Epistula #3: Defying Orthodoxy
A heretical approach to venture capital
I have been thinking about Deciens' approach to venture capital for a long time – at least a dozen years. The reason is simple: the last thing the world needs is yet another undifferentiated venture fund.
If Deciens is to stand out from the crowd, have longevity, and be successful, we need to have a rock-solid foundation and build a powerful structure on top of it. We must believe certain things and act in ways that are true to who we are.
I want to take this opportunity to talk about Deciens’ approach to venture capital and how heretical that approach is.
Deciens’ Primary Objective
Let’s begin at the end – with Deciens’ goal. We want to be the best early-stage fintech venture capital firm, as measured by performance. We believe there is only one measure that aligns with all stakeholders: net realized multiple of invested capital.
This goal should not be not surprising, but it stands at odds with the goals of orthodox VC firms for two reasons:
Their goal is not excellence. Orthodox firms are simply satisfied with raising more funds, collecting management fees for their owners, and generating enough returns to survive. In our book, survival is neither necessary nor sufficient.
They focus on vanity metrics. “Vanity” comes from a Latin root meaning “empty, lacking content.” Metrics like assets under management (AUM), number of deals, transaction velocity, team size, term sheets won, and social media followers have no meaningful content.
The First Commandment of Deciens
Historically, median returns in venture capital have been about 1x paid-in capital. Our goal requires returns far above the median. This leads to what I have taken to calling the First Commandment of Deciens, which is an homage to Einstein’s definition of insanity:
The only way to have variant outcomes is to have variant people run variant processes. Conversely, if you have median people run median processes, you will have median outcomes.
Misguided Beliefs of Orthodox VC Firms
If we are serious about talking the talk, we must be serious about walking the walk. We must not fall into the misguided beliefs that undifferentiated VC firms often share.
Misguided Belief #1: Only a few companies become winners in any given period, usually in “hot” sectors.
This view is factually incorrect and fraught with survivorship bias. We see no reason to believe that the number of great companies per year must be limited. We will have more winning companies if we have more great founders and courageous capital — neither of which are finite.
Having seen many different “flavors of the week,” we suspect that "hot" sectors do not often create enduring, valuable businesses. In fact, these sectors may create just the opposite.
Misguided Belief #2: There is little a VC can do to substantively change the trajectory of a company’s outcome.
Winning companies, their founders, and investors tend to rewrite history. In their retellings, certain companies were preordained to be great, and companies achieve greatness quickly or not at all.
In reality, paths toward greatness are usually nonlinear and often take a long time. We have seen from our own experience that investors, especially courageous ones, can dramatically alter a company’s prospects.
Misguided Belief #3: Scale is the principal moat around a VC’s business because scale is what lets them attract “winning” companies.
We simply do not agree with the premise underpinning this belief. While scale can be an advantage, it can also be a weakness in terms of sourcing high-quality deals and making timely and informed investment decisions. Scale does not equate to excellence.
The Destructive Behaviors of Orthodox VC Firms
Misguided beliefs have turned orthodox VC firms into portfolio managers, many of whom demonstrate destructive behaviors. They have lost any sense of adventure, which is at the heart of venture capital.
Destructive Behavior #1: They focus on scaling AUM rather than delivering returns.
This manifests itself in several ways, including the proliferation of products (VC, growth, debt, crypto, fund of funds, publics, etc.) and a shorter and shorter fundraising cycle (raising new funds every year or two instead of three or four).
If you believe that scale is a moat, then this makes sense. It also makes sense if, as a general partnership, you decide to stop fighting for carry and therefore want to maximize the fee-paying AUM.
Destructive Behavior #2: They have become obsessed with seeing and winning deals.
Venture capital is won and lost on how a firm allocates resources across the five key skills – sourcing, picking, winning, supporting, and exiting.
If you believe that the number of great companies is finite and the outcome of companies is preordained, then focusing on simply seeing as many deals as possible makes sense, along with furiously fighting for deals deemed to be winners merely because other VCs are excited about them.
Destructive Behavior #3: They are staffing up, particularly on “portfolio support” rather than actually supporting portfolio companies.
These hires typically often focus more on supporting GPs, who want to do more deals faster. This is logical as GP time has historically been the limiting factor in terms of deal velocity and, therefore, speed of capital raising and deployment.
