20VC IA Ventures' Jesse Beyroutey on Game Theory and How It Impacts Investor Mindset, How To Avoid The Pressure To Deploy Today In Venture & Why Ownership Is The Single Most Important Parameter When Investing

Summary Notes


In a comprehensive interview with Harry Stebbings, Jesse Beiruti, a partner at IA Ventures, delves into the intricacies of venture capital investment and the strategies for building market-dominant companies. They discuss the importance of early-stage investment for securing significant ownership and the challenge of passing on opportunities. Beiruti emphasizes the significance of capital efficiency in follow-on investments and shares his personal approach to media consumption and providing thoughtful feedback to founders. They also explore the concept of market game theory as it applies to the venture landscape, highlighting the delicate balance between capital as a moat and the necessity for a more nuanced analysis of market opportunities. Additionally, Beiruti shares his regret over missing out on investing in Plaid and his excitement about his recent investment in Gauntlet, a company leveraging simulation for the crypto market.

Summary Notes

Introduction to Jesse Beyruti and IA Ventures

  • Jesse Beyruti is a partner at IA Ventures, an early-stage venture fund.
  • IA Ventures has a successful portfolio including Transferwise, Datadog, DigitalOcean, X.AI, and The Trade Desk.
  • Jesse Beyruti's personal investments include DigitalOcean, Ironclad, Transferwise, Sitemachine, among others.
  • Before venturing into VC, Jesse studied systems engineering at the University of Pennsylvania.
  • Roger Ehrenberg, Jesse's partner at IA Ventures, is noted for writing an exceptional venture blog.

"Now Jesse is a partner at IA Ventures, one of the top performing early stage funds of the last decade." "And prior to joining the world adventure, Jesse studied systems engineering at the University of Pennsylvania."

These quotes introduce Jesse Beyruti's current role and background, highlighting the success of IA Ventures and his academic foundation in systems engineering.

Jesse Beyruti's Entry into Venture Capital

  • Jesse joined IA Ventures about eight years ago, shortly after his college experience at Penn.
  • His inspiration to enter venture capital came from working on a startup with his friends from school.
  • Jesse's love for early-stage companies and the energy of early-stage founders led him to venture capital.

"I started at IA Ventures about eight years ago and I joined my partners, Roger and Brad, almost straight out of college at Penn." "I realized that I had this absolute love for early stage companies and that's what led me here."

Jesse's quotes explain his transition from college to venture capital and his passion for early-stage companies, which was a significant factor in his career choice.

Love for Early-Stage Companies

  • Jesse was inspired by the ability to rapidly build and deploy products with small teams.
  • He was motivated by the potential of serving needs and providing value to people through the internet.
  • The optimism and energy of early-stage founders significantly influenced Jesse's direction.

"I realized that there was something incredible about the ability to build a product very early on with very few people and get something that people were using within a matter of days or even hours." "I found the energy and optimism of early stage founders also incredibly inspiring."

The quotes capture Jesse's admiration for the speed and impact of early-stage company development and the founders' positive mindset.

Market Game Theory

  • Game theory involves studying dominant moves in a game with a clear set of opportunities.
  • Market game theory applies the principles of game theory to economics and financial markets.
  • It allows for strategic analysis of a company's positioning and resource acquisition.

"So game theory is the study of what makes a set of moves dominant or strictly dominant." "Market game theory is the application of that to capitalism, to financial markets, to an economy, which is just an instance of a game that happens to have a massive parameter space and many opportunities available and many participants, I mean."

Jesse's explanation of game theory and its application to market dynamics provides insight into strategic decision-making in venture capital.

Application of Market Game Theory in Venture Capital

  • Jesse uses game theory to analyze strategic opportunities and positioning for early-stage companies.
  • The focus is on messaging, customer guarantees, and exclusive access to resources like data, expertise, or employees.
  • Early-stage thinking about market dominance is crucial for setting a company's advantage.

"It allows you to even sometimes in a closed form, to analyze the opportunity and strategy available to a company from any current position." "What positioning can the company occupy in people's minds that's differentiated, and that is taking the best possible frame from customers perspective and therefore dominant."

These quotes show how Jesse applies game theory concepts to evaluate and enhance a company's competitive positioning and strategic advantages in the market.

Defensibility in Modern Markets

  • The concept of defensibility is challenged in modern markets, with many assuming that cash, resources, or data access are sufficient.
  • Jesse Beyruti acknowledges that while these may have been strong defaults in the past, they are not guaranteed advantages.
  • Beyruti compares the current sentiment to the early 2000s belief that competing with Microsoft was impossible.
  • He suggests that attacking large incumbents in specific, smaller areas can be successful.

"There is no form of defensibility today except the blind spots in which incumbents aren't going, is that fair, or is that slightly glib and short sighted, do you think?"

"I think that that's fair in a whole host of markets."

  • The quote emphasizes the vulnerability of incumbents in certain blind spots and the opportunity for new companies to establish themselves in these areas.

