✒️#26. Portfolios of people
Investing is hiring is investing is hiring
☀️Good morning
Here's your roundup of one of the most interesting things I've read, learned, or listened to recently. I write about the people and funds that can create a better world for us.
I recently listened to Tim Ferris’ podcast with Graham Duncan: Talent is the Best Asset Class. Graham is co-founder and Chairman Emeritus of East Rock Capital, an investment management firm. In the podcast, Graham discusses how he selects investors to steward money. Many of his insights can be transferred, with minimal translation, to building an organization. I’ve interviewed hundreds of people and done about as many references when hiring and investing in people. I used to separate the two processes, but I don’t anymore. Because investing is hiring and hiring is investing.
Being an LP (investor) into funds is a quantitative endeavor. But investing, particularly into funds, is a fundamental assessment of people. Across asset classes, stages, and industries. You are selecting individuals to steward capital for years (or decades). Who they are, how they manage their firm, and how they make decisions will inform how well or poorly your potential investment will perform. I’ve thought about how to best articulate this for a while. Graham’s podcast and blog have blown that door open for me.
🤝 Hiring, meet investing.
…what most people think of as the hard parts of hiring—asking just the right question that catches the candidate off guard, defining the role correctly, assessing the person’s skills—are less important than a more basic task: how do you see someone, including yourself, clearly? - Graham Duncan, What’s going on here, with this human?
When building a portfolio, you determine your appropriate asset allocation mix based on organizational needs. Those needs are typically investment return, risk tolerance, and liquidity. Building the portfolio incorporates how each asset class will play a role, and how correlated their performance may be in given market events and trends.
When building a team, you determine your ideal organizational structure based on organizational needs. Those needs are typically target outcomes, timeline, and budget. Building a team incorporates how each person and department will play a role, and how specific personalities and teams intermingle to achieve the broader goals.
In both exercises, the essence of the structure you are attempting to build - an organization or portfolio - boils down to how effectively the people within that structure can execute within their zones of genius. That requires you, as the hiring or investing manager, to match what these people bring to the table with what you need done at the table. Both the people and the table will change over time, so simply matching skillsets with current needs is too fragile to stand the test of time. Effective hiring is fundamental to building an enduring organization or portfolio.
There are several ways these two seemingly unrelated worlds of the operator and asset allocator can inform each other. In both processes, there are four questions I seek to answer.
(In the below, I’ll assume “investment” is into a fund, but this can just as easily be viewed as management teams of a direct investment.)
1. Do you care?
When hiring somebody, your aim is to select for people who want to hone the craft for which you’re hiring them. That seems like it could be the end of the section, but that’s not what humans do. We hire people who seem like they can solve our immediate problems - regardless of if they want to (they applied, right?) or how enduring or fleeting our problem is.
The issue with this method is that many candidates approach open roles as stepping stones to something else - the thing they actually want to do. You want your new hire to want to do the job you need them to do. Interests change as people learn new things. That's ok. But if you’re hiring a salesperson who really wants to work in operations, that person will not be a good salesperson.
The benefit of hiring people for how they want to apply their background is that these candidates want to hone their craft in the area that you need excellence. They will read books about it, listen to podcasts about it, and excel within the function. Contrast this with your stepping stone sales hire. This person reads about operations while you train them on sales, and they do the bare minimum until they can jump to do what they really want.
When investing, you want to “hire” managers who want to play the role you’re hiring them for in your portfolio. If you invest in a $10m seed stage VC, you want that VC to be singularly interested in creating the best seed stage firm they can. You want them speaking with the storied seed firms, being introspective about what makes a good v. bad seed investment, and intimately understanding the mechanics of a seed stage company. You don’t want to invest in a VC who’s focusing on seed because they can only raise $10m, and they invest their seed fund until they can raise their $300m fund to focus on Series A. That’s inherently a different stage, portfolio construction, and strategy. That investor will not be a great seed investor for you.
I prefer to imagine that I’m trying to find the candidate the best possible job for them; it may be the job I had in mind, or something else altogether. - Graham Duncan
2. Are you playing a finite or infinite game?
James Carse first wrote about Finite and Infinite Games in his book by the same title. His summary of the two types of games: “A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play. Finite games are those…in which the participants obey rules, recognize boundaries and announce winners and losers. The infinite game includes any authentic interaction…that changes rules, plays with boundaries and exists solely for the purpose of continuing the game. A finite player seeks power; the infinite one displays self-sufficient strength.”
