Jerry Neumann – Why Venture is Hard – [Invest Like the Best, EP.134]

My guest this week is Jerry Neumann. Jerry is one of the most thoughtful early stage investors that I’ve encountered, and his writings at reactionwheel.net are my favorite on this topic. He applies an incredibly structured way of thinking to a notoriously mysterious investment category. This is our second conversation, in which we cover why investing with one’s gut is a bad idea and why some of the popular edges in startups, like network effects, may be picked over. Please enjoy our conversation.

Show Notes

1:17 – (First Question) – His take on the venture landscape and the type of investments new VC’s are making vs what they should be making

3:44 – Most important implications of excess VC firms

5:32 – Misalignment of incentives in the VC space

8:19 – What he does differently from angel investors or VC’s

            8:21 – Post about what he does not being VC

10:11 – The notion of risk and the types of risk the people he invests in takes

14:33 – Protections that he thinks about when it comes to the ideas he invests in

19:37 – Is there an area of expertise that provides an edge for startups

20:11 – Network effects are picked over

21:35 – IP protection

23:08 – One of the two most interesting things for VC’s to go after, brands

25:13 – The other most important thing, the value chain

27:42 – A current example of a disruptive value chain

29:14 – Innovation as the source of profit

            29:16 – Schumpeter on Strategy

31:50 – Efficiency innovation vs value innovation

            31:52 – Energy and Civilization: A History

35:50 – Efficiency investments he’s made

37:13 – Investment in Unsupervised and the machine learning landscape

41:25 – Investment in Sila

43:14 – Investment in Edmit

44:44 – investing on gut

            48:59 – Management Assessment Methods In Venture Capital: Toward A Theory Of Human Capital Valuation

50:32 – Black boxes and their value in investments

            52:58 – Kanaman and Danny Klein on instinct/gut

53:23 – Metrics about the predictive level of whether people are going to succeed

54:45 – What defines good people worth backing

57:50 – Advice for LP investors in this space and how they should evaluate VC’s in this space