Sunday Service: Lessons from Danny Rimer at Index Ventures
Market sizing is deceptive. Data should be balanced with instincts. Diverse groups make great teams.
Introducing Sunday Service (Beta): Hi all, I’m trying something new that I hope you’ll like. On Sundays, I’ll share a brief note of VC lessons that I picked up in the week from high-performers.
I was inspired to do this thanks to a podcast interview a friend shared of Joe Mazzulla. At age 35, he is the youngest head coach to win an NBA championship since Bill Russell in 1969!
Here’s the quote that inspired me to do this.
“Once I got this job, I tried to build almost like a Mount Rushmore of coaches that I could learn from [and] develop my game from.”
Mazzulla has the former chess prodigy Josh Waitzkin in that group. Manchester City’s Pep Guardiola, a leading football (soccer) coach, and Nick Lavery, the first US Army amputee to return to combat as a Special Forces operator, also provide mentorship.
I started this newsletter to learn from the best (and share that along the way). This Sunday schedule and my other regular posts will add to that aim .
Here’s to more of your continued growth and mastery! 🚀
Harry Stebbings recently interviewed Danny Rimmer of Index Ventures. The full episode has lots more but here are three memorable observations I took from the interview.
Observation 1: Market Size is Often Misleading. Exceptional Founders Can Develop a New Category or Expand the Existing Market.
Index Ventures missed out on Snap because they couldn’t see how big another social media platform could get. Index was totally justified at the time, given the limited outcomes of other social media businesses. The firm also missed out on Airbnb because they couldn’t see how much bigger it could get. Danny took this lesson to heart.
“One of our tenets is definitely that market size, TAM, is noise. That is a clear viewpoint that we learned early on; that we were not going to be able to judge, as you said, you can’t judge the market. And so therefore, it’s crazy to assess an investment based on the size of the market. I mean, one of the big lessons on Airbnb was, when we were evaluating it, we were thinking, how many hotel rooms is Airbnb going to cannibalise? Rather than thinking: actually, Airbnb is going to create an entirely new market; an entirely new amount of inventory that has never hit the market prior.” - Danny Rimmer
On the surface, this view strongly contrasts with another legendary investor, Don Valentine of Sequoia Capital. “If you don’t attack a big market, you’re highly unlikely to build a big company,” he once said. “At Sequoia we we’re never interested in creating markets, it’s too expensive,” he added. But I think both investors are right.
Creating and educating a new market from scratch on your own is a bad idea. But growing an existing market (for example by making a product more accessible) or building on an emerging trend with others (for example what Coinbase did with crypto) can lead to huge outcomes.
Observation 2: Trust the Instincts You’ve Developed from Experience. Data Only Goes so Far.
Data and analysis are important. However, once you have a solid bank of experience, you can also lean on your instincts, especially in areas of high uncertainty and velocity (aka early-stage investing). Danny asks us to consider the following:
“…in this industry, right, we’ve been trained to think through first principle thinking; to be analytical; to think of all these other signals that either are the primary driver of our investment thesis or are the primary support for our investment thesis. And I’m sort of saying, actually, what is the first impact? What is the first reaction that you have to the founder, to the opportunity? How does it make you feel?” - Danny Rimmer
Trusting a premature, inexperienced, and biased “gut” comes with all sorts of issues. But a well-calibrated initial view of an opportunity can be revealing.
I’ve noticed that a lot of great investors give credit to this time-honed skill of judgement. It comes up so often that I believe it shouldn’t be ignored.
Observation 3: Diverse Perspectives Make Great Partnerships.
Index Ventures has “varied personalities” and each partner leads thesis development across different areas. As Danny puts it, “everyone is encouraged to have a major and a minor” with investment areas.
Critically, everyone is a peer. “You just get to a better decision”, says Danny, when you have peers who think differently and have conviction in their perspectives but are also respectful and open to their partners’ views.
Takeaways
Give more weight to exceptional talent over tenuous market assumptions.
Hone your instincts to balance out data-driven and analytical thinking.
Build a team with varied thinking styles. This improves decision-making.