understand why they're doing it. And then to understand some of the more subjective qualities that you're describing, right? Like, how are they going to deal with adversity if something doesn't go well? Do they have insights into how their market's evolving? And to your point, will they have ability to pivot? Do they have this balance of maybe deep-seated conviction in a category, but a flexible enough mindset to understand that, hey, like my first business model might've been wrong, or maybe my conception of who the customer, the best customer is might've been off, right? Do they have an ability to intelligently shift and evolve? I think you can only really learn those things after you speak with a founder. But after we have a conversation with a founder, we're trying to quantify those elements, right? So we're not saying, what we're trying to do is say, look, like, those aren't purely subjective, right? You can get a better sense of somebody's tendencies through multiple conversations, right? After you've had four or five conversations with a founder, you have a reasonable sense of like what they might do and what they might not do, right? And those are personality traits. Those are kind of qualities that they develop over a long period of time. And that's, but that's really getting into like their life background, what makes them tick, things they've gone through in their just family, like their upbringing, all those elements. Those give you a better sense of like what somebody is going to do. You're not going to know for sure, but you're going to have a much better sense of what they're going to end up doing. And I think that oftentimes informs our first investment. We typically start with early stage. So we're doing seed series. I typically it's seed, right? But when we're following on after, say, two years, like now you have a whole body of information. You work with those founders, you've been in the trenches with them and you have a much better sense of what they're going to do. And you have a sense if you're right or not. So that's how we do it. And I do think it reduces the failure rate. The biggest thing is we've had a much lower rate of companies either just kind of giving up, not wanting to do it, not persisting. And so that approach can kind of improve that. But this is our game. Our business is all about the exceptional companies. So the biggest question is, like, does it improve the ability to find outliers? Speaker 1 (12:11) There's a view among many venture capitalists that somebody needs to have trauma in their childhood in order to be. a truly great entrepreneur do you subscribe to that i Speaker 2 (12:20) don't subscribe to that in the sense of you have to have had that there are examples of founders who are outlier founders who have had maybe really challenging lives that creates that drive and the willingness to like never give up but i wouldn't say like in my experience the best founders that i've worked with necessarily had that trait They definitely had developed extremely strong drive and a desire to build a business for the long term. But I think that can come from a lot of things. I think that can come from... you know, being underestimated in some sense that could be chip on the shoulder, right? And that could be, I mean, there's all kinds of things, right? I was an athlete in college and just everybody has their own biases. I tend to like folks that were competitive, right? Especially in sports where they had to suffer adversity. Say you're a swimmer or you're a boxer or name that sport. We're like our tennis player, right? We're like. You're kind of on the court and like you're winning or losing. It's all up to you. And you're oftentimes when you're losing, it's like, that's tough. Those experiences develop skills and kind of gives you that. So I wouldn't say it's childhood trauma, but I think it is through a set of life experiences. You develop certain traits that are going to kind of drive you forward in a compelling way. I mentioned on top of the podcast, Speaker 1 (13:37) you've been working on quantifying this black magic known as venture capital since 2002. Speaker 1 (13:46) How has that evolved and what variables today have proven to be effective that you never imagined from the very beginning? Speaker 2 (13:52) That's a great question. So at Six for Five, we're continually learning and we'd like to take learnings from a lot of different places. Speaker 2 (14:01) founders when we're sitting down with them, other investors. You know, there's a whole set of folks that inform our learnings. I would say one of the most impactful set of learnings came from a friend of mine, Mike Maples, who wrote a great book called Pattern Breakers. So when we first started the firm, I'd heard about Mike and Floodgate and what they built there and some of the great companies they are a part of, Twitter and Lyft. So I remember in the first year, I sent a cold email to Mike and I said, hey, like, I'd love to sit down with you and learn from. your experiences. He was like, sure, I'm Palo Alto. So I was like, okay, I'll just meet you. Right. So I booked a flight out there really just to meet him and had other meetings. It was really just to sit down with Mike. So I went to his office and this is back in 2014. And I sat down with him and I said, look, Mike, like, I just love to learn about how you think about investing. And What are some of your approaches to kind of defining? Because Mike's always, even at that time, he wrote a book later kind of to really define like his frameworks. He's always been framework driven. And so he talked a lot about this idea of exceptional founders and what makes them tick, what drives them, but also the external events happening that inform the success. And he codified that in Pattern Breakers where he talked about this idea of inflections. So an inflection is basically a major change event happening. It could be a technological change. It could be a regulatory change. It could be a behavioral change happening, societal change. That is really like the tailwind or the wave that drives the startup and gives it the momentum that it needs to. Independent of the founding team. Yes. So what you find is, and we've codified this at 645 in terms of how we think about inflections, but basically you need momentum. You can be an exceptional founding team. The analogy that Mike uses, which is a good one, is surfing. You can be the best surfer in the world, but if you're surfing at a beach with tiny waves, you're not going to surf very well, right? Like you need the waves, right? And what defines a great surfer is their ability to surf these amazing waves, right? The analogy is a really good one for founders. So you can be a really good founder, but you need these inflections, the change events that are going to drive customers to want to buy your product. If you don't have those, there's no reason why a customer would want to buy your product versus the incumbents, right? Like when you're a startup, you start off with very small amount of resources. You have no brand. You're basically battling uphill constantly, right? So the inflection is basically the change event. that drives the need from the customer, which enables you to be in the game. So we look for first inflections and we kind of, we use that concept from Mike. We define it, we codify that. We try to understand the depth of the inflection, how long it's going to take for that to manifest itself, how difficult it is to capitalize on it, whether a founder has insights into those inflections. So do they have a deeper understanding of those? So that