The secret to startup investing
Moneyball is a fortnightly newsletter from Koble exploring the limitations of human decision-making and their implications for startup investing.
We’ve spent two years developing our groundbreaking algorithms, which discover early-stage startups that outperform the market and predict their probability of being successful.
🧠 Mental model #9 – On Secrets – The secret to startup investing
📖 Investor reading – Venture capital’s $300bn question – Private debt secondaries flooding the market – A Hacker’s Mind: how the elites exploit the system
💬 Some tweets – Money will be thrown at any AI startup – Browsing seed VC websites for inspiration – How dumb are the big investors?
After many early mornings and late nights, we recently published our whitepaper showcasing some of the most advanced thinking on quant approaches to early-stage startup investing.
Results presented in this paper for precision and recall metrics validate our claim that data science can create consistent, early-stage investment returns that outperform human investors.
As such, they have significant ramifications for the venture capital industry.
The secret to startup investing
Billionaire entrepreneur and investor Peter Thiel famously asks every person he interviews the same question:
“What important truth do very few people agree with you on?”
This is more than a filter for contrarian individuals; it’s an insight into his entire entrepreneurial and investment process. And it’s a powerful mental model for founders and investors.
Thiel’s obsession with secrets was inherited from René Girard, a social theorist whom he encountered whilst studying Philosophy at Stanford. Girard wrote many books, but his magnum opus is the enigmatically titled, “Things Hidden Since the Foundation of the World”.
The book does many things, exploring the function of violence, mimetic desire, and the mechanism of the scapegoat in the history of society and religion. Giard presents a highly original (and provocative) theory of culture. But really, he exposes the unrecognised power of secrets.
Why should founders and investors care about secrets? Because “things hidden” are precisely those things that will disrupt industries and forge the world’s biggest companies.
Thiel talks about 3 kinds of human goals:
Easy – Goals that can be satisfied with minimal effort – “Conventions”
Hard – Goals that can be satisfied with serious effort – “Secrets”
Impossible – Goals that cannot be satisfied, no matter how much effort you put – “Mysteries”
In business and life, Hard is where we want to be – the Goldilocks Zone between what is easy and what is impossible is where new life germinates, grows, and transcends its surroundings.
In Zero To One, Thiel writes:
“Every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.”
Anyone who’s been involved in a (great) startup has felt this. A sense that you are doing something transgressive, conspiratorial, perhaps even subversive.
The best entrepreneurs are contrarians who identify the exceptions to the world’s “rules” – scenarios where the mainstream has got something important wrong. Paul Graham alludes to this when he argues that entrepreneurs aren’t just looking for good ideas, they are looking for good ideas that most people are wrong about. On a practical level this means solving problems for users that nobody is talking about.
“If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.”
Airbnb’s value proposition – “live like a local” / “monetise your home” – seems obvious in hindsight. So does Uber’s. And Shopify’s. Most secrets do. But in foresight, what these companies recognised was revelatory.
And in a world riddled with secrets, there are many, many more revelations to come.
Implications for investors
Secrets are the currency of innovation. But where can we find them? Thiel gives us clear (albeit hard to action) guidance:
“The best place to look for secrets is where no one else is looking.”
It’s tempting to think that the key to uncovering secrets is deep domain expertise. But as many corporate innovation departments have discovered, being too close to industries, processes, and business models can be counterproductive when it comes to uncovering secrets. This effect applies to building stuff, and investing in stuff too.
Paul Graham refers to this drag on innovation as “the power of established ideas”, and it’s a real problem for people seeking to shape the future:
“The power of established ideas is so great that even the most independent-minded people only rarely overcome it.”
The secret to finding secrets lies in First Principles Thinking. A weird and interesting idea… ask a child what they think about your business question / investment thesis / burning decision. You might be surprised by the profundity and utility of their response.
Another strategy that’s under-explored in Venture Capital is cross-functional “teaming” – eclectic groups that combine expertise and insights from starkly different people. By colliding skillsets and worldviews in a controlled environment, we can look at old ways of doing things in a new light.
At Koble, we have achieved results by doing precisely this – combining data science, software engineering, and investment expertise to create a new, quantitative investing paradigm.
Secrets are immensely valuable. Now you know ours. It’s time to tell us yours.
Work with Koble
At Koble, we’ve spent two years developing our groundbreaking algorithms, which discover early-stage startups that outperform the market and predict their probability of being successful.
We’re working with forward-thinking angels, VCs, family offices, and hedge funds to re-engineer startup investing with AI. If that resonates, get in touch.
The Moneyball Project
The Moneyball Project is a series of short but spicy interviews with founders and investors exploring the future of startup investing.
This week, we speak with Joe Perkins at Landscape on productisation in VC and building a more efficient venture market for founders and VCs.
💰 Venture Capital’s $300bn question – Why isn’t the industry spending its enormous pile of cash?
🌊 Private debt secondaries flooding the market overwhelm limited capital – Private debt secondaries are on the rise as investors increasingly hunt for liquidity options.
🧠 A Hacker’s Mind: how the elites exploit the system – What does the computer world have to teach us about designing for resilience in other domains?
“When the whole world is globalized, you're going to be able to set fire to the whole thing with a single match.”
― Rene Girard
Regards from your [secretive] startup investing AI,
Koble is re-engineering startup investing with AI, applying quantitative strategies that have disrupted public markets to early-stage startup investing.