Steve: A Fable

Scene
Investment committee meeting at Steve Ventures.

Characters
STEVE, senior partner
Steve, junior partner
Stephen, principal

STEVE: Okay, let’s get this thing started. Who’s first up?

Steve: I have a really great company to present. Widgets.com. They make and sell widgets on the internet. Terrific business idea, and the founder will knock your socks off.

STEVE: Tell me more.

Steve: Well, his name is Steve and he’s one of the best founders I’ve ever met. Really solid resume. Undergrad at Steveford, worked in sales at Stevebook and bizdev at Stevify. Killed it wherever he went. In between he played professional tic-tac-toe in France and wrote a book about heli-skiing in Tahiti. What a life story.

STEVE: Wow.

Steve: This is actually his second startup; the first one raised a bunch of cash before failing, and he has some great lessons to share from it. Amazing presence and confidence, super ambitious, this is a guy who was born to succeed.

Stephen: And the business itself?

Steve: Huge idea, just huge. Selling widgets on the internet. The competition is tough and the margins are brutal, but man, what an idea. Not much traction yet and the product is still early, but that gives us a chance to get in at a decent valuation.

STEVE: I like it. I like it a lot. What’s he asking for?

Steve: 20M on a 180M pre, no board seat.

Stephen: That seems high for no product and no revenue, doesn’t it?

Steve: Well, you know, the market sets the price. And I gotta tell you, this one’s likely to be competitive – Steve just ticks so many boxes. Lots of interest in this one. We’re only getting a shot because he loves our track record working with other founders named Steve.

STEVE: For a good deal, no price is too high. Power law outcomes, right?

Steve: Exactly.

Stephen: Have we done any reference checks?

Steve: Oh, for sure – I called Stevie over at Steven Capital. He loves him. He wants to co-lead with us if we’re up for that. He said he couldn’t remember when he last saw such a great founder. Candidly, he told me Steve reminds him of Steve Stevens. That’s pretty cool.

STEVE: Okay, I want to do this. We should make it happen. Get on it, Steve.

Steve: On it.

STEVE: Okay, what’s next.

Stephen: I have a deal that’s a bit unorthodox, but it could be a doozy.

STEVE: I’m listening.

Stephen: The company is called Acme Corp and they’ve built a low-cost, high-efficiency solar energy cell. Order of magnitude better than the current state of the art. It’s based on the founder’s own PhD research. This guy is a legit genius.

Steve: Who’s the founder?

Stephen: Well, his name is Brian.

STEVE: Hmm.

Steve: Hmm.

Stephen: Pretty inspiring story actually. Grew up in the middle of nowhere, went to a state school for undergrad, but he impressed the professors so much that they fast-tracked him into the PhD program.

STEVE: At state school, right?

Stephen: Right. And then he turned down tenure to build a company based on his research. He’s a real missionary. He’s recruited an amazing team, they’ve already built a whole suite of products, and customers are falling over themselves to sign up.

Steve: This is a hardware startup, right? Hardware is tough.

Stephen: Well, it’s tough to develop, but in this case that’s already done. They have a product in the market and customers love it. There’s no risk there.

Steve: Still. Hardware is tough.

Stephen: But widgets.com is hardware.

Steve: Sure, but that’s different. That’s an internet model. And the founder Steve is really something special. He just projects so much confidence in his ability to solve problems as they arise.

Stephen: But Brian has already solved those problems! And he did it on a shoestring budget, too.

STEVE: Hmm. Yeah, you know, I really don’t like that. I want someone who can go big or go home. Shoestring budget doesn’t cut it for me.

Stephen: He didn’t have a choice. Nobody would fund him.

STEVE: Everybody has a choice, Stephen. Let’s move on.

Stephen: Okay. You’ll like this one. CHOAM Corp. They’ve built an AI that outperforms Stoogle and everyone else.

Steve: I like the sound of that.

Stephen: They plan to license it to big tech firms, big banks, big manufacturers, high-growth statups, you name it. It’s perfectly general AI, the market is huge. It’s the biggest market there is.

STEVE: That sounds promising. Tell me about the founder.

Stephen: He’s amazing. His name is Mike.

STEVE: Hmm.

Steve: Hmm.

Stephen: First-gen college student. Got a full-ride scholarship to Steveford, won a bunch of prizes there, then got hired into Stoogle Brain. Then he did a startup which he sold to Stevacle – pretty big exit. He’s smart and capable and just flat out knows how to execute.

Steve: Hmm. Sounds a bit too good to be true.

STEVE: Was he a diversity admit at Steveford?

Stephen: I don’t think so, everyone I checked said he was the real deal.

Steve: Who did you talk to?

Stephen: Well, I talked to Jim over at Second Ventures – they funded his first company. He couldn’t stop raving about how good he was.

