Grit is the only Alpha
How to make money now (and always)
Grit is the combination of perseverance & passion.
All entrepreneurs are implicitly gritty. But grit isn’t created equal.
How hot the candle burns changes: the prospects for a business, and an entrepreneur’s own situation and motivations, naturally, evolve.
As investors, it’s always important to understand the grit embedded in an entrepreneur and company.
Right now, with the changes in capital markets and emergence of AI primitives, it’s more important than ever – it’s the only alpha.
Markets and entrepreneurs face two historic challenges.
High cost of capital following a historic rate hike
AI is for real, and going to disrupt your business
These are two very different realities, but both demand radical change from entrepreneurs (and change, albeit less radical, from investors)
For entrepreneurs, the capital cycle impacts operational cadence, headcount planning, and future fundraising prospects. We’ve already seen many companies, including strong performers, undergo layoffs and down-rounds.
In practice, executing these cuts – while maintaining morale, trust, and growth – is exceptionally difficult. Grit is a prerequisite for the glass-chewing an entrepreneur undergoes during a right-sizing.
The implication of AI may be even more painful: a new technical modality is rendering many products – and years of R&D spending – obsolete.
An example would be help-desk/chat companies. One that comes to mind is Intercom.
Since being founded 12 years ago, Intercom has raised $200mm+ to build a formidable, category-leading helpdesk product with sophisticated chat routing and automation.
However, with the arrival of OpenAI, a developer may bootstrap a product that can outperform Intercom’s 12-year-old product – via generative responses and improved routing – in a matter of days.
As a product leader, executive, or founder facing this disruption – the humility & grit required to steer your company onto this megatrend, rather than be crushed by it, is immense.
For later-stage entrepreneurs, who have spent years, tens of thousands of hours, and millions of dollars developing a product that, now, is having its market presence radically challenged – only the grittiest will survive (and those that do will win even bigger via embracing AI).
Venture firms are also being impacted by this capital cycle and AI modality: some funds are actively downsizing – and everyone now has a Generative AI market map! (haha)
Jokes aside, investors have been, generally, making some common high-level adjustments: focusing on earlier stages, special situation rounds, structured deals, or leaning into new “contrarian” categories (many of which are increasingly not-so-contrarian or even saturated, as written about last week).
I think there are many other changes to come for investment firms, which I’ll write about in the future, but my biggest thought for venture firms: these 30,000-foot strategy shifts – from Series B to Series A, or horizontal SaaS to vertical SaaS – are generally a waste of time.
There’s a popular saying “Missing the forest for the trees” … but in venture, you actually want to miss the forest, and only find the handful of Great (and gritty!) Oak Trees.
Similarly, the best investments over the next 18 months will be very case-specific, and start with understanding the psychology of the entrepreneurs and management teams at the helm.
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