Novice Investor #20 - How to Become an Expert Investor, Venturing On Podcast and Deep Work
Happy November All,
Since the last newsletter, I’ve had a month of many airport visits and cool experiences. From fundraising in Monaco to SaaStock in Dublin, our first Scoro board meeting in Tallinn and I even made it to New York to visit some friends. I love travelling but too much of a good thing has me yearning for some good old-fashioned routine. Here is a picture of the Scoro board in Tallinn unintentionally recreating the Estonian flag 🇪🇪
We also hosted another founder networking event this week. This time we were in my old stomping ground, Dublin City. One of our Irish-based portfolio companies, FileCloud, gave an extremely unbiased talk about how great a fund Kennet is to work with. Thanks to everyone who joined us.
Venturing On - Kennet Partners
I was featured on the Venturing On podcast/video series hosted by David Frodsham last month. I give an overview of Kennet Partners, explain our focus on bootstrapped B2B software companies and touch on sectors I think are exciting at the moment. Check out the video here.
How to Become an Expert Investor?
As a private market investor, there are numerous areas you can focus on to add value to a fund. From fundraising, hiring, winning deals, branding, founder relationships, due diligence to operational know-how. The list goes on but if I had to just pick one skill to optimise, it ultimately has to be picking the best investments. Everything else is secondary.
How does one become an expert investor? Some like, Malcolm Gladwell say it takes 10,000 hours of practice to be an expert in a skill or profession. Unfortunately, data shows that time spent is not enough and some industries do not lend themselves well to producing experts. A great example highlighting this is Philip Tetlock’s study, where he surveyed 284 political experts and received 82,361 predictions on political events over a 20-year period. He concluded that these highly educated experts performed worse than assigning simple probabilities to each outcome. According to Veritasium, there are four key conditions that are required to produce an expert, in addition to 10,000 hours.
Environment - You must operate in a valid environment that isn’t purely probabilistic. For example, you’ll probably struggle to become an expert in roulette.
Experience - You must get repeated experiences of the same events. If you spend 9,999 hours reading about tennis but just 1 hour practising, I would probably beat you love and love.
Feedback - You must receive regular and timely feedback on events. A chef who has never tasted their own food might struggle to get a Michelin star.
Comfort Zone - You can’t get comfortable with your expertise. You must deliberately learn new skills related to your expertise. If you play the same guitar song for 25 years you won’t be a great musician.
So how does this stack up for becoming an expert private market investor? Pretty poorly it seems. Let’s look at each point.
Environment - Numerous studies following the release of “A Random Walk Down Wall Street” have shown how dart-throwing monkeys can outperform Wallstreet’s hedge fund experts in the public market which suggests public market investing is more probabilistic in nature. On the private market side, there is data suggesting Top Tier GPs have generated persistent returns over time. It seems the private market investing environment can produce experts. ✅
Experience - If you make a decision to invest in one or two companies per year, that doesn’t seem like adequate experience to become an expert. ❌
Feedback - If your one or two private market investments typically payback after 3 - 7 years of holding, I would say this is definitely not timely or regular enough feedback. ❌
Comfort Zone - For any career, this is in your own control. Particularly in the investing world, where there is an endless pit of skills that you can learn to help your career. ✅
Generally, becoming an expert as a private market investor does not seem all that likely. Two of the four key conditions to becoming an expert can’t really be met in our day-to-day roles. So are we destined to be beaten by dart-throwing monkeys? For most of us, probably. However, I started something which should help improve points 2 and 3 and potentially create experts out of us.
For the past month, I have been filling out a very simple Notion template when I meet a new company. After a 20-minute call, I rate the Team, Market, Numbers (traction) and Differentiation out of 5 each and total the score. Then I force myself to decide whether (i) I should personally invest and (ii) Kennet should invest in the company at the prevailing BVP Median EV/Revenue multiple. The reason for the split is to maximise thoughtful decisions. Just because a company doesn’t fit a fund mandate doesn’t mean I can’t make a hypothetical investment decision on it. I then post this decision to our CRM which is crystallised in Kennet's corporate history for all to see. Example below.
The idea here is to increase Experience by making considerably more recorded decisions. Every 12 months I plan to do a review of the decisions to improve the regularity of Feedback. I’ll share the results when I have them. Fingers crossed I will be an expert soon.
Books
Deep Work: Rules for Focused Success in a Distracted World
I have become a little obsessed with the art of focused work in recent months so this book was relevant. It is useful for anyone looking to be more productive in their day-to-day, which should probably be everyone. It illustrates the importance of focused work, explains how modern-day living and work culture is negatively impacting our ability to do focused work and provides some techniques and examples on how to improve our ability to focus.
The standout in the book to me is a mindset shift towards knowledge work. When comparing your day-to-day of sending follow-up emails/analysing financial statements to soldiers on the frontline or NHS nurses saving lives, it can be a little uninspiring. However, when you approach the mundane like a craftsman, with a level of skill and intensity to consistently improve the quality and volume of output, you can transform the mundane into something satisfying that will ultimately help achieve the larger vision i.e. finding, growing and exiting great companies.
“We who cut mere stones must always be envisioning cathedrals.”
Like all self-help books, it was full of many learnings. However, they are completely useless unless they resonate with you and you actively put them into action. Here are the learnings that will shape my work going forward:
As above, approach-focused work like a craftsman.
Your ability to focus is like a muscle that must be trained. During blocked periods of focused work, you must be disciplined and approach it with intensity. Over time this will become easier.
Apparently, our subconscious mind is very good at decision-making and creative solutions when given time to process information. It is best at this for high-level decision-making with disparate information and complex relationships. When faced with a tough decision, it might be best to take a walk in nature or get a good night’s sleep to allow your subconscious brain to do its work and find a solution.
Kennet Partners’ Investment Target
Kennet Partners is a Growth Equity investor with over 20 years of experience partnering with European and US SaaS companies. If you know any companies which fit our criteria, please reach out.
Investment size: $8m - $30m
Maturity: Over $3m in ARR
Growth: > 30%
Type: Bootstrapped and capital-efficient B2B SaaS businesses
Geography: Europe & US
Disclaimer: None of the content in the Newsletter should be taken as financial advice.