STEVE: (dismissively) Oh, Jim. Yeah, well, I don’t know about that. They don’t really know what it takes to play in the big time.

Stephen: I also talked to Stevie at Steven Capital. To be honest he was a bit reserved. He said he had doubts about Mike’s leadership ability. Couldn’t really compare him with any of his founders.

STEVE: Hmm.

Steve: Hmm.

Stephen: Look, he ran a top team at Stoogle and then took his first startup from 0 to 500 people and a big exit, I think he’s got leadership ability.

Steve: You can’t really coach these things. Some people just stand out, you know? I’d trust Stevie on this one.

Stephen: Well, let’s talk about the business. It’s an absolutely huge market, the product is totally unique, there’s clear customer demand, terrific structural economics and really great defensibility.

Steve: It’s a software business, right?

Stephen: Yep.

STEVE: Hmm.

Stephen: But I thought we loved software!

STEVE: I wonder if we should take a contrarian line on this. Everyone’s funding software businesses. Maybe the right move is to double down on hardware like widgets.com.

Stephen: Shouldn’t we just invest in the best companies? Hardware or software, doesn’t matter: just look at the market and the product and the economics.

STEVE: Yeah, okay, I hear you, but a good market and a good product don’t matter if the team isn’t good. VC is a people business, first and foremost. I’m a bit concerned about this Mike person. I don’t know if he can cut it.

Steve: I don’t see any accounting experience on his resume, do you think he’ll be able to manage a budget?

STEVE: He might be technically adept, but can he sell?

Steve: He might have customer traction, but is the product technically sound?

STEVE: I don’t know if I buy the macro thesis around AI.

Steve: Hmm, I’m looking at their data room and it looks like their NRR is only +155%, that’s not as good at Steveflake you know. I don’t think we should be investing in companies that are not best-in-class.

STEVE: Do you think he’ll be able to attract a top team?

Steve: Or later stage investors, that’s important too. I don’t know if they’ll want to invest in somebody who isn’t out of the top drawer.

STEVE: Zooming out, I see Stevetech, Stoogle, startup – it’s all a bit careerist. Too one-dimensional for me. Not sure I see a spark there.

Steve: Stevie mentioned a possible lack of charisma. Mike is no Steve, that’s for sure.

STEVE: Yeah, I don’t think we can make this one work.

Stephen: But …

STEVE: So, we’re agreed. We’ll offer terms at 20M on 180M for our guy Steve at Widgets.com.

The meeting ends.

Later that day…

Stephen: Can you help me think through our IC decision today? I’m not sure I understood your process.

STEVE: (affably) Of course.

Stephen: So I’m trying to get a handle on why you wanted to invest in Steve but not Mike. To me it seemed like Mike’s company was better in almost every respect. Better tech, better traction, better founder, everything.

STEVE: You can’t reduce venture investing to just numbers on a scorecard. Otherwise anybody could do it. There’s a whole lot of intangibles to consider.

Stephen: That’s precisely what I wanted to double-click on. What intangibles should I be looking for?

STEVE: Leadership. Leadership is the key. We want to invest in superstar leaders above all else. So I’m looking for things like a strong personality, big ambition, supreme confidence. And that’s where Steve wins.

Stephen: But are any of those things justified? Steve’s actual track record is pretty mediocre. Where does his confidence come from? Feels totally unearned to me.

STEVE: I don’t see your point. Confidence is confidence. Winners are winners.

Stephen: Surely leadership is defined by results?

STEVE: I think I can recognize leadership quality when I see it. You know, Steve actually reminds me of myself in some ways.

Stephen: He does?

STEVE: Yes, and I know what you’re thinking. You’re thinking I just want to invest in him because his name is Steve. Come on! Give me a little more credit than that. I’m not that superficial. When I say he reminds me of myself, I mean in terms of charisma, and big ideas, and vision. That’s the stuff that matters. Not a little thing like his name.

Stephen: I think I understand. But surely it’s easier for you and me to appreciate charisma in somebody named Steve.

STEVE: Charisma is charisma. Everybody appreciates it, not just you and me.

Stephen: Well –

STEVE: (interrupting) – Besides, you have to face the facts. Empirically, founders named Steve outperform all other founders.

Stephen: But that’s because we don’t fund anyone else!

STEVE: That’s a perfectly rational decision. Succesful startups are almost always founded by people named Steve, so of course we only fund such people. Look at all the big tech firms – there’s Steve Jobs, Steve Gates, Steve Zuckerberg, Steve Bezos. I mean, how can you argue with that pattern?

Stephen: But surely this is just a chicken-and-egg problem. If we funded more non-Steves, then you’d see more tech leaders not named Steve, and so the perception that only Steves can be leaders would erode.