Iconoclastic Beliefs of Deciens
Just as orthodox practitioners of venture capital believe certain things, at Deciens we have our worldview – and the deeply heretical set of behaviors that flow from it.
Deciens’ Belief #1: There can be many great companies at any given time.
There is no natural or physical law limiting the number of important companies. The limiting factor seems to us to be the quantity of high-quality human and financial capital. If we have more of these two inputs, we will have more great start-ups. And we seem to be nowhere near exhausting either of these resources.
We are living in a time of plenty rather than a time of scarcity.
Deciens’ Belief #2: Investors can help change a company’s trajectory.
Throughout our lived experience, we have seen how hard it is to build companies and how circuitous the journeys can be. There is no relationship between getting the answer right away and getting it right.
It is not that we need more cowardly, impatient, uninspiring, and disinterested investors. Rather, we need brave, patient, visionary, and involved investors who can help founders create the future.
Deciens’ Belief #3: The only way that an ecosystem is sustainable is if all parts of it are in equilibrium, aligned for mutual benefit.
In our case, that means that we need to be strongly incentivized by carry, rather than fees, as carry aligns the success of founders with the success of GPs and LPs. Anything that creates greater alignment across all parts of our community further reinforces the entire reason we do what we do.
Deciens’ Belief #4: We need to have the courage to be very wrong.
Seeking variant outcomes requires taking the maximal risk and often doubling or tripling down on the most risk-seeking, high-variance opportunities. Being that far out on the risk-reward curve means we will often be wrong.
To even try to deliver superior risk-adjusted rewards, to attempt to be the best, we need to try to be very right. And that requires the courage to be very wrong.
The Unorthodox Behaviors of Deciens
Our iconoclastic beliefs lead to several unorthodox behaviors that we cultivate and believe will become hallmarks of the franchise.
Deciens’ Behavior #1: We don't worship sourcing as the primary creator of alpha.
We are not overly concerned with trying to see every deal nor are we excited to compete in auctions for “hot” deals.
We focus deep due diligence on an unusually small number of opportunities far outside of the consensus view, investing alone or with a few aligned partners. Then, we work like hell to make the companies as successful as possible, while being very comfortable knowing that some (even many) will fail.
Deciens’ Behavior #2: We support companies in the ways that are the most impactful to them.
We are more involved with portfolio companies, their founders, and their leaders, and stay that way for much longer than most of our peers and VC firms more generally.
Deciens’ Behavior #3: We are bold and brave in how we invest.
Specifically, we do not believe that sharing is caring in venture capital; we believe that ownership is caring. We make big bets and assertively double down when we see companies breaking out. We will not hand our best companies and their founders to our competitors, for it serves neither us nor our founders and LPs. We always recall that concentration is how you get rich, while diversification is how you stay rich.
Only through concentrating capital, being right, and having tremendous fortitude will we be able to achieve our goals.
Deciens’ Behavior #4: We want to maintain (and even cultivate) our outsider status.
We’ll never stop knocking VC practices that don’t serve investors and founders. We like being weirdos, nerds, and outsiders. We’re happiest practicing our craft, our way, on the fringes. It gives us our edge.
A Pioneering Journey
A few months ago, I had the good fortune to read Ed Caesar’s Two Hours: The Quest To Run The Impossible Marathon. In this incredible book, he analogizes these pioneering athletes to mountaineers:
To reach the summit, the pioneer knows he must endure more, live braver, plan better, and be luckier than his forebears – and that all of these qualities will likely be insufficient. They know the honor may fall to another generation.
Our playbook rejects venture capital orthodoxy because we know the gospel of venture capital is broken. It’s rooted in a perverse set of incentives, a clearly false reading of history – and it puts the interests of venture capitalists above the constituencies they are notionally in the business of serving. Our journey is about rewriting that gospel, and we accept it may fall to the next generation to finish it. But six years in, Deciens is starting to show signs that it will not be a pyrrhic victory. We have grown and evolved more than I thought possible. At the same time, we remain steadfastly committed to our core belief in the power of deep partnership between founders and investors, as well as the importance of alignment between GP and LP interests.
We are also thankful to the many venture capitalists who have made our ideas heretical. We are always most comfortable being iconoclasts.
