20VC Oren Zeev on Why Diversification Does Not Work, Thesis Based Investing Is Sceptical & Partners Mostly Stay Together For LPs

In a conversation with Harry Stebbings on "The Twenty Minute VC," venture capitalist Oren Zeev, founding partner of Zeeve Ventures, shares his journey from a founding team member at IBM's chip design group to a successful VC with investments in companies like Audible and Houzz. Zeev emphasizes the value of being an outsider to an industry but an insider to the pain, which has guided his investment strategy and led to backing transformative companies. He also discusses his non-traditional approach to venture capital, operating without a typical firm structure, which allows him to offer entrepreneurs the benefits of both an individual angel investor and the resources of a VC. Zeev critiques the inefficiencies of large VC partnerships and advocates for a concentrated portfolio, offering unconditional support to founders while eschewing the herd mentality of thematic investing.

• Harry Stebbings introduces the podcast episode and expresses appreciation for his guest's assistance with the show.
• Harry mentions his use of Snapchat and invites listeners to join him there.
• He introduces Oren Zeev as the founding partner of Zeev Ventures, highlighting the fund's success and Oren's previous roles.
• A special thanks is given to David Sachs for introducing Harry to Oren.

"Welcome back to another week in the world of the 20 minutes VC with me, Harry Stebbings, and if you haven't already, it'd be great to see you on Snapchat at H. Stebbings with two b's. But to our episode today, and we have a very special guest in store for you."

This quote sets the stage for the podcast episode, indicating the host's engagement with the audience and the introduction of his guest, Oren Zeev.

• Harry Stebbings shares personal recommendations for products that have improved his travel experience, including Raiden luggage and Simba mattresses.
• He provides details on the features of these products and offers promo codes for listeners.

"And then I had Joshu Dashkin from Raiden on the show. I bought one of the cases after the episode, and it's genuinely changed the game for me."

Harry is endorsing a product based on his positive experience, suggesting its usefulness to his listeners.

• Oren Zeev comes from a family of scientists and engineers, which influenced his career path.
• He started as an Electrical Engineering major, worked at IBM on image processing and chip design, and later pursued an MBA.
• Upon returning to Israel in 1994, Oren joined the newly formed venture capital industry as part of Apex Partners.

"I come from a family of scientists and engineers, so I didn't even know that there was any other option."

This quote provides insight into Oren Zeev's background and the influences that shaped his career in technology and venture capital.

• The venture capital industry in Israel experienced rapid growth, coinciding with Oren's return from business school.
• Oren joined Apex Partners, which was a global firm headquartered in London, and he played a significant role in starting their operations in Israel.

"When I returned to Israel, it was 1994. The venture capital industry in Israel was literally born overnight when I was away in business school."

Oren discusses the serendipitous timing of his return to Israel and the birth of the venture capital industry there, which he became a part of.

• Oren reflects on the learning experience of going through the dot-com bust in 2000 and the financial crisis of 2008.
• He emphasizes the importance of not getting too carried away during frothy market conditions and investing in companies with strong fundamentals.

"First of all, I think having gone through it a few times, I think you get a little bit better identifying when there are signs of danger that seems maybe heading there again."

Oren shares his perspective on how experiencing market downturns can improve an investor's ability to spot signs of danger and make more prudent investment decisions.

• Oren believes that diversification does not work during market downturns as everything is correlated and thus, prefers a concentrated portfolio.
• He argues that a concentrated approach allows for a higher investment threshold, more focus on selected investments, and the potential for significant impact from successful companies.

"So to me, the lesson is the opposite. The lesson is I want to be highly concentrated, because when I'm highly concentrated, first of all, I put the threshold higher."

Oren explains his counterintuitive lesson from the market crash, advocating for a concentrated portfolio to achieve higher quality investments and greater impact.

• Oren initially invested only his own money, which he refers to as non-institutional.
• In recent years, he has accepted limited partners (LPs) but maintains an unorthodox approach with no physical office, admin, or partners.
• Zeev Ventures operates with the personal touch of an angel investor but with the financial capacity and involvement of a venture capital firm.

"The look and feel is like angel, but I'm not angel in terms of the amount that I invest and the role that I play in the companies."

Oren describes the unique structure of Zeev Ventures, which blends the approachability of an angel investor with the scale and engagement of a VC firm.

• Entrepreneurs deal with an individual investor rather than a VC firm, eliminating the risk of a partner leaving the firm and the entrepreneur becoming an "orphan" in the partnership.
• Individual investors can provide both the personal touch of dealing with a single person and the resources and power similar to a VC fund.
• Lack of overhead in an individual investor's operations allows for more time to be dedicated to working for and investing in companies.

"I don't have any other constituents other than themselves. So you deal with an individual, they know that there's no risk that I'm going to leave the adventures." "I have the resources and the power in terms of the investment amount and what I'm able to bring to the table of a VC, again, because it's not one of 100 investments, I have a lot of time."

