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Having spent ~15 years across two private investment firms, have a few thoughts on why so many are dysfunctional.
First, many founders had 1-2 homeruns early in career off which they raised AUM. But often have no systematic investing style, leading to unstructured approach. 1/7
First, many founders had 1-2 homeruns early in career off which they raised AUM. But often have no systematic investing style, leading to unstructured approach. 1/7
Many investors, even good ones with systematic process, are often not good managers of businesses. But since they constantly evaluate businesses and management teams, they think they know how to run a business.
As investment firms grow, they become complex organizations. 2/7
As investment firms grow, they become complex organizations. 2/7
Early team often unwilling to share economics with junior team. Founders say they took all the risk and built the initial business (all of which is true), so why share.
Meanwhile younger team members say founder does nothing and just has name on door.
Creates conflict. 3/7
Meanwhile younger team members say founder does nothing and just has name on door.
Creates conflict. 3/7
Many founders just stuck in the past. They don't get that Reg FD, internet, growth of pods, etc. all mean that "informational edge" basically doesn't exist.
Many founders also shaped by tech wreck so think tech investing is dangerous.
Often creates conflict w junior team. 4/7
Many founders also shaped by tech wreck so think tech investing is dangerous.
Often creates conflict w junior team. 4/7
So many investors (young and old) don't do their own work. They rely on sellside/investing themes. When this works, looks genius.
But so often, a little volatility hits and they end up selling at the lows because there's no conviction due to a lack of first person diligence. 5/7
But so often, a little volatility hits and they end up selling at the lows because there's no conviction due to a lack of first person diligence. 5/7
Many firms ultimately settle on an investment committee approach, which is terrible. It's consensus driven and often stifles honest debate.
As Lou Simpson says, "if you have a lot of people involved, you tend to have the least competent person making the decision." 6/7
As Lou Simpson says, "if you have a lot of people involved, you tend to have the least competent person making the decision." 6/7
Best firms IMO have 1) clearly defined investing style and process, 2) small teams where people get along, 3) are nimble, 4) know their companies/industries extremely well, 5) have clear incentives with thoughtfully distributed equity, and 6) are flexible in their thinking. 7/7
