Invest Like the Best with Patrick O'Shaughnessy
· 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.
· John Kim
If you know your bite size is going to be a certain amount, just plus or minus on a bell curve, and you know your conversion ratio is this, then all you do is say, okay, cancel Christmas, cancel Easter, cancel Valentine's. I'm just going on the road and I'm going to meet people. And by the way, who figured this out? Just the largest asset managers in the world. They're like, look, we're pushing our product through a conversion ratio. And our levers that we get to pull are how do we improve that conversion ratio? You can do it by having better performance. You can do it by having better differentiation. You can do it by reducing the complexity of your story. And now all of it ties together. Now appreciate you have to get past the hard reelect number, because that conversion ratio is artificially high. But once you get past your hard reelect number and you start getting the market and you're like, wow, one in ten people are saying yes, then it's really just a matter of, hey, how much do you want it? What do you want to get to? And so it's literally pipeline times conversion ratio times bite size. That literally is the only math that is important for a fundraise.
· Patrick O'Shaughnessy
[00:00:00] S0: I really like the simplicity of thinking through — you're raising money for a company or for a fund or whatever — starting with the law of differentiation, then thinking about these trade-offs, being deliberate about, intentional about what you're going to care about. And then it's the actual motion of going to do it, where conversion ratio is the thing. That allows us to come now to this idea of the drama triangle. So here's my value proposition, here's how I'm thinking about what I want. And here's the equation that's going to determine if I'm successful. Now I have to literally go sit and do meetings. And so I'd love you to describe this idea of the drama triangle and personas, because I think it's a really useful frame. If you're doing 100 meetings, it's a helpful thing to know.
· John Kim
[00:00:00] S1: There is a psychological framework called the Karpman Drama Triangle, and the idea is that we as people have a hard time accepting that we have agency in our lives. So we have a victim consciousness. And so when something bad happens, it happened to us. Life happens to us. When life happens to you, you're a victim. But when bad things happen, you're a victim responsible for what happened. And then when you're a victim, you're looking for a villain, and usually you're also looking for a hero. In a sales pitch, if you already know that this person is feeling victimized, or feels that something, in some way, is happening to them — if you can find out what that is, it is very easy then to craft a story that allows you to alleviate that pain. And if you can do that, then you become heroic. So for instance, somebody's complaining about the fees. You can, rather than saying, hate the game, not the player — which isn't so useful. You can talk about how you can mitigate fees if that will help them say yes. It's your choice. You can do that. And that allows them to say, okay, I've found a hero for my problem. I found a solution for my problem. That's really what they're looking for, a solution. But that's a heroic idea. If you can't be a solution, then you look at the villain and you have deep empathy for the villain that exists. And then you move into therapist mode. I've never met somebody who isn't better off by being empathetic to their problem. I've never met the person who has been shunned because they're overly empathetic to somebody's real problem that they've discovered. In fact, it's quite the opposite. You learn to trust them. And it is a very simple way to manage a meeting. Find out what the drama is, if there's drama in this person or these people. Do I have the ability to be a solution to that drama? If I cannot be a solution to that drama, can I empathize with that drama so they're listening to my solution as something that is useful to them? And in its own way, that's almost as much as you need to actually make sure that almost every sales call goes well, if you can find a wavelength to the person where they actually feel comfortable with you.