Bill Gurley sat down with Kara Swisher to talk tech and his experiences. This interview was great. Among other things, when Swisher plugged Audible as a sponsor she asked Gurley for a suggestion. He said:
“I’m going to give you two because we’ve been talking a lot internally about trying to identify great talent; one is called Mindset and one is Grit by Angela Duckworth and they’re both about trying to identify high performance talent.”
My notes on Grit was one of the most popular posts ever.
Also, we’re going to deviate from the list style post that this blog normally dons and do a bit more of a how-to post. It’ll be like Ramit Sethi’s business advice, Ben Horowitz’s advice on hard things, and what happened to Yahoo?. Ready?
The Google example that ‘any damn fool’ could not see.
Swisher asked Gurley about his biggest mistake and he tells her it was not investing in Google. Why didn’t he invest?
It wasn’t that the product was bad. “We were all using it in our office,” Gurley said, “it was a better product.”
It wasn’t that the business model was bad. “The business model really wasn’t a question either.”
Okay, you have a good product (from smart people) and a business model that works. What was the problem?
“I think it came down to the price at the time was remarkably high and the team was remarkably self-confident in a way that would cause you to question whether they could pull it off, but they did.”
Gurley immediately points out the error of his reasoning. Even with a high price it can still be a good deal.
“I go back, and the learning is that if you have remarkably asymmetric returns you have to ask yourself, ‘how high could up be and what could go right?’ because it’s not a 50/50 thing. If you thought there was a 20% chance you should still do it because the upside is so high.”
That’s the tricky part about an investment. Sometimes it makes sense to bet on a long shot or pay a lot because the rewards are so high.
Charlie Munger said that “any damn fool” can pick a winner. The real trick is picking the best bet. Michael Mauboussin said, “The way you make money isn’t picking a winner. The way you make money is picking mispriced odds. That idea really carries over to investing. I think as investors many of us blur those two things”
Google, though costly, had mispriced odds because the upside was so large. Gurley says the prices was “seemingly ridiculous but obviously very good.”
Okay, so the problem was blurring the value and the payoff. But there was something else in Gurley’s explanation that stuck out.
Gurley wasn’t the only suitor to dance with Google. He notes that his company didn’t really “pass” on the opportunity.
“We failed to pursue it, and it’s always important to state it that way. To say ‘pass’ makes it sound like I had a chance, I don’t know if we had a chance. They presented to us and we failed to pursue it and if we would have we’d had to compete with two of the best.”
Wording like this matters. It shifts the way we look at problems and gets us out of our mental ruts. Benjamin Graham did it for the stock market by renaming it, “bipolar Mr. Market.” Mellody Hobson reframed problems by pretending her company is public rather than private. Chris Dixon reframed startups as a maze. Dan Coyle reframed exercise repetitions as meditative. Louis C.K. thinks of skills as merit badges.
Imagine you have a gnarly mole. You go to the doctor and she says, “that doesn’t look good. We can slice it off and when we do 85% of patients have no further complications.”
Hmm, you think to yourself. That sounds okay, but you want a second opinion.
You go to another doctor and she says, “that doesn’t look good. We can slice it off and when we do 15% of patients have slight complications.”
People respond differently to these two options, even though the “backend” is the same. Daniel Kahneman wrote that people don’t take risks when there’s something to gain. Most people favor a sure $10 over a 20% chance to win $100. However, people are risk seeking to avoid losses. People roll the dice to keep from losing something.
Reframing situations changes the way we look at them and changes the kinds of solutions we can come up with.
Besides Gurley sharing problems, he also gives advice on how to solve problems. Let’s take a moment to appreciate how amazing this is. For sixty minutes of podcast time you get access to one of most articulate and thoughtful venture capitalist around and HE GIVES YOU ADVICE! How great is that?!
Here’s what he suggested.
A/ Find secrets where no one else is looking. “Most big startup breakouts are where people aren’t paying attention.” Virtual reality may not be your best bet says Gurley, because “Samsung, HTC, and Facebook are all at the table.”
But being different is difficult. It’s easier to an imitator. In my book, 28 Lessons from Start-ups that Failed I observed this stress. People want to feel like they’re doing ‘the right thing,’ and one of the signals for that what other people are doing.
Phil Knight found a secret in running shoes. Coca-Cola found a secret in the 20 oz glass bottle. Yvon Chouinard found a secret in outdoors clothing.
It may be lonely, but as Peter Thiel wrote, “The best place to look for secrets is where no one else is looking.”
One thing that may help is looking for patterns.
B/ Look for patterns. (Uber for X) “Having come out of Opentable being successful I was trying to come up with other industries where if you put a network on top of would absorb waste and make it more efficient and more usable. The thesis of cars had come up.”
Gurley invested in Uber. The investment has done well.
At the end of the interview he told Swisher that this network idea is being applied to neighborhoods too, but not health care. It’s a running joke that there’s an ‘Uber for X’ but finding patterns works.
