How Much Does Pedigree Matter?
Depends on who you ask
Growing up, I had a buddy who lived around the corner from some family members of a dog-food tycoon. At least that was always the story we heard when we looked up at their house: “That’s the Pedigree people’s house - they are loaded.”
Of course, the irony here was that in Cincinnati, we had the wrong brand of dog food - it was actually an abode that housed members of the Iams family. (We weren’t totally incorrect, just a little early - Iams was the largest divestiture ever at one point for P&G when it was sold to Mars, Inc., the parent company of Pedigree).
Pedigree, of course, is named such because of the importance of pedigree when breeding animals. That’s where that term comes from - what stock this horse or that dog comes from will help me know how worthy of steed or birddog it will be. In humans, pedigree is a little less familial (depending on who you ask), and a little bit more practical - what school did you go to, what town did you grow up in, where have you worked, how do you spend your free time, etc. These forms of pedigree are supposed to help signal how strong or how weak of a candidate you will be for… something - maybe a job, an investment, or a membership to an exclusive club.
The idea is simple and age-old: if you went to a certain school, then certainly you must be smart because that school has a reputation for intelligent students. But don’t we all know someone who went to a good school and just wasn’t that bright. Or if you worked at a certain company, you must be a good worker because that company has seen recent success that you must have contributed to. Again, we all know folks who worked harder at not working hard than anything else. Or, one of my personal favorites “if you already achieved an exit, you must be a great startup founder”. But is that always the case? Plenty of folks have failed their second time around after being wild successes in their freshman attempt.
In theory, looking at someone’s pedigree should be a shortcut for answering some question you have. But like so many shortcuts, it doesn’t always help you as much as you would wish. An over-reliance on pedigree can cause you to miss more important signals. Everyone has examples of when pedigree has failed, but does that mean we should discount it entirely?
I doubt that’s a useful exercise either. It’s hard to deny that there are a lot of smart people at Harvard, or a lot of high achievers who work(ed) for P&G. Founding a startup and achieving a successful exit is particularly difficult task - one that is tough to just “luck into”.
So what does matter? What you have accomplished or how far you have come? Like everything in life, nuance can reign supreme. I personally prefer distance traveled - reviewing how much someone has accomplished can tell you a lot if you have a strong grasp on how hard it was for them to get there.
But at a certain point, that defeats the entire purpose of pedigree - it’s a useful tool for communicating a lot of information and big ideas in a simple format. So the trick becomes looking for the right signals. Because that’s what this is all about - signalling.
So if you are looking to hire someone young and hungry, look around the edges of their resume to see if that hunger exists. A third generation Harvard grad is still mighty impressive, but how about a first generation college student who went to Penn? When you have to bet on one of those two horses, who are you making an investment in? Like most investment decisions, past performance is not necessarily indicative of future results, but trend-lines can still be helpful.
And how about pedigree when it comes to actual investments? Strong, high cash flow businesses that have been around for a handful of wars have survived a long time for a reason. But when looking toward the future, it’s the companies that are making the right investments today that are going to win tomorrow. Over the past decade, growth stocks have dominated the conversation because that’s where the signal has been drawn and the pedigree has been agreed upon. High growth companies reinvesting in their futures now carry more weight than their steady-eddy, high-dividend counterparts.
When it comes to investing in startups, looking at founding team pedigree is much talked about. Previous successful founders are golden (and probably should be). Folks who have ridden rocketships companies have witnessed ultra-growth before and have some good experience under their belts. They know the zigs and zags of a startup and have better outfitted themselves for pivots, uncertainty, and ambiguity. But what else should we look for? Three signals that come to mind:
What else have the founding team built in the past? Not just businesses, but anything - can even be reputation. Startups are an exercise in going from zero to one and doing that in any field can be tough, even if it’s not a high growth startup.
Did the founding team’s previous success ride a wave that would have been impossible to miss, or did they grow something in a space that was previously conquered and long forgotten? There’s a difference between swimming upstream and swimming cross-stream.
Who have they convinced to ride this journey with them? Startups can be unappealing for a variety of reasons - risk, low pay, high stress, etc. If a founder is able to convince an impressive co-founding team to build a rocketship together, that’s already a sign of a step in the right direction. As a founder, you have to convince a lot of people about a lot of different things about your business.
Those three are not an exhaustive list, but certainly some of the more important ones.
My favorite example of pedigree gone wrong in the past few months has been the story of Quibi. I won’t spend a lot of time here talking about what’s going on there, but by all accounts, they should have the pedigree and resources to revolutionize short-form media. Instead, they are essentially getting bludgeoned by TikTok. There’s still time for them to figure things out, but so far, their pedigree hasn’t done anything for them.
Invest in the Midwest - Episode 1: The Population and the Economy
A blog post from a VC-you-should-know - Victor Gutwein at M25 - about why you should invest and participate in the Midwest startup ecosystem. This is a drum I will beat on whenever I get a chance - the Midwest is due to be a massive tech/startup hub and will get there one way or another. We are still underfunded, however, and need more attention from both the locals and the rest of the country. We have the talent, the economic engines, and the desire. From the post:
“While it hosts roughly 10% of all US-based VC-backed startups, it consistently receives less than 5% of all VC funding (3 states — New York, California and Massachusetts — received 78% of all VC $ in 2019)². This mismatch is driven by a host of factors, but should be seen as an opportunity for many.”
Or how about:
“An enormous amount of business is being done in this region, and it has resulted in the creation of America’s largest companies. The Midwest plays host to the headquarters of 139 Fortune 500s³, more than any other region.”
If you read one of my links this week, make it this one. I am looking forward to future entries.
The Tech I.P.O. Comes Roaring Back in the Pandemic
It looks like there is about to be a deluge of tech IPO’s, assuming the equity markets hold up through August. This is a fascinating time to be a growth stage company looking to go public right now because they are riding a wave of uncertainty and economic acceleration / disruption - two things that generally bode well for startups.
Speaking of pedigree, are there two startups that have more different stores, but similar levels of pedigree than AirBnB and Palantir? Reading the S-1’s for both of them will surely be fodder for this newsletter in weeks to come.
The 10 Most Useful Mental Models
Last week I talked about a mental model I use frequently - every decision is an investment decision. How you allocate your time, resources, and energies can have a positive and negative return, and they are all unknown. This list of mental models is a helpful reminder about how you can view the world more easily. I talked a lot about the idea of “signalling” in today’s musings. Wonder which one I will talk about next week.
Why Are Investors Obsessed with Churn?
I have essentially done very little consumer software investing in my career as a VC, but I found this post to be very enlightening. Yannick does a good job breaking down why churn is such an interesting stat, and what else you should be paying attention to. Knowing you churn metrics can help you find holes to plug in your product / business model and looking at churn by time-frame can let you know how valuable each customer really is.