Rapidly Growing Valuations Shouldn’t Scare You Off

Humans are bad at understanding exponential growth
Good investors show their best deals to their friends, so one subtle type of social proof is when you see a group of investors who like to invest together. It means they’ve socialized the deal and it’s a hit. There’s also the Peter Thiel rule: When a company’s valuation climbs rapidly between rounds, that should attract you, rather than scare you off, because humans are bad at calculating nonlinearities. More

Reading Social Proof Is an Art Form

The ultimate social proof is a credible VC increasing their ownership
Social proof only works when the actors are independent and it matches up to your diligence and conviction. Then social proof can be a clincher, filling in gaps in your knowledge or helping you figure out when it’s time to stop waiting to exercise an option and close the deal. Social proof cannot be the sole determinant for investing.  Learning how to read the signals around social proof is an art form. More

Social Proof Is a Valid Signal

Every investor brings new information to the table
Social proof can get a bad rap, deservedly so because it can be a herd mentality where one monkey imitates the other.   There are reasons why humans follow social proof. Historically, if a member of the herd yells “lion!” and the rest of the herd starts running, it doesn’t make sense for you to stand there and look around until you see the lion. More

Ask About the Metrics They’re Not Showing You

One weird trick to get the truth about metrics
There’s a psychology trick you can use when you’re trying to find out why someone does or doesn’t do something. If you’re trying to make a sale and someone politely declines, they’ll give you a reason. The first reason is almost never the correct one. If you can get a second or a third reason out of them, you’re much more likely to get the correct one. More

Everything Is a Proxy for Traction

The holy grail is explosive growth, stickiness and an ability to monetize
At the end of the day, everything is about traction. You pick a great team, go for a big market and invest in great products because you’re trying to predict what masses of people will use or pay for. Where will their attention and money go? Traction is the ultimate evidence. More

Early Winners Don’t Always Make It to the Finish Line

Competitors can catch up while the market’s still small
Ben Horowitz is credited with the line: “The best product doesn’t always win, but the winning product becomes the best product.” There are exceptions, though. It’s highly specific to the situation. When you’re winning, you can get capital and talent to retool your product to become the best in the space. More

Invest in the First Credible Mover

Pick the right founder at the right time
Because of the nature of the Internet, products that seem extremely niche can spread quickly across the world, get into everyone’s phones and saturate entire markets before the competition knows what’s happening. This is one of the reasons we tend to underestimate market size. It’s hard to catch one of these runaway product trains. More

Monopolies Fall When Platforms Shift

Companies that fail to innovate will get displaced
The important concepts in modern microeconomics are: monopolies, network effects, supply and demand, cumulative advantage, moats, lock-in, marginal costs, consumer and producer surplus, price discrimination, pricing power, viral networking, viral adoption, and economies of scale, among others.  Most of the valuable businesses are natural monopolies. More