Assuming you have selected for people interested in honing their craft in your area of interest, you now have to determine who is executing the rules v. who is creating them. In the short term, there may not be a significant difference between the two. But in the long term, the difference is astronomical. All functions change. Always. In sales, buying habits change, methods of communication change, and budgetary discretion changes. As well as a hundred other things. If you have somebody who has played the finite game, they will play well within the existing rule set. But any meaningful and inevitable rule change will render that person ineffective. They (and perhaps by extension, you) won’t see the need to change coming until it’s already hurt their and your performance.
Meanwhile, your infinite players have been reading, listening to, and speaking to thought leaders. They continuously look for how they can improve the sales function - they've likely already recommended a few changes. They don’t accept the current rules or boundaries, they play with them and learn how to improve the company. When change comes, they will react quickly and well to it. Likely because they are, in part, the reason for that change. They make the game.
Paradoxically, infinite players tend to be the least cocky, not the most. They are grounded by the perspective of a larger game at play that is, in many ways, out of their individual control. They don’t ascribe to the illusion of existing in a controlled arena over which they have complete domain. Put another, very famous, way emanating from David Foster Wallace’s Kenyon commencement speech: they can see the water in which they swim.
Over the last 10 years, every investor has been a genius. You can safely chalk many investors' success to our recent set of rules - namely, money is free and all markets go up basically all the time. This is the water in which we have been swimming. Graham notes that, as you take someone from one ecosystem to another, you’re changing the water in which they swim. Notable because that water may have been heavily responsible for their performance.
We will all be swimming in new water soon. The investors who can sustain their returns into this next market will be the ones who can play outside of the prescribed rules of the past 10 years. While resident geniuses reclined in leather chairs, the infinite players have developed new rules and boundaries with which to play. Unbeknownst to the finite players, the infinite players are already playing a new game that the finite players don’t even know exist. They are building a truly durable investment organization.
3. Can you get your hands dirty?
In his podcast, Graham points to some ideas by Dean Keith Simonton, who has made a career out of studying genius. Simonton has pointed out that there exists an element of genius that spans across fields and lends itself to an impressive volume of ideas. Bach composed a song every week, resulting in hundreds of times more compositions than the average composer. Most of them were worse than second tier composers. The good ones were spectacular. Simonton also notes that the process of going from idea quantity to idea quality is one in which its creator subjects the ideas to ruthless Darwinism.
Empirical research has shown that quality tends to be the consequence of quantity when it comes to creativity. Those who produce more masterworks also produce more rubbish. - Dean Keith Simonton
I’ve come across a lot of people who have accomplished impressive things at large companies. They work well managing through people, but are no longer built to roll their sleeves up and get their own hands dirty. They draw on decades of experience to create interesting ideas and strategies, but need subordinates to assess and then execute or kill them. In many companies, start-ups in particular, there are no people to manage through. C-level teammates need to be able to get their hands dirty and actually do the work. And even when subordinates are available, the ability to scrutinize your own ideas lends itself to a level of organizational efficiency not available otherwise.
The primary job of investors is to come up with great, non-consensus ideas. Developing non-consensus ideas requires stepping outside the immediate thought bubble into other intellectual circles. Developing great ideas usually requires a higher volume of ideas. But those investors, like the teammates who need to get their hands dirty, must be able to assess and either execute or kill. Sometimes, a thesis does not pan out as intended, market conditions shift, or the idea runs aground on newfound realities. That’s fine. Great investors and managers (but not parents) must have the strength to kill their babies.
4. Can I rely you?
The above questions help answer the binary “do I want to hire/invest in you or not?” But, even if the answer is yes, there is work to be done to understand just how much faith to put into a new hire or investment.
In his piece on the infinite game, Graham outlines your job when building a team. Actually, he’s talking about investing, but that’s kind of the point of this article then, isn’t it? Your job is two-fold: (1) find people who are better than you at the given task and (2) help them build space in the organization to operate in their zone of genius.
Graham has an affinity for examining tensions, one of which being credibility v. decision space. As a hiring manager, your job is to build space within your organization for people to operate within their zones of genius, and do so with increasing autonomy. You cannot give somebody that level of decision space without trusting them. To trust them, they must be credible. If decision space is the volume within a balloon, credibility is what inflates that balloon. More credibility = more decision space. As you grow to be able to rely on somebody, they can more readily operate in their zone of genius and meaningfully contribute to your organization.
When you find a manager or company you want to invest in, your decision is not a binary “do I invest or not” decision. You size the investment. Will you invest $100? $100,000? $10 million? The extent to which you align with the manager's vision and trust them to act responsibly and communicate with you dictates how much you can trust them and, thus, how much you're willing to commit to the investment.
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This is the beginning of broader philosophical thoughts on the craft of investing. If this gets you jazzed up, I highly suggested listening to Graham’s Tim Ferris podcast and reading his unexpectedly heady piece What’s going on here, with this human.
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— Nico
www.nicochoksi.com | @nico_in140
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