The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:10:33 · Nick Shalek
[00:10:33] S1: Yeah. Yeah, definitely. And I'll make sure to say this all with a lot of conviction. You know, we felt from the start of Ribbit, one way to be a great investor is to be thesis driven. It doesn't mean you have to have the answers. In fact, you shouldn't. But it means that you have thought hard about what they might be, you've looked at all the data you have available to you, developed a reasonable hypothesis about the future. So we might take an area like crypto or insurance and write a thesis and share with our friends and LPs and entrepreneurs and use the feedback and dialogue from all that to get us to a level of conviction that gives us an advantage. And that advantage is when a great founder walks in the door and wants to start something, it's easy to say yes, since we've already pre negotiated our enthusiasm for what the company might be or how the space might evolve. And to me, that's conviction. The danger in all this is you get too stuck on your ideas. Focusing intently on something doesn't give you a crystal ball about it. Things that work are often the things that fly in the face of experience. So for example, early days at Ribbit, we had a view that digital payments were commoditizing and would be a declining margin business. And it's the kind of thing an expert would say, and it sounded smart to me at the time, but it turns out to be very naive and reflect a very static view of the world. We just had too much certainty, you know, and at some point, we wised up and adjusted, but it costs us a lot of great returns. In the meantime, I had to generalize this, and I think you probably agree, like I'd say, in most cases in tech investing, it's great to have conviction about things to invest in or to do, but you got to be really wary of conviction around things not to invest in. Type two errors are a lot more painful than type one errors.
00:11:56 · Harry Stebbings
[00:11:56] S0: Can I ask, how do you prevent past successes or failures in investment decision making? So you could look at a certain vertical and it went incredibly well. You name many of your companies that have gone to multi billions in valuations. And then kind of anything else in that vein, you automatically view with this kind of rose tinted spectacle. And then everything is done badly. Like, oh, we're never gonna make money. As you said, that kind of payments declining, margin business, whatever. How do you retain that mental plasticity
00:12:20 · Nick Shalek
[00:12:20] S1: with the successes that one has? You just have to train your mind to constantly be paranoid. And for me, this is a lot of what trying to be a good investor about is maintaining the optimism to see how big something can be, and the skepticism to not believe sort of your own BS. And I think it comes from constantly examining what you believe, and then comparing it against the actual data, you know, does this belief hold up, you know, we're all subject to confirmation bias, and we want to find data points that suggest that we're right. And it's really easy with the sort of filter bubbles that exist today to go find lots of people who tell you that you're really right about something. But I think when you step back and you say, Well, what's the consumer actually doing? What's the customer want? Are they responding to this thing? And why are they doing that? And that was the thing with payments was, we might have this intellectual view of how the space was going to develop. But then when you really looked at what developers were doing, or merchants were doing, and then you started to see the incredibly smart people who were attracted to companies, like, you know, Stripe is, of course, the most iconic example, you know, at some point you just have to capitulate and realize you're fooling yourself.
00:13:19 · Harry Stebbings
[00:13:19] S0: You mentioned that kind of how big things could be. This is often what people tell me when I talk about my concern around pricing. They go, oh, but Harry, companies are now so much bigger than they ever were, and we ever thought they could be, so you can pay three x the entry price. I'm inherently a lot more skeptical and and worried. Are you as concerned as I am about the levels of pricing today, especially in fintech, actually?
00:13:39 · Nick Shalek
[00:13:39] S1: Harry, I'm always concerned about pricing. Always have been since the start of the firm. So you're asking the wrong person. But what upside multiple is attractive is a subjective question for everybody to answer for themselves. Like it's something you negotiate with yourself and your LPs based on what success looks like for you. Our simple answer has always been like, we don't think of ourselves in the venture or the growth business, but in the business of making asymmetric bets on the exceptional people are going to change finance. So whether we're investing at seed or in a public company, whether, you know, we tell ourselves that a price, you know, round is cheap or not, the conversation has to come back to the question you're asking, which is how big can this be? You know, for us, it's like, can this become one of the most important companies in the future of financial services? I think finance is big enough that if you get that question right, you can earn venture type returns, sometimes even at a later stage and sometimes even when it's incredibly hard to write down on paper what you need to believe for something to be that big. You know, the only way to to earn exceptional returns, this is sort of the framing that I would bring it back to, which is a little different than what you're asking, but I think it kind of cuts to the core is if you want to generate several multiples of whatever LPs trust you with, which is, you know, our goal, the only way to do that is to be contrarian, since otherwise returns get competed away. It's just sort of like the law of investing. So we always ask ourselves, like, do we have a non obvious or non consensus point of view? And it's not always clear, like, it's very obvious when you're truly non consensus in retrospect, like how it felt when we first invested in Bitcoin and Coinbase. And most people just had no idea what we're talking about. But then you look at something like crypto today with Coinbase as a public company, and is it non consensus? Like, I think in the broader scheme of things, it still is exceptionally early. You know, even when everyone seems to agree with your general points, like say, neo banks can be big, they might not agree on degree.
00:15:13 · Nick Shalek
And this, know, gets to the heart of what you're talking about, you know, like, one of the hardest things I found in tech investing is updating your priors, know, one point you can only see Stripe as a billion dollar company, and then you got comfortable with as a $10,000,000,000 company. But how do you get over that view and see it as a $100,000,000,000 company or a trillion dollar company? And this imagination and constant reframing is like, seems to be one of the key intellectual traits of the best investors. It certainly might be the case that people are tricking themselves and over applying this kind of thinking. I think that definitely happens because you see too many companies priced too richly. But you know, for us, it might be true that the best fintech companies are still in the phase of selling DVDs and books. And if you believe that, like what might happen next? Warren Buffett has this saying that time is the friend of the wonderful company more than valuation, which is very important. We all need to focus above all things on like what are really the wonderful companies. And I imagine that's true for you too.