Invest Like the Best with Patrick O'Shaughnessy
· John Kim, Patrick O'Shaughnessy
There's a consensus that they're the winners of the class, and General Catalyst created a consensus. And so that was the whole goal, but you had to do it fund by fund by fund, but it was very intentional. And by the way — here's the thing — you have to have the courage then to lose the people who actually were the people who invest with you because you're a contrarian. In other words, you had to have the courage to get past the innovator's dilemma. And so if there's a set of folks, high net worth family offices, endowments, or whatever it is, or small fund of funds that say, hey, you're now too big for me, — you're going to lose them. And you have to have the courage to do that. The only way you're not going to succeed is if you actually want to have your cake and eat it too. Now, there is a truth to if your performance is so dynamic, you're so differentiated — then you'll be able to run the table. And there are firms who do that. You can't get into the fund. You can't because their performance, their track record is so absurdly strong relative to the industry that you trust that they're going to actually develop these returns again. [00:00:00] S0: I remember once one of the partners at Benchmark, I asked them, how do you fundraise? And they said, well, we send an email on a Tuesday night and the fund is closed on Wednesday morning.
· Patrick O'Shaughnessy, John Kim
[00:00:00] S0: I remember once one of the partners at Benchmark, I asked them, how do you fundraise? And they said, well, we send an email on a Tuesday night and the fund is closed on Wednesday morning. [00:00:00] S1: Right, right, right. So in that case, let's talk about trust. The consistency — they consistently perform exceptionally well. Consensus is they're actually one of the best funds in the world, and there's scarcity. You don't have to have experts like a consultant say, well, that's the best one. Look, I already know. Consensus is there. They don't have to do anything for you. There's no reciprocity but returns. But I'd say, but returns, again, that isn't everybody's desire. It's most people's desire because it makes them look good, but it's really about the consensus and the scarcity that allows them to have the advantage and the privilege of keeping their funds small and keeping their fundraising energy or calories very, very low. [00:00:00] S0: You mentioned the word differentiation before. Can you explain your law of differentiation?
· John Kim
[00:00:00] S1: If anybody wants to learn three laws of physics that are the most important in fundraising — law of differentiation, law of trade-offs, and law of pipeline. Let's talk about law of differentiation. This is the law. This is your track record, plus your differentiation, and you divide all that by the complexity of your story. So, track record — that isn't just your returns, but is how do you behave? So if you're an elected official, your track record is your voting record, right? Or it's the way you show up in the media. It's your consistency. Differentiation could be anything. It can be, I can take contrarian bets. It can be I only do one or two things, but when I do them, I'm highly operationally intensive. It can be I access this part of the market that no one else does. It could be my GP commit is abnormally large. So let's take those two positive features, when you are trying to build a portfolio, because almost everybody at the institutional — the big money, not the small money — the big money has a portfolio. So you have a portfolio of diversified assets and you try to have those assets not replicate what each other's doing because if they're autocorrelated, then you didn't do a great job. So you kind of want people who are differentiated. And you're trying to add something that is additive to your portfolio somehow, some way. Then complications. Complications are usually the enemy of trust. The more I have to explain — like when my daughter comes back late at night and I said, look, you're supposed to be back at midnight, but gosh, it's 2:00 AM, explain yourself. And there's this long story of this and that. I'm like, I don't trust this. My daughter's pretty smart. She knows, oh, Dad, you know what? I just blew past it. I was having fun.
· Patrick O'Shaughnessy, John Kim
[00:00:00] S0: Sorry. [00:00:00] S1: Sorry. Well, I trust her. Complications gut you. They gut you for two reasons. First, they gut you because it ruins or it just dilutes trust. But the second is really much more commercial, which is I have seen with my own eyes many times where people trust and want to do something. But they can't explain it to somebody else that is making the decision. You better give them that phrase that they can repeat to somebody else because that's how somebody else will then trust what they're saying. And that is the trick. And one of the most famous examples of this is of course the O.J. Simpson trial. If the glove doesn't fit, you must acquit. One of the most famous lines in the history of the world. You really think that if he didn't have that, these folks would've actually been okay walking outta the courtroom finding him not guilty or being hung as a jury and having to explain to the media why they did that? No way. But he was smart enough to say, okay guys, you're going to have to defend yourself to everybody. It's very complicated. Why? They're not going to want to hear about your civic duty to adjudicate the law. You say, look, I had no choice. The glove didn't fit. I had to acquit. Changed my life when I saw that, by the way. I looked at it, wow. That's what persuasion looks like. So if you have complications, make sure you give them that phrase that allows you to cut through those complications, even if you have complications.
· Patrick O'Shaughnessy
[00:00:00] S0: And so when you were doing a fundraise, would you literally go through these three variables and try to improve each one systematically?
· John Kim
[00:00:00] S1: Very much so. Very, very much. Religiously. That track record plus differentiation divided by complexity of thought. You're constantly trying to make the track record look better in their eyes. You're constantly trying to make your differentiation look better, and you're constantly trying to reduce your complications. The differentiation piece is — back to the question you asked me about General Catalyst — what do people do when they get to that level? There are two kinds of people who sustain. There are those who find their why. Why are we this big? Why do we exist? And there are those who say, now I've got the money, I'm now big, and I'm going to continue to push forward. Those who do that actually get small again. Those who find their why — why do we need to be this big? Why is this size helping us? And why is this helping you? And the why can't be a branding, because every why has a cost. Every differentiation has a cost. Great differentiation requires great sacrifice. And if you're willing to say, I am never going to invest in weapons, then you're going to miss out on a generational amount of investing that's happening right now in the venture community.. Take a look — you can go back to 2019, and the vast majority of venture capital firms said, we will never invest in weapons. It's the hottest area right now. The same people who said they would never invest in weapons are actually now leading the weapons charge. It's unbelievable. Great differentiation requires great sacrifice. They will never be differentiated for what they say. They've lost their consistency. So in the long run, if anybody remembers — they'll remember — hey, you said you're never going to do this, now you are doing it. You lost your why. You lost why you're doing it, because it was just branding. As a great advisor, as a fundraiser, you're always trying to say, hey, you got to have the courage to stay disciplined in your differentiation, because if you don't, there's not differentiation and people will see through it ultimately. Then the other two laws, really quickly, is the law of trade-offs: size, speed, and terms.