STEVE: I don’t see any empirical evidence for that hypothesis at all. You have to be more rigorous than that if you want to work in venture.

Stephen: But what if there’s an opportunity for us here? If everyone is funding Steves, maybe there are hidden gems among the non-Steves?

STEVE: Don’t be silly.

Stephen: I’m not! I’m being serious. As investors we love business models that capture new sources of value that nobody else can spot. What if we can find that kind of value in startups founded by non-Steves?

STEVE: I doubt it. What’s your a priori reason for assuming such value exists?

Stephen: Surely it’s just common sense?

STEVE: (snorting) I don’t think you can make such simplistic assumptions. In fact I’d argue that the burden of proof is on you to show that such value exists. Frankly, the data is not on your side.

Stephen: But –

STEVE: In any case, it’s irrelevant. You want to be serious, okay, let’s be serious. We have a fiduciary duty to our LPs. We’re professionally obligated make investments that, in our judgement, will produce the best returns. We can’t just fund any old James or Jason or Jake based on some unproven hypothesis around unappreciated talent. That would be completely unprofessional and in fact borderline unethical.

Stephen: Wouldn’t our LPs back us if we explained the opportunity here?

STEVE: The hypothetical opportunity, you mean. What do you think our LPs would say if we went and invested in Brian, and his company failed, and our returns suffered as a result?

Stephen: I don’t think they’d be pleased.

STEVE: Damn right they won’t.

Stephen: But Steve’s company could fail, too.

STEVE: Yes, but at least in that case we know that we invested in the best. It’s the process that matters, not the outcome. Venture is risky, we all accept that, but that’s all the more reason to be rigorous and disciplined.

Stephen: And in this case, being disciplined means investing in Steves.

STEVE: Exactly. The bottom line is, we can’t afford to lower our standards. Our LPs expect us to run a meritocratic organization, and that’s what we do.

Stephen: Are you saying that meritocracy implies that we only fund people named Steve? That people not named Steve are less capable?

STEVE: I’m not saying that. I’m no Stevist. I’m just following the data. Look, we’re in the business of funding world-changing companies. And historically the world has been changed by Steves. Steve Columbus. Steve Washington. Steve Edison. People named Mark and Bill and Jeff and – what was your guy again? Mike? – they just don’t have the same abilities.

Stephen: But that’s because historically they haven’t had the same opportunities as all the Steves.

STEVE: And you think that’s going to change? Get real. Late stage capital, public markets, the media, government, LPs, allocators – everyone in our ecosystem – they’re all dominated by Steves. In this environment, you’d be an idiot to invest in anyone else.

Stephen: That’s a depressing thought.

STEVE: No it isn’t. The system works. Look at all the innovation we’ve unlocked. Look at all the wealth we’ve created.

Stephen: That’s hardly a good argument. It’s like saying “we succeeded doing things this way, hence this is the only way things can ever be done”. Sounds pretty ripe for disruption if you ask me.

STEVE: On the contrary, it’s the only argument that matters. Success is self-perpetuating, and so is failure. People who didn’t back Steves in the past, don’t have the resources or the standing to back anyone at all today. If they did, maybe we’d all be working for Mike Ventures today instead, hahaha.

Stephen: Hahaha.

STEVE: Look, I get what you’re saying, I really do. It’s a provocative argument. But even if everything you say is true and we decide we’re going to commit career suicide and invest in the Brians of the world, it still wouldn’t make a difference.

Stephen: It wouldn’t?

STEVE: No, it wouldn’t. And you know why? It’s a pipeline problem. For every 10 Steves who ask us for investment, we get 1 Brian. The simple fact is that not enough Brians start companies. Maybe Brians just aren’t cut out to be risk-takers.

Stephen: But surely that’s rational on their part? If the entire ecosystem is less likely to support a Brian, then the risk-reward is much worse for them than for a Steve. Why should they play in a rigged game?

STEVE: Well, if they don’t play, they’re definitely not gonna win. Steves are winners, and that’s the bottom line.

Stephen: So what you’re saying is that there’s already a self-fulfilling prophecy at work here. Only Steves enter the game, and only Steves get funded, and only Steves succeed, and that fact is both the justification and the motivation for non-Steves to be frozen out.

STEVE: Exactly.

Stephen: A network effect of Steves.

STEVE: You got it.

Stephen: And like all great network effects, it’s almost impossible to disrupt or replace.

STEVE: Bingo.

Stephen: Wow. It’s all clear to me now.

STEVE: Excellent. Shall we go get dinner? There’s a new burger place down the road. The owner’s name is Bob. What a great name for a burger guy.

This article was brought to you by the fact that there are more CEOs named Steve in the FTSE 100 than there are CEOs who are women.