Market Dominance and Scale

  • Discusses the relationship between market dominance and market scale.
  • Beyruti believes that smaller markets offer better opportunities for dominance.
  • He does not invest based on the expectation that a company will move into adjacent markets due to the compounding improbability of dominating multiple markets.
  • Beyruti stresses the importance of being excited about the initial market before considering adjacency.

"Generally, the opportunity to dominate a market is inversely correlated with its scale."

"Achieving dominance in one market generally does not lead to enough extra advantage in the next market to then dominate that one too."

  • These quotes highlight the inverse relationship between market size and the opportunity for dominance and the challenges of expanding dominance to adjacent markets.

Capital as a Moat

  • Beyruti discusses whether capital can be considered a moat.
  • He compares access to less expensive capital to economies of scale.
  • Beyruti cautions that having a lot of capital can lead to undisciplined expansion and requires careful analysis to determine if it's the right strategy.

"Is capital a binding constraint in your market opportunity?"

  • This quote questions the effectiveness of capital as a primary advantage and suggests that it should not be the sole factor in strategy development.

Venture Capital Suitability and Feedback

  • Beyruti addresses how to determine if a business should raise venture capital.
  • He emphasizes the importance of founders understanding whether venture capital is suitable for their company's stage and goals.
  • Beyruti shares his approach to giving feedback to entrepreneurs, focusing on the suitability of venture capital and the personal investment model of his firm.

"Hey, I don't think that there's enough information yet to establish that this company would be well served raising venture capital."

  • This quote reflects Beyruti's careful consideration of whether a company is ready for venture capital investment based on available information.

Pressure to Deploy Capital

  • Beyruti speaks about the pressure to deploy capital in the venture capital industry.
  • He describes the steps iaventures takes to maintain independence in investment decisions.
  • Beyruti explains that iaventures does not raise funds on a set cycle and does not grow fund size to avoid the pressure to deploy.

"So we've done a lot of work at iaventures to try to create and maintain our independence."

  • This quote shows the deliberate efforts by iaventures to avoid external pressures and focus on making independent investment decisions.

Investment Pace and Pressure at iaventures

  • iaventures does not focus on maintaining a specific investment pace.
  • The team avoids the baseline pressure to deploy capital frequently.
  • Jesse Beyruti does not feel exogenous pressure to deploy capital.
  • Self-reflection occurs when an investment that excites hasn't been found for a while.

"So I would say I don't feel it. People frequently ask me, what's your investment pace? And my answer is always, I actually don't even know. It's not a thing that we talk about or manage to at iaventures."

This quote highlights iaventures' lack of emphasis on investment pace as a metric of success or productivity, indicating a strategic choice to avoid pressure to deploy capital.

Internal Decision-Making Process at iaventures

  • Independence and accountability are key principles in iaventures' decision-making.
  • The three partners, Roger, Brad, and Jesse, have years of experience making decisions together.
  • They work closely in a shared space, discussing opportunities frequently.
  • Decisions can be made quickly due to their close collaboration.
  • Each partner may lead an investment, but all decisions require unanimity.
  • Non-leads challenge the lead to consider all potential risks and opportunities.
  • The process relies on mutual trust and understanding between partners.

"The combination of feedback internally and a deep level of trust and understanding between us, and then spending as much time as we possibly can, getting points of view from others and synthesizing them, leads us to decisions that are ultimately independent and our own."

This quote explains that the decision-making process is collaborative but also independent, with each partner having a significant role and mutual respect for one another's opinions.

Building Ownership in Investments

  • Ownership is a critical parameter in iaventures' investment model.
  • iaventures prefers to build ownership early, often leading seed-stage investments.
  • Follow-on decisions after initial investment are crucial.
  • The team looks for indications of a capital-efficient model by Series A or B.
  • They sometimes increase ownership at later stages if the company demonstrates capital efficiency.
  • The first investment is seen as the primary opportunity to build ownership.

"But at the core, we are in vehement agreement that you build your ownership in your first investment."

Jesse Beyruti emphasizes the strategy of securing significant ownership stakes early on, which is fundamental to their investment philosophy.

Price Sensitivity in Investments

  • Jesse Beyruti has not attempted to measure or benchmark price sensitivity.
  • The three partners maintain a consistent and disciplined approach to investment prices.
  • They differentiate between a great company and a great investment in that company.
  • Option valuation and derivatives expertise are leveraged in investment decisions.
  • Roger, one of the partners, often provides clarity on price worthiness.

"But I guess I'd say we've pretty much kept consistent over the years about price."

The quote reveals that iaventures has maintained a consistent approach to price sensitivity over time, balancing investment quality with valuation.

