The puzzle piece that doesn’t exist.

The mystery of the Mayan calendar revealed!(Warning: this post gets a bit “meta.”)

After 10 years of iTunes usage, I finally shelled out $17.99 to buy my first audiobook: Malcolm Gladwell’s What the Dog Saw. With Gladwell seemingly whispering in my ear in his unmistakable tenor, the 5-hour Memorial day car trip simply flew by.

The book contains lots of great nuggets, all drawn from Gladwell’s long career writing for The New Yorker. While any of these could inspire a blog post, I was particularly drawn in by “Open Secrets: Enron, intelligence, and the perils of too much information.”

I quote from the full article, which you can find here in its entirety.

The national-security expert Gregory Treverton has famously made a distinction between puzzles and mysteries. Osama bin Laden’s whereabouts are a puzzle. We can’t find him because we don’t have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.
The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn’t a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much. The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows. For that matter, so did every cabdriver in Baghdad.
The distinction is not trivial. If you consider the motivation and methods behind the attacks of September 11th to be mainly a puzzle, for instance, then the logical response is to increase the collection of intelligence, recruit more spies, add to the volume of information we have about Al Qaeda. If you consider September 11th a mystery, though, you’d have to wonder whether adding to the volume of information will only make things worse. You’d want to improve the analysis within the intelligence community; you’d want more thoughtful and skeptical people with the skills to look more closely at what we already know about Al Qaeda. You’d want to send the counterterrorism team from the C.I.A. on a golfing trip twice a month with the counterterrorism teams from the F.B.I. and the N.S.A. and the Defense Department, so they could get to know one another and compare notes.
If things go wrong with a puzzle, identifying the culprit is easy: it’s the person who withheld information. Mysteries, though, are a lot murkier: sometimes the information we’ve been given is inadequate, and sometimes we aren’t very smart about making sense of what we’ve been given, and sometimes the question itself cannot be answered.
Puzzles come to satisfying conclusions. Mysteries often don’t.

And, so, the question struck me:

To a VC, is a startup a puzzle or a mystery?

If your startup were a puzzle, I would decide to invest in it on the basis of individual pieces of currently missing information recovered after a detailed investigation. I don’t know all the answers, but they’re discoverable. And, if I put enough resources towards my investigation, I will eventually come to a definitive answer.

On the other hand, if your startup were a mystery, all I could do is rely on my intuition to reach a conclusion. In fact, the more information you gave me, the more uncertain I’d become. As Gladwell says above, “the hard part [with mysteries] is not that we have too little information but that we have too much.”

So which is it? For me, startups can be both puzzles and mysteries, but not at the same time. Sort’ve like Schrödinger’s cat.

A startup is a mystery when you first encounter it. After the first 3 minutes of a 30 minute introductory meeting, I usually know if I’m interested in another meeting. My intuition, whether right or wrong, informs my opinion, as I subconsciously collect tiny clues from my encounter. There is no amount of “real” information I can collect in that first meeting that will help me make a decision. I have to go with my gut.

At some point, a startup becomes a puzzle, usually when it enters due diligence. I ask myself, “What would I have to believe for this company to make a compelling investment?” That question generates a list of more specific questions, which I then attempt to answer by investigation. The puzzle pieces are out there somewhere. I just have to find them in between the proverbial couch cushions.

Inevitably, the startup must once again become a mystery. I may find an analyst report that quantifies the market size, and I may calculate the unit economics in Excel. These are puzzle pieces I can find. What incessantly eludes the puzzle solver, however, is the most important aspect of all: the team.

The startup team is always a mystery.

No amount of data will ever answer the question, “Is this a team who will build a billion dollar company?” Certain pieces of information gathered may make an investor more comfortable, but at the end of the day this is an impossible question to answer. Intuition, not investigation, must be our guiding light.

This is why VCs like to spend so much time “getting to know” an entrepreneur before investing. We need to give our intuitive brain time to soak it all in. We’re trying to solve a mystery…you specifically. And, conversely, we are a mystery you should be solving as well.

That can be a tough pill to swallow. The only challenge bigger than solving the mutual mystery is accepting that a mystery exists in the first place. Mysteries don’t come to satisfying conclusions, according to Gladwell, and we want to believe that “the truth is out there.”

But it’s not. So, we have to trust our gut and hope we make the right call. The puzzle piece simply does not exist.

This entry was posted in Advice, Entrepreneurship, Venture capital. Bookmark the permalink.

2 Responses to The puzzle piece that doesn’t exist.

  1. Good post! How do you think folks in VC should (can?) develop a good “gut” feel when the results often take years to materialize? How many decisions / experiments need to be run before building that up? Gladwell seems to be a fan of the 10,000 hours notion of practice before mastery.

    • Alex Taussig says:

      I like 10,000 hours too. I think it’s important to qualify what exactly that 10,000 hours is spent on, however. If we are in the business of backing people who will have phenomenal careers, then we should be spending 10,000 hours learning how to identify those people. You can’t do that if you’re not exposed to them 8-10 hours a day. Even that would take 1,000 days. So, I think the one thing every investor needs to do is constantly surround themselves with phenomenal people. Sounds simple. Hard to execute!

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