Over the past few years, Dustin Mix and I have spoken with many students in the process of discerning whether they wanted to be investors, and if so, what kind of investors they wanted to be. We have gone through (and are going through) the same process ourselves. It struck us that the first part of the question receives far more focus than the second. Aspiring investors often convince ourselves that discernment in professional investing is a purely rational pursuit. We will be guided by the invisible hand to the place our risk tolerance and return desires intersect.
As we have wandered toward investment careers, however, we have been disabused of this notion. Discernment in investing is only valuable if it is specific, and so we have tried to delineate types of investment practically. We have come to see investing as a series of questions frequently asked, and a set of behaviors to turn the answers into money. The questions for aspiring investors become "which questions can you ask for a long time, and which behaviors can you repeat?" We find this not only relevant to investors discerning which styles might be a fit for them, but also critical to investors wondering which type of market might support their investing styles (us).
This framework is far from comprehensive, though we would argue the primitives are all here. Real estate investing for example is some blend of Credit + Private Equity + Macro (even Public Equity) depending on the strategy.
Additionally, these strategies move and expand/contract over the course of the cycle. In peak venture cycles, for example, control can decrease substantially for most investors. At various points in the cycle, as well exploration can decline or increase. Oddly, we would note that this seems to have a counter cyclical bent, as in peak markets, relatively known business models in well understood markets can achieve exceptional valuations (and then need efficiency to grow into them). As Bryce Roberts would say, "The hardest thing to make is an edgy movie with a $200M budget." In down markets, creativity is required to do more with less, and under-explored market segments tend to show their value.
In most market environments, however, Quadrant III remains empty. This has something to do with value and cost.
When presented with low value asset, investors face a choice. They can manage the asset at a sustainable, low cost and potentially sacrifice control in the future, or they can manage the asset with a high control strategy that may impose outsized cost relative to the current asset value. There are many reasons that this might be a false dichotomy, for example Praxis' model of redemptive entrepreneurship, which recognizes that setting down control may be the best way to build influence over outcomes. Additionally, venture capital is beginning to reckon with the reality that startups may appreciate in value more deliberately, and should be more sustainably capitalized.
In recent years, however, many investors preferred a race to significant control over high market value assets rather than a sustainable management structure around assets with less clear market value. This had dramatic consequences for ideas, teams, companies and communities that did not capture market value as quickly as their cost structure demanded. In many cases, not only was the future sacrificed, but present assets were too. Young people discerning their course should question whether they want to be in a race against the clock, or whether they wish to be patient with their investments. Communities investing in their futures should ask the same questions.
We observe that most economies are built on low value transactions that produce attractive cash-on-cash returns, and occasionally, reflect those returns in substantial market value. The future of the internet may lie in such economies. The future of small physical communities certainly does. An investment structure built for such environments may prove uniquely suited to such economies.
Cooperatives have not been an attractive place to invest over the past several centuries because the market has either refused to recognize the value they create, or when it does, higher cost, higher control structures have more efficiently collected that value.
In its truest form, venture-backed startups were much like co-ops. Many people came together to contribute labor, skill, and other non-monetary assets in return for an ownership stake. Even venture capitalists had to bring more than money to the table in order to be a part of the endeavor. We have gotten away from the goal of ramen profitability for most startups. That's not a value judgement. It's just a reflection that most venture capital is not a fit for most businesses and market problems. We would also observe that bootstrapping (with equity well distributed across a team) resembles co-ops as well.
We find ourselves drawn to the motions of cooperative investments, and find technological and financial reasons for optimism about their future. We hope to find others who feel the same.
Regardless of where you find yourself on this chart, the world needs more of it. Best of luck on the journey.