August 25, 2021
QED Investors Founding Partner Frank Rotman on 20VC podcast
QED Investors Co-Founder Frank Rotman joined Harry Stebbings on The Twenty