Time ~= Money

A stream of consciousness exploration of what makes a company successful, how founders/investors can be two sides of the same coin and how intangible force multipliers can drive outsized returns.

I’m sure plenty has been written on this in the past but here are some unfiltered thoughts. I’ve been asked a few times to give a finance person’s perspective on business by my friends in tech. Having spent a bit of time on both sides of the table (investor/operator) I have a few thoughts that are sort of related, maybe not coherent for a banger essay, but here goes:

1. Any successful investment is by definition a refutation of the efficient market hypothesis for which you have experimental evidence.

2. Every decision at a company, at any stage, is one of resource allocation (and since a lot of it is how you spend time and we all know time ~= money, it’s essentially capital allocation too.) Thus, investing and operating, while obviously not exactly similar, *can* be viewed as two sides of the same coin. And someone successful in one domain *can* be successful in the other, though it requires a successful mapping of one side to the other and it’s by no means a guarantee (i.e. just because you’re a successful investor doesn’t mean you can step in and run a company, but a perspective from one side of the table can be an advantage for someone who wants to do both. There are many examples of people who have been good at both, would love to hear their thoughts.) The operator is making investment decisions with the company’s capital and the investor needs to understand how those drive value (ideally in a unique, differentiated way that will drive above market returns over a long time horizon.)

3. Since decision making at any stage company is one of capital and resource allocation (time ~= money) the intangibles such as - the people you hire and the velocity at which you iterate, are the biggest force multipliers (certainty at early stage and probable at any stage) that can make founders/operators successful and give the investor a lens through which to understand the company’s unique advantage (defensibility, durability, general ability to succeed and deliver above market returns)

Starting a company is an investment decision. The Efficient Marker Hypothesis says the best way to allocate your money is in a portfolio of securities that delivers the best possible returns for your given risk profile. You’re saying “No, i have information that will help me get better returns. Thus, I will allocate my time and maybe even my money towards proving this hypothesis right.” Now, the EMH is often written off as overly academic. And while I agree with that general viewpoint, I do think it’s worth understanding why it’s the prominent theory of finance for the sake of understanding what it takes to be a statistical outlier. Point 1 from above suggests that a founder starting a company believes that have information that the market either doesn’t or hasn’t fully priced in. It is a statistically insane choice to start a company, yet when you look at the Forbes list of richest people, most have attained their wealth through their equity in one company. So, the founder had information sufficient to make them believe they could beat the market by concentrating their time and money into one bet. This information asymmetry is far larger in private markets, and thus the variance of outcomes is far wider.

In public markets, companies have standard quarterly disclosures and there are laws about what information is “material non public,” upon which it is illegal for investors to trade on. In private markets, capital is allocated differently, often based on storytelling and vibes (vibe rounds or excel rounds.) Thus, the founder must convince investors they have an information advantage. And to attempt to continue bridging the gap between the academic world of EMH and the power law world of early stage venture capital, this information asymmetry + the ability to execute on it is what creates the necessary conditions for a company to be successful. Otherwise, by definition, there would be no opportunity for this kind of alpha.

The second point should naturally follow from the first. An investor able to generate alpha over a long time horizon should have a unique understanding of what differentiates successful companies from average ones and a founder able to start a successful company should have both an information asymmetry advantage and the ability to act and execute upon their unique vision. This means that every decision (for the sake of simplicity, I will use capital allocation to refer to both literally spending money and how companies spend their time) is one of capital allocation. Startups are not just “good founders, good team, good idea, big market, consistent execution and iteration” well ok they are, but they’re the cumulative result of thousands and thousands of decisions made every day. There is probably no way to formalize early stage strategy - it is probably closer to entirely based on vibes than a formal field like Decision Science, but this is the lens I believe can be helpful to people on both sides of the table (and hopefully for those who want to both invest and start/operate companies.) You need the asymmetrical information (Peter Thiel talks about how “All great companies have secrets) and the ability to execute. It is probably overdoing it to calculate return on capital for each decision you make, but eventually there is a real tangible value that can be ascribed to decision making. And these decisions certainly have a magnified impact in the early stages (key hires, go to market strategies, product decisions etc.) This can perhaps explain why so many successful venture capitalists talk about the bet in the early stage being so much about the founders. You are betting on both their unique vision based on what is hopefully an information advantage, and their ability to make the thousands of decisions necessary every day that will eventually drive outsized value and returns. That is something that’s probably impossible to put in a spreadsheet in the early days, though I really believe it shows up later on, once the value of their decision making has compounded and the company raises a spreadsheet round / goes public (guess an IPO is just another spreadsheet round lol.) One relevant metric might be revenue per employee, something that seems to be high across the best companies, even though they have vastly different business models, strategies and founders.

The third point, which is by no means a unique insight (in fact it’s probably so well known in startup culture that it’s almost a truism,) should be now quite obvious to a founder thinking of how to build an outlier business or an investor looking for ways to pattern match traits of outlier companies. Your unique vision that’s based upon what you believe to be information asymmetry drives the “what?” the “why?” and the “when?” of the business you’re starting, and your decision of how to best allocate resources drives the “how?” There are many ways to map the story of a company to their numbers - this is essentially the job of a fundamental public market investor (and a later stage private growth investor) but for a founder, the decision of who to hire and how fast to iterate on feedback are the intangibles that provide the largest possibility for positive force multipliers, especially at the early stage. While teams comprised of exceptional people that iterate quickly do not necessarily guarantee success, an investor looking for the best way to “de-risk” an early stage investment may consider the degree to which the founder has a valuable “secret” (information asymmetry they’re choosing to act upon) and then also the degree to which they can build an organization that iterates rapidly and can attract the best and brightest people. This would suggest then, that almost by definition, outlier companies (in terms of their returns) are built upon outlier cultures. And so, outlier founders are ones who consistently allocate resources in such a way that their company is able to compound its unique advantage in a way that proves their hypothesis (that their unique information + their ability can deliver above market returns over a long time horizon, the bet they made when they started their company.)

In summary, whether starting, joining or investing in a company; you need to look for information asymmetry and exceptional decision making in terms of capital allocation, especially in terms of the intangible force multipliers (iteration speed and hiring being two of the most essential/highest leverage.) Someone who understands these aspects - information asymmetry and intangible force multipliers, would give themselves a better chance as a founder/investor and could likely fluently navigate between the two roles.

There is probably a lot more to write on the matter, and this would likely have been better delivered as a well thought out coherent essay with concrete examples but best I can do is a one take apple note stream of consciousness. Do not hesitate to reply with your opinion, always curious to hear what people have to say.