The first quote discusses the advantage of entrepreneurs dealing directly with an individual investor, emphasizing the stability and commitment that comes with this relationship. The second quote highlights the benefits that an individual investor can provide, similar to those of a VC, but with more dedicated time for each investment.

• Large VC partnerships often involve internal politics and career management, which can lead to suboptimal decision-making.
• Partnerships can be dysfunctional due to varying levels of seniority, tensions, and the fact that partners do not always choose each other.
• Partners may stay together for the sake of Limited Partners (LPs) who value longevity and stability over change, even if there are internal conflicts.

"The larger the partnership is, the more as a VC, you manage your career in a way, and you manage. There is internal politics." "There's so much room for accumulated frustration over many, many years."

The quotes describe the internal dynamics of large VC partnerships, where career management and politics can play a significant role, often leading to frustration and suboptimal outcomes. The second quote specifically points out the potential for long-term frustration within these partnerships.

• Investors should be supportive and provide a positive environment for entrepreneurs, who already face a lonely and challenging role.
• Supportive behavior does not exclude challenging entrepreneurs with tough questions and honest feedback.
• Once an entrepreneur makes a decision, even if it differs from the investor's opinion, the investor should support them without resorting to "I told you so" attitudes.

"It's so difficult to be an entrepreneur... The last thing you need from a board member is to give you a hard time." "I would give the founders all the rationale, all the arguments and all my input. But if at the end of the day... they decided to go down the path of direction b, then I would absolutely be supportive of their path."

The first quote emphasizes the importance of being a supportive board member to entrepreneurs, who already face significant challenges. The second quote outlines the balance between providing input and respecting the entrepreneur's final decision, committing to support it regardless of personal opinions.

• Experience on boards leads to personal growth and understanding of effective board membership.
• Early in their careers, board members may act more authoritatively and confrontationally, which can be counterproductive.
• Over time, board members learn the value of humility and the importance of not overgeneralizing from personal experiences.

"The more clueless I was, the more I compensated for it, acting as if I knew what I was talking about and that was a bad thing." "I think over time as you get more experience, you understand how much you don't know."

The quotes reflect on the learning curve of becoming a board member, where initial inexperience may lead to overcompensation and poor behavior. With time and experience, board members realize their limitations and the dangers of generalizing from limited experiences.

• Harry Stebbings discusses the importance of not micromanaging founders and allowing them to be the smartest in the room.
• Founders usually have the best understanding of their market and receive input signals that investors do not.
• It is a negative sign if an investor believes they know better than the founder about the business.
• Founders should learn from their own mistakes rather than being forced to follow the investor's path.
• Empowerment and passion in founders are crucial for success; they should not feel micromanaged by the board.

"I don't need to be the smartest person in the room. In fact, I don't want to be the smartest person in the room. I want the founder to be the smartest person in the room."

This quote emphasizes the belief that founders should be the most knowledgeable about their business and market, and the role of the investor is to support rather than overshadow them.

"And by the way, if I know better than them, that's a horrible sign. I should write the investment off if I think I know better than the founder."

Harry Stebbings suggests that an investor believing they have superior knowledge to the founder is a red flag, potentially indicating a poor investment.

"Because if they're going to adopt the path that I think is correct, even if it objectively is a better path, if they're not convinced, it's going to be a self fulfilling prophecy."

Stebbings points out that even if an investor's strategy is objectively better, it must align with the founder's vision and conviction to succeed.

• Oren Zeev shares the story of investing in Howes, a company started by an Israeli couple in Palo Alto.
• The founders worked on Howes as a hobby before deciding to pursue it as a business.
• They were reluctant to take money from VCs due to negative stories they had heard.
• Oren was introduced to the founders and was impressed by their work and his wife's reaction to the product.
• The investment deal was made quickly and was based on the founders' passion and the product's potential.

"So the founders are a married couple, and they're Israeli and they're in Palo Alto. So it's like my people, because I'm also an Israeli and I'm also in Palo Alto now."

Oren Zeev relates to the founders of Howes on a personal level due to shared nationality and location.

"And they asked, but they were very, very reticent about taking money from VCs because they heard some horror stories, by the way."

The founders were initially hesitant to accept venture capital funding due to concerns about negative experiences.

"I was blown away by the meeting. We immediately scheduled another meeting the next day at their house."

Oren Zeev's decision to invest was influenced by his immediate positive impression of the founders and their product.

• Oren Zeev expresses skepticism about theme-based or thesis-based investing.
• He prefers to be surprised by unique ideas that are not obvious or widely recognized by other investors.
• Zeev believes in the potential of markets that are currently perceived as small because they offer a grace period for growth without significant competition.
• Success stories like Howes, Audible, and Chegg were not obvious investment choices at their inception.