Alex Blumberg started Gimlet Media because he saw patterns. Blumberg cut his teeth in public radio (a job where Terri Gross said you learn a lot because you have to do everything). Then Blumberg worked for This American Life. Then he cofounded the Planet Money podcast. Then he started Gimlet. When asked about these dominos he said:
“This American Life worked. Planet Money worked. After Planet Money worked it felt like you can take this kind of storytelling, this kind of long form journalism and you can apply it to a bunch of different places and now we know that this is fertile ground for this kind of storytelling….then Serial comes along and demolishes everything in its path and then it was very clear that it was the right instinct.”
That’s pattern recognition.
Tren Griffin said that Charlie Munger thinks we should teach this way in school.
“Business school should be taught from more of a historical case format, that you learn from pattern recognition and in order to learn from pattern recognition you have to see a lot of examples.”
Good pattern recognition is a superpower because it saves you time. Gurley didn’t start at square one to look for Uber. He had a head start because of his pattern recognition.
C/ Be patient and keep your balance. “One of the things that Silicon Valley does when it gets risk seeking, which it did in ‘99 and now is that they invest in businesses with lower and lower gross margins and that’s riskier.”
When Warren Buffett was asked what his favorite book was, he said The Science of Hitting by Ted Williams. The reason was because, “Ted Williams described that the most important thing for a hitter is to wait for the right pitch. That’s exactly the philosophy I have for investing.”
It’s patience. It’s being able to wait, wait, wait then GO!
Bill Belichick waits until the second half to try trick plays so the other team can’t adapt during the calm of halftime. Richard Feynman said “the only thing that solves safe cracking is patience.” Gary Vaynerchuk noted that “There’s not a single fucking person on earth that made it big in four minutes.” Steven Pressfield wrote, “The professional arms himself with patience.”
The two most powerful warriors are patience and time. —LEO TOLSTOY
If patience is so important, why aren’t more people doing it? Why are the valuations being driven up? Gurley notices this, pointing out to Swisher that “you have to play the game on the field.” If one of his investment’s competitors raises money, his company probably will need to too.
Seth Klarman addressed this situation when he talked about the kinds of investments he looks for. Part of Klarman’s advantage comes from his flexibility. “The more flexibility you have, the better your ability to maneuver in complicated, volatile, and fairly competitive markets.”
To some degree Gurley lacks this flexibility. His hand is forced by what other people do. He may be forced to “do something” rather than “just sit there.”
D/ Choose a business to provide, not a problem to solve. “We made a huge mistake choosing HR over sales. HR is a corporate purchase by someone who doesn’t have any authority. Sales is a credit card purchase by someone who has all the authority.”
Part of the success of a business is the conditions around it. It’s not enough to solve a problem, but to solve a problem people want to pay for.
One of the startups profiled in my book was Dinnr, a food delivery service in Europe. The founder thought that because a service worked in Britain he could transplant it elsewhere:
“Apart from lacking a sophisticated online supermarket system like the UK, Scandinavia has a few cultural traits that make people much more susceptible to Dinnr-like services: As I’ve been told (after launch, unfortunately) by expats living in Sweden, the Swedes are generally much more attached to their routines than Brits. You can easily ask a Londoner at work if they’ll have a drink with the team after work. Ask a Scandi and chances are you’ll have to schedule it a few weeks in advance. They also have a much stronger “eat at home with your family” culture.”
This founder had found a problem to solve, easy and immediate access to good food but found the wrong environment for it. In the same way that Gurley chose the wrong department (HR instead of Sales), this founder chose the wrong country (Sweden over Britain).
Sam Shank said that all businesses need to save someone time or money, “and ideally both.” Gurley adds that it’s easier if you’re saving the time or money of someone who can say yes.
E/ Align the incentives. “It was really helpful for me at Benchmark that there’s an equal partnership. There’s this team orientation where if you feel like you’re struggling people are getting beside you and have a stake in you doing well.”
When Coca-Cola expanded beyond America they tried to employee locals. “As one Coke executive pointed out, ‘in Germany it is a German business; in France, it is a French business; in Italy, it is an Italian business.’ Local industries to produce glass, carton, crown, and bottling equipment started in each new country.”
Seth Klarman’s company is structured like Benchmark. Charles Ponzi paid fat commissions for his notes. Milton Hershey was good to the dairy farmers and they were good to him.
Phil Knight actually had to borrow money from one of his suppliers when he couldn’t make payroll at one of his early factories. The supplier didn’t want to do it, but when he realized that if Knight’s company left he would be in bigger trouble, he floated the loan.
F/ Get lucky. Gurley explains that he got lucky when he started. “I got very lucky that CS First Boston gave me an opportunity. Then two weeks after I joined, Charlie Wolf announced that he wanted to resign and back off and so I went into my tiny little apartment and wrote a 20 page assessment of the PC industry. I went in and begged for Charlie’s job.”
Other people left too, and Gurley said, “it couldn’t have been more fortunate because I moved through the ranks very quickly.”
Luck has some role in any outcome. What I liked about Gurley’s response was that he noted the role of luck, but also what he did about it. He went home and wrote a report that he could show his boss and take advantage of the lucky situation.
This makes sense given the books Gurley recommends. Part of theoretical backbone to both Grit and Mindset is the idea of personal growth. It’s a belief that your actions can lead to some effect. Gurley got lucky, but he also acted.
Thanks for reading, I’m @mikedariano on Twitter.
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