Ride your winners
Applying the fundamentals of early-stage investing to your career
👋Hello to the 783 Intentional Wisdom readers receiving today's newsletter and a special welcome to the 39 who've joined us in the last two weeks. Today, I’m talking about a concept that I’ve come to believe very deeply: that we need to double down on our strengths (even if it means ignoring our weaknesses) to do anything truly great. And I’m drawing inspiration from the world of venture capital to prove the point. Let’s see if this works. But before we start…
A special thank you to Intentional Wisdom reader and my friend, Bill Baer, for buying me a virtual coffee (actually 5 of them!) last week. I truly appreciate the support in helping me to produce the newsletter and offset the costs of the soon-to-be-launched Intentional Wisdom podcast (which I am so excited to share with you). If you'd like to support the newsletter and the podcast, just click the button below, which automatically triggers eternal gratitude from me to you. Okay, enough shameless solicitation. On with the newsletter.
💡 The big idea
If you know anything about the world of venture capital or angel investing, you've probably figured out that it's a risky business to be in. Contrary to our experience with traditional stock or bond markets where we're (typically) investing in well-established businesses, the world of early-stage investing is a different animal altogether. One needs to enter this world with eyes wide open, recognizing not only the possibility—but indeed the probability—of capital losses.
So why then is the VC industry growing so fast—doubling in the last decade alone? It's because the returns can (and have been) immense compared with more traditional investments. According to data from Cambridge Associates, annual VC returns over the last decade were 18.7% on average and a whopping 88.1% in the year to June 30, 2021. Of course, these outsized returns are by no means a reflection of the performance of the average company in a VC fund's portfolio. In fact, looking at the "average" returns across a portfolio of VC-funded companies could be the least helpful statistic in all of finance. Why? Because, of course, virtually all of the returns in early-stage investing come from the outliers.
Here's roughly how the math works. One can broadly assume that 25% of VC-funded businesses will fail. That money you invested? Sorry, that's gone now. And for the remaining 75% of the portfolio (forgive me but I'm using very broad brush strokes here), you can expect that the vast majority, let's say ~70 investments in a portfolio of 100 will either return back your original investment (that's a 0% return) or earn you some very marginal gains.
In other words, if you’re investing in an early-stage portfolio of private companies, you can expect that about 95 out of every 100 investments will either earn you very little or lose your money altogether. Not sounding very promising so far, right?
Well, this is where the outliers come in. Outliers are where all the money is made—and then some. How concentrated are the returns? Well, Cambridge Associates calculated that out of 4000 investment rounds tracked over more than a decade, the top 100 investments generated between 70 and 100 percent of profits. In other words, virtually all of the returns came from just 2.5% of the investments. Crazy, right?
The thing about outliers is that they’re not just “one and done.” VCs continue to bet on their winners. They invest more into them, often through multiple rounds of capital-raising, each (hopefully) valuing the company at a higher level than the last.
So the VC model goes like this:
Make lots of small bets
Let your losers go
Double down on your winners
This idea of backing your winners is not just a private market phenomenon either but is also the basis for 'momentum' investing in public markets—where capital allocators continue to place larger and larger bets on stocks that are winning.
Does this always work? Nope, it sure doesn't. But when it does, it can really work. You can end up with Apple or Google or Tesla and if you were right on those and had large enough positions over a long enough period of time, it truly doesn’t matter what happened in the rest of your portfolio.
Investing (like a VC) in yourself
So why am I going on and on about VC returns in a newsletter that claims to be focused on helping you with your career, your habits, your motivation, and even your health?
Because this concept of "riding our winners" applies not just in the world of investments but in other parts of our lives as well—including in the area that is the focus of this article today: our careers.
And when it comes to "riding winners" in our careers, the way I'm thinking about it is basically leaning into our strengths.
Rowing with the tide
We all have things we are naturally good at. Some of them are apparent to us; others are ironically easier for others around us to see. But if we can a) identify those strengths and then b) adapt our jobs/days/lives so that we get to spend more time utilizing these strengths, the benefits can be immense.
What happens when we are naturally good at something?
First, we tend to enjoy our work more when it comes naturally.
Second, we tend to get better at it more quickly than others. If the rule of thumb for the time to master a skill is 10,000 hours, perhaps that is cut in half in areas that come naturally.
And third, we've got a legitimate shot at becoming really, really good at it. One of the best.
So why don't we all just lean into our strengths and catapult ourselves to this utopian state I'm describing?
Because, of course, it's a lot easier said than done. It turns out that the way we've structured the traditional path from school to the workplace doesn't necessarily lead us to careers that are based on our natural strengths.
There are roadblocks and distractions along the way.