"I'm very skeptical of my ability, and by the way, theirs. Predicting the future, right. So I don't really have preexisting thesis."

Oren Zeev doubts the ability to predict future market trends and prefers to encounter unexpected opportunities.

"Because the problem with thesis based investing, whatever thesis someone has, there are 1000 other people who have the same thesis, right?"

Zeev criticizes thesis-based investing for being too common and competitive, leading to a lack of unique investment opportunities.

"If the market is big today, it would be much more difficult to build a market leader because everyone knows it's big."

He argues that entering a currently large market is more challenging due to the presence of established players and intense competition.

• Oren Zeev discusses his favorite book, "Innovators Dilemma," and its impact on his investment strategy.
• He admits to not reading or listening to much media but recommends Fred Wilson's blog for its concise and insightful content.
• Zeev plans to listen to Harry Stebbings' podcast after being introduced to it through David Sachs.

"There is a book called Innovators Dilemma. Have you heard of it?"

Oren Zeev cites "Innovators Dilemma" as a book that profoundly influenced his approach to investing.

"I don't read so much and I don't listen too much either."

Zeev shares his limited engagement with blogs and newsletters, highlighting his selective media consumption habits.

"There is Fred Wilson's ABC."

He recommends Fred Wilson's blog for its brevity and quality of insights, suggesting it as a valuable resource for readers.

• Audible IPO was a significant milestone for Speaker B, marking their first major win.
• This event served as a legitimizing factor in Speaker B's career, showcasing a successful track record.
• Prior to Audible, Speaker B had a few exits but considered them "base hits" compared to the "home run" with Audible.

I think the audible IPO was a big one for me because it was the first major win. And you never forget the first day.

The quote emphasizes the importance of the Audible IPO in Speaker B's career as it was their first significant success and a memorable milestone.

• Speaker B foresees House becoming an incredibly successful venture, potentially surpassing current valuations.
• They believe House's future success will make its valuation in 2017 seem like a bargain.
• Speaker B is the main early backer and remains the second-largest shareholder after Sequoia.

I think House is going to be my best deal. I think it's going to be massive.

Speaker B is expressing strong confidence in House's future growth and success, indicating their belief that it will become a standout investment.

• Speaker B co-founded Tipalti, identifying a market need and building the company from scratch.
• Unlike other investments, Speaker B was directly involved in the creation and development of Tipalti.
• The company operates in the accounts payable market and was built without external VC funding due to the co-founder's preference.

I was the founder. It was an idea that I came across. I saw the need and I convinced a friend to do it with me and we built it from scratch.

The quote reveals Speaker B's entrepreneurial role in founding Tipalti, highlighting their proactive approach to addressing a market need through company creation.

• Speaker B has noticed that successful deals and transformative founders often come from outside the industry but have a deep understanding of the industry's pain points.
• This insight is based on Speaker B's experience with companies like House, Audible, and Chegg, where founders were not industry veterans but had personal experiences with the problems they aimed to solve.
• Speaker B coined the phrase "Outsiders to the problem, insiders to the pain" as a guiding principle for successful investments.

The deals that I like, deals that I was the most successful with, are and the founders that were able to really transform an industry, at least in my case, they were always outsiders to the industry, but they were insiders to the pain.

The quote encapsulates Speaker B's observation that the most impactful founders and deals come from those who are not entrenched in the industry but have personally experienced the problems they aim to address.

• Next Insurance is Speaker B's most recent publicly announced investment.
• It targets small businesses, offering a range of necessary insurance products through an online platform.
• Speaker B believes Next Insurance will revolutionize the way small businesses purchase insurance, similar to the transformation seen in the travel industry.
• The company's founders had no insurance background but were motivated by their own challenges in acquiring small business insurance.

I believe that in the case of small business insurance, it's going to transform in the next few years, and basically this offline agencies are going to be replaced with an online agency.

Speaker B predicts a shift in the small business insurance market, suggesting that Next Insurance will lead a move away from traditional offline agencies to online solutions, mirroring changes in other industries.

• Speaker B expresses appreciation for the opportunity to share insights on the show.
• Speaker A thanks Oren Zeev for his support and introduces a product recommendation segment.

I really appreciate. It was fun. Thank you.

Speaker B is showing gratitude for the enjoyable experience of participating in the podcast.

• Speaker A recommends Raiden luggage for its tech features, including a removable battery, USB ports, and Bluetooth location tracking.
• A promo code for Raiden is provided for listeners.
• Speaker A also endorses the Simba hybrid mattress for its comfort and technology, mentioning a free trial and guarantee.

With a removable battery and two external USB ports, I never have to worry about a dead battery when traveling.

Speaker A shares a personal recommendation for Raiden luggage, highlighting the convenience and tech features that have improved their travel experience.