Content and Response to Consumption Ratio in Founder-VC Relationships

  • Founders produce significant content in the early stages of their company.
  • VCs often respond at a high level without deep engagement.
  • Jesse Beyruti strives to match the amount of content produced by founders with thoughtful reflection and response.
  • This approach enhances understanding of the company and deepens relationships with founders.
  • The practice of using Google Documents for board decks facilitates this engagement.

"So I try to respond to everything from early on with, actually, I think the first company that I had the pleasure of working on at IA called transferwise, started doing this, and we ended up doing it with a lot of our other portfolio companies."

Jesse Beyruti shares his practice of actively engaging with the content provided by founders, which helps him gain a better understanding of the company and strengthens the founder-VC relationship.

Managing News Cycles

  • Jesse Beyruti discusses his personal approach to managing news cycles.
  • He finds the news cycle exhausting and has a low tolerance for consuming large amounts of information.
  • To cope, he deleted all apps that he would unconsciously open and refresh, including social media and news platforms.
  • He also uses an app to block off most websites during the week and only reads selected content on weekends.
  • This approach allows him to stay informed without feeling overwhelmed and creates space for other activities.

"I personally find that the news cycle is exhausting for me and perhaps it's a result of being an introvert or something like that. So I have very low tolerance for consuming a lot of information and it triggers for me the absolute worst sort of behavior loops where now I have to finish reading the Internet and that takes a whole lot of time."

This quote explains Jesse's personal experience with news cycles and the negative impact they have on his behavior, leading him to limit his media consumption.

"So instead I've worked on really limiting my media consumption. And I'll tell you where I've landed after experimenting a lot this year."

Jesse shares his strategy for managing media consumption, which involves self-imposed limitations to avoid the negative effects of being constantly connected to the news cycle.

Book Recommendation

  • Jesse recommends the book "Seven Powers" for business reading.
  • He values the book for its insights into creating and sustaining a company's dominance and power over time.

"I would say my most interesting book is with respect to business. This book called Seven Powers."

Jesse identifies "Seven Powers" as his book of choice for understanding business strategies related to long-term company success.

Evolution as an Investor

  • Over eight years, Jesse has gained clarity on what he looks for in a company.
  • He emphasizes the importance of companies making strong guarantees to their customers.

"Have gotten much clearer on what I want to see in a company, and in particular on how strongly I feel about the company making strong guarantees to its customers."

Jesse reflects on his growth as an investor and the increased importance he places on customer guarantees within the companies he invests in.

Personal Beliefs

  • Jesse believes that keeping up with the news is more about entertainment than productivity.

"I definitely believe that keeping up with the news and news cycle is more of a form of entertainment than a form of productivity."

This quote reveals Jesse's contrarian belief that news consumption is not as productive as it is often perceived to be.

Investment Regrets

  • Jesse regrets missing out on investing in Plaid.
  • He acknowledges the mistake of not recognizing the potential of the infrastructure that Plaid was building.

"The company plaid, I would count as one of my absolute biggest misses. And the mistake that I made was I looked at the product that they were thinking about building in the very beginning, which was consumer financial management and playing with location at the time app, and didn't think about the infrastructure that they built underneath it."

Jesse discusses his missed opportunity with Plaid, attributing it to a lack of foresight regarding the underlying infrastructure Plaid was developing.

Advice for New Board Members

  • Jesse advises new board members to spend as much time writing as reading to quickly ramp up their understanding of the company.

"I would say spend time writing as much as you spend time reading, and that will cause you to ramp up as a board member and understand and be effective at knowing what the company does much faster than not."

Jesse emphasizes the importance of active engagement through writing for new board members to become more effective in their roles.

Desired Change in Tech

  • Jesse wishes to change the focus on raising capital in the tech industry to building the company itself.

"I would most like to change the way that people raise capital and to make raising capital not the focus of building their company."

Jesse expresses his desire to shift the emphasis from fundraising to the actual development and growth of tech companies.

Recent Investment

  • Jesse's recent investment is in a company called Gauntlet.
  • He is excited about the investment because of the founder's expertise in simulation and its application to crypto assets.
  • He believes Gauntlet's agent-based simulation will enable natural demand for crypto assets, moving beyond speculative interest.

"It was the first investment that I've personally made after spending a whole lot of time around financial services in the crypto world. And I got so excited about it primarily because it was started by a good, close personal friend of mine, Tarun, who is, first of all, one of the most brilliant individuals I've ever met in my life."

Jesse shares his enthusiasm for investing in Gauntlet, highlighting the founder's brilliance and their personal relationship as key factors in his decision.

"But beyond that, he was an expert in simulation and has applied simulation to everything from physics to financial markets to proteins and chemistry."

This quote details the founder's extensive background in simulation, which Jesse finds compelling as it applies to the financial and crypto markets.

"And I saw him applying something that he knew everything about to a domain that most deeply needed simulation and in particular, agent based simulation, which was enabling natural demand for crypto assets."

Jesse explains that the founder's expertise in simulation is particularly well-suited for creating genuine demand in the crypto space, which is a key reason for his investment.

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