Invest Like the Best with Patrick O'Shaughnessy
· 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.
· John Kim, Patrick O'Shaughnessy
I cannot tell you how obvious it is, and how no one believes this, that if you want to raise a fund or you want to raise an investment, your trade-off is how much money you want to raise, how fast you want to raise it, and what kind of terms you're going to give. [00:00:00] S0: And is it as simple as you hear this about quality, cost, and speed in building a house or something, like you get to pick two?
· John Kim
[00:00:00] S1: Yeah, you get to pick two. But the difference here though, Patrick, is that it gets back to money moves at the speed of trust. Size and terms are the trade-off from each other. Speed actually is trust. And that's the part where it drives me crazy when I try to explain to somebody, like, no no, this isn't just a discussion of mechanics. Okay, let's use scarcity. I take my size, I shrink it up so there's scarcity, a real scarcity. People will move faster. Let's say I don't have scarcity. Now geometrically, they're going to move slower. That's straightforward. So back to your example, the venture capital firm, I'm saying, look, I send it out and next week they bring it in. It's very scarce. Money moves fast. But let's say you don't have scarcity, and now money's going to move very, very slowly. It's going to move at the speed of trust. Then there's the terms — lowering the terms actually may make the person move a little faster, but they're going to move faster because they think that you won't have capacity for them now that you've actually come to this tipping point. Where, oh my God, if I don't move, I'm going to miss out and I was here early. That's how it moves faster. It doesn't move faster because I lowered the terms — why aren't they coming in faster? No, the state pension plan still has to go through its four months of diligence and this and that. And people miss that trade-off versus quality, speed, and cost. They actually truly do trade off from each other. You could have speed if you have scarcity. Very few people I know will actually legitimately use scarcity. Benchmark does — wonderful. Most people like to bullshit their way through scarcity. Oh, well, if we have room, and the investor 100% knows that they're lying and you immediately lose credibility. So I never let my candidates — the people I represent — play that game, because they see through it and you lose trust. And if you lose trust, you've lost the velocity of money. Then if you take a look at the law of pipeline, you need to run a campaign where you have a pipeline and you have to shove it through a conversion ratio and there's a bite size. The only thing you care about is your conversion ratio. Only thing. Why? Because if you know your conversion ratio is 20%, then you know it's a matter of effort.