One roadblock is a lack of opportunity. An 18-year-old may have a real interest in journalism or finance or marketing but lack the resources to attain an education that would help them to develop skills in these areas. Fortunately, as I've discussed before in this newsletter, the internet is helping to address this by democratizing access to information. In fact, if this writer is correct, we're heading fast toward a world where the main limiting factor is no longer geography or economics, but one's own motivation and curiosity.
Another roadblock is money, or more specifically, the desire to make it. Many a generation of college students have been reminded by their parents that accounting or finance majors typically support themselves immediately upon graduation while art and philosophy majors are often destined for a future of couch surfing. The unfortunate consequence of this structure is that far too many young people give up far too early on pursuing areas of natural interest—areas that angel investor and modern-day philosopher, Naval Ravikant describes as more akin to “play.”
Don’t worry, parents. I’m not saying we shouldn’t strive for self-sufficiency.
We should. I believe that deeply.
What I’m saying is that we might be going about it the wrong way. We risk getting so caught up in managing our downside risk that we miss our upside potential.
Later on in life, another formidable roadblock we face is complacency. We get comfortable where we are—even if we’re not exactly doing something that is suited to our strengths.
The funny thing is that against all odds—against all of these roadblocks—many of us still ultimately find our way back to what we should have been doing from the start. If we should have been a mechanic, we find our way there by tinkering with cars on the weekends. If we should have been teachers, we end up in mentorship roles. And if we should have been journalists, we spend our nights and weekends writing newsletters (know anyone like that?).
Riding our winners
If we’re not exactly where we want to be today in our careers, what can we do about it? Perhaps we can take a page or two from the playbooks of venture capitalists. Specifically, we can try the following:
Stop worrying about our weaknesses — Guess what the VC manager does when an investment doesn’t work? They cut it. Gone. On to the next thing. You and I may not be able to completely circumvent our weaknesses, but do we really need to spend so much time focusing on them? Probably not.
I once joined a new investment firm and was so worried about my Microsoft Excel skills that I bought a huge book on the topic, signed up for a class, and started spending nights and weekends trying to do advanced financial modeling. I hated it and am still pretty bad at it. That’s kind of embarrassing for someone in finance. But I finally realized “I am never going to be great at this… but do I really need to be?” The answer was no. My time was better spent elsewhere.
Double-down on honing our best skills — When the VC manager finds a winner they invest more time, money, and resource into it. I don’t know why this is so complicated for us in our careers, but it is. Maybe it’s those roadblocks I mentioned earlier. If we enjoy something, and we’re good at it—to the point that others have noticed—that is a major hint. We need to lean into it. Go hard at it. Loving something and being good at it is the exception, not the rule. So when we find it, we have to pursue it. This is by far our best chance to do work that feels like play and to become true experts.
Adapt our jobs to our strengths — “Pivot” might be venture capitalists’ favorite word. They realize that in order for early-stage companies to succeed, they often need to change tack—maybe to concentrate on a new product or service that is really working. The same is true in our jobs. We typically perceive our roles as fixed but often they are more malleable than we recognize. With a bit of creativity and intention, we can actually change our jobs to fit our skills rather than the other way around.
Ultimately, this all comes down to career satisfaction and one of the best predictors of career satisfaction is whether or not we feel that we are able to use our natural skills on a regular basis.
Concentrating our efforts on those skills—and continuing to develop them—is the foundation for truly rewarding work.
But we are not going to achieve greatness or satisfaction by spending all of our time addressing our weaknesses. That’s a recipe for mediocrity.
We need to make some bets. You already know where your bets should be. You just have to be courageous enough to double down on them.
…
That’s it for this week. I appreciate you reading.
See you in two weeks!
— Greg
Image credit: Nicholas Cappello @ Unsplash.com
📚🎙 Content diet:
I’ve consumed (maybe too much?) great content in the last couple of weeks. Here are a few pieces that I’d like to pass along for your content diet.
🎙 James Altucher and Tom Rath — This is an oldy (2015) but a goody. It inspired and informed much of today’s article. Rath wrote Strengths Finder 2.0 and a ton of other great books on personal development and careers. And by the way, I love that podcasts have been around long enough that I can just search topics and find conversations from eight years ago that are still highly relevant today.
🎙 Tim Ferriss and Balaji Srinivasan — The last time these two got together, I called it my favorite podcast of the year. This one is equally mind-blowing especially if you’re interested in where the world is heading as it relates to geopolitics, technology, and many other subjects. But this one is 4.5 hours long so… get comfortable.
🎙 Jim O’Shaughnessy & Matt Clifford — I love O’Shaughnessy as an interviewer. So incredibly rich in his knowledge and experience. I don’t even really know how to describe this conversation—but it touches on the very long perspective of humanity, commerce and creativity and does so in a very entertaining and informative way.
And finally… I’ve been meaning to write something on why life is getting better in almost every way. But Romeen Sheth beat me to it in this epic Twitter thread. Highly recommend, especially if you’ve been watching too much cable news lately.
Have a great week.
— Greg