Venture Investing: Lucky Dogs, Dirty Air and the Road to Victory Lane
With this weekend’s Indy 500 top of mind ask yourself: Is the CEO you’re investing in a Driver, a Crew Chief or a Mechanic?
Over the last 5 years Revel has invested in 37 companies. Along the way we’ve had some amazing successes and others where the jury is still out. There are myriad factors that go into why and in whom we invest. They range from market opportunity to sector focus to investment stage. Primarily, though, we’re betting on founders. At Revel, we ourselves are founders and believe wholeheartedly that the secret behind any success in investing begins (and frequently ends) with the foundation, the vision and the leadership of the CEO. Having considered — and interacted with — 1000s of CEOs over the last 8 years we’ve collected an array of data points that in many ways allow us to approach an investment with a little less art and a little more science. Our data points have also revealed a host of traits and characteristics that are common to successful CEOs - regardless of circumstance or industry. We now frequently group founders and CEOs according to three basic archetypes based on those traits and characteristics. Understanding which archetype you’re dealing with is critical to success when you’re investing in the post-revenue Seed to Series A stages, as Revel does, where the unknowns of any given investment are still considerable. Auto-racing actually provides a useful analogy for thinking about these archetypes and where any given CEO fits. It’s a good way to organize your thinking to help spot crucial traits and characteristics before you buy a car.
When using the racing analogy to consider an investment, the first step in your analysis is to separate the CEO from the company and the market situation they exist in. Before you sit down with a company you should always have a firm grasp of the race track and racing conditions (i.e., the industry, market size, macro environment, etc.) if you want to properly evaluate whether a racing game-plan — meaning, the CEO’s industry and directional thesis — holds any water. You also have to bring a basic understanding of the other drivers on the track (who’s the lucky dog in the field? who’s the backmarker?) to understand not only the competition within the space but also the opportunities and potential pitfalls that attend any investment. The primary question you must answer, though, is simple: Is the CEO a Driver, a Crew Chief or a Mechanic?
The Driver CEO almost always has — and can succinctly explain — a clear and compelling business vision, be it with product, market direction or GTM strategy. They’ll also demonstrate deep tribal knowledge and a sharp understanding of the track and racing conditions. (Where are the marbles on the course where a company might lose control? Is there any dirty air that’ll slow a company as it starts to accelerate?) They have an uncanny understanding of each significant car and driver they’re up against, as well. Driver CEO’s all tend to be experienced, intellectually confident, pliable but committed to a vision. They’re also quite rare.
Jeff Green, CEO of Trade Desk, is a perfect example of the kind of top flight Driver CEO I’m referencing. When I first met Jeff in 2010 he had a very clear vision as to where the digital ad industry was headed and how the race was going to play out. I distinctly remember him telling me how he wanted Trade Desk to be the Goldman Sachs of online advertising! He had a track record that demonstrated his tribal knowledge, a great technical co-founder in Dave Pickels and he could support his vision with data. He identified the issue (lack of tech) and the solution (real-time bidding) and could show how IO based ad networks would not survive the advent of real-time building. Ultimately, it was his uncanny vision and, importantly, his ability to demonstrate it that allowed investors to share in that vision and his ability to see beyond the engine and the race track to glimpse the market from 40,000 feet up and five years down the road. That clarity of vision and that confidence — without being arrogant — was incredibly compelling, not to mention his ability to handle turns while driving at 120 miles an hour!
CEOs like Jeff Green are hard to find. More often the sort of CEOs you encounter are the Crew Chiefs. They’re generally competent. They’ll oversee all the hands-on activities of building and tweaking the car that will race on the track. They know all about how the car works but also know how the car will handle on a specific course. What they lack is the intuition, the natural ability and the intimate understanding of a course that the Driver CEO has. In short, you wouldn’t feel confident with a Crew Chief behind the wheel. I often find CEO Crew Chiefs also lack a forward vision, in that, they ultimately can’t anticipate future events that will shape a market the same way, say, a Driver can anticipate bends in a course or another racer making a move to overtake him/her. They’re generally well spoken and possess a surface level understanding of circumstance, but they lack substance and a Driver’s sixth sense. Those qualities are critical when a company is deciding when to draft or when to splash & go. Sometimes Crew Chiefs are also constrained by the car they’ve designed or the track they’re on (small TAM). They often can be a safe bet but they’ll never see a checkered flag and drive an outstanding return.
The last category of CEOs are the Mechanics. Mechanics understand the car sometimes better than the Drivers and Crew Chiefs themselves. Therefore, they almost always have great cars! But they rarely understand the track and, while they may possess a tertiary understanding of their competition, they almost never have the same innate feel for the other drivers and cars that the CEO Driver has. This ends up being a critical blindspot. Mechanics also don’t understand sales, can’t explain a GTM strategy clearly and have a limited vision. An obvious sign that you are dealing with a mechanic? They confuse you! They lack perspective and can’t articulate a compelling plan. The return on Mechanics is almost always zero. Very rarely, you get lucky. Most times, however, you’re leaving the track frustrated.
When it comes to disciplined investing, having a strong conviction about who you are dealing with begins with organizing your thinking correctly so that you can spot the obvious traits and characteristics of a CEO that — in the long run — will drive huge returns. Don’t be fooled by Mechanics and Crew Chiefs. Find the Drivers! That is the core investment consideration if you want to be the one drinking milk on Victory Lane at the end of the day.
