Annie Duke: evaluation

Transcript context

…So prior to talking to First Round, I have another client too who, they're amazing, Renegade Partners at Roseanne Wincek and Renata Quintini. They're incredible. Before finally hooking up with them, and they work at different stages, First Round is C, obviously. Renegade is more like A B, tiny bit of dabble in C. But before running into them, I talked to quite a few venture firms who are interested in talking to me post-Thinking in Bets having come out, so this would be 2018. And there was a theme, there was a theme across them all. The first one was, well, the kind of decision-making you're talking about we don't need to do because we just know a good founder when we see one. So that is a sentence that came out of many people's mouths. And as I just said to you, okay, I have no doubt, but don't you want [inaudible 00:46:52] make that explicit? There's all sorts of great things that come from making it explicit, not just in terms of the increase in decision quality in the moment, but it actually allows you to close feedback loops much better. So that was one thing that I found quite surprising. But the one that I really found very interesting was being told, "Well, what you're talking about doesn't apply because our feedback loops are a decade." And in poker, you got an answer right away. You won or lost the hand right away. So the way that you're thinking about decision-making doesn't really apply, until I met First Round and then Renegade where they actually heard what I had to say because I gave the same answer to everybody. So we'll just put aside that wouldn't you want to make that explicit. The first thing that I would say is, oh, poker is much noisier than you think because when I win a hand, I have no idea why. So I do actually have to wait a long time because I have to play many, many, many hands before I actually know, do I actually have an edge? Because I actually don't know very much. On one hand, for one thing, I almost never see my opponent's card, so I'm left in a dust of uncertainty. But separately from that, the main thing that I said was, how could you possibly think that the feedback loop is 10 years? And this is what I think really caught First Round's eye because when I was talking to Josh Kopelman about it, he said, "Well, what do you mean? We don't get an exit for 10 years." And I said, "Oh, I'm sorry, do you invest? And then you go to sleep like Rip Van Winkle? And then you wake up 10 years later and you go, 'Hey, how'd that go?' Or are there all sorts of things that happen in between?" The simplest thing, the simplest thing is does it fund at Series A? And the little pushback that I would get there is, but we're not investing for Series A. And I say, "Well, I know that", but have you ever had a company that exited for more than a billion dollars that did not fund at Series A? And the answer is no. And I'm like, okay. So it sounds like that's necessary. Might not be sufficient, but it's necessary. ny that exited for more than a billion dollars that did not fund at Series A? And the answer is no. And I'm like, okay. So it sounds like that's necessary. Might not be sufficient, but it's necessary. And it's certainly a signal that is actually more highly correlated with exiting out well than the investment at C. And then, oh, right, you have series B. And that's separate from all the other things that you can look at, like what you talked to Todd Jackson about. Is it achieving product market fit? We know that eventually for it to be successful, it's going to have to achieve product market fit, right? So you can look at what's happening with that, just general things about traction, what's happening with net new ARR, ability to retain top talent churn. I mean, there's so many different things that you can look at, all of which are things that you know must happen in order for the big thing to happen. Okay, so what that means is that this is the big, I'm going to make a bold statement here. There is no such thing as a long feedback loop. You can make a decision about how long the feedback loop is. That is your choice to live in a long feedback loop, and you can choose to shorten the feedback loop. And the way you choose to shorten the feedback loop is to say, what are the things that are necessary but not sufficient? That's one thing, for getting a good exit, or what are the things that are correlated with the outcome that I eventually desire? And what that means is that when you're at the decision point, right? Like in First Round's case, I'm going to invest in a company. What you have to understand is that you are making a prediction about how the world is going to unfold, how the future is going to unfold. And those things that you're predicting. You can track, and you can track them back to the decision and you can do it pretty darn fast, mind you. I mean, think about being in 2021. There were companies that were raising in A six months after seed. Today, it's a little more 16 months-ish. But even so, let's just say that that was the only thing that you decided to do. I'm going to forecast the probability that this company's going to fund at Series A. And then obviously, those companies start to fund or not fund at Series A and you're finding that out in 16 months. Here's my question for you, Lenny. Is 16 months shorter than 10 years? So it's probably why he said to ask me that question because I just really do. I mean, I have a very strong opinion about this. The feedback loop is as long as you choose it to be. And if I take that back to some of the things that I heard early on when I was talking to people, what I would say is that I think that there is a certain amount of psychological safety in allowing the feedback loop to stay long because really of two main factors. One is that, look, if I was early into Uber and now I'm a celebrity investor or something, I don't really want to know if I'm good or not. Do I? Right? I don't really want the world to know that. I mean, if I'm good, that's great. But it feels like they already believe that I'm good because I happen to be early into Uber. 'm good or not. Do I? Right? I don't really want the world to know that. I mean, if I'm good, that's great. But it feels like they already believe that I'm good because I happen to be early into Uber. So since people already think I'm good, I'm just losing to that decision, psychologically speaking. Not investment quality speaking, but psychologically speaking. Okay, so here's the problem though. Why was I early into Uber? Did I have an insight into a real pain point in a developing market, blah, blah, blah? Or did my buddy start Uber and I was like, "Sure, I'll give you some money?" Right? I mean, obviously, I'm talking about the extremes here, but we don't actually know what the decision quality was, right? All we know is that you had a good result and given that you had a good result and people think very highly of you, what are you going to gain? Right? So it's so nice to just let that feedback loop sit there and allow people to have the opinion of you. That is really nice, feels good, right? And not actually find out the answer because why would I want to? Unless you're really super focused on decision quality, then you would want to do that. So that's part of the psychological safety. And what that goes to is, the real core of it is that it's very, very difficult for human beings to deal with feeling wrong in the moment, even if it helps them in the long run. It's just hard. And the tighter the feedback loop, the more that you risk finding out you are wrong in the short run. Now that helps you to learn and improve your decision-making if you're focused on it and you're good at it, right? That's going to help you. And then in the long run, you're actually going to do better. But human beings are notoriously good at trading off the long run just to feel good in the short run. That's why we're all eating chocolate and cupcakes and stuff that we know is bad for us because it feels good. And so much of our decision-making is trying to advance this positive self-narrative and the idea that yeah, we're going to have a more positive narrative ourselves in five years if we do some stuff. Most of us are like, "No, I don't really want to make that trade. I'd rather just feel good now", and I can use the fact that we are living in power law, under the influence of power law. I can use that to just confirm a lot of things that I wish to believe that are true of me. And if you take that away from me and you take the uncertainty away from me, it's going to be really hard. And I will tell you that's what I love about both Renegade and First Round is that they're just like, I want to know. It would be such a horror for me to think that I was making good decisions when I actually wasn't. And that's what really matters to me and I think that it's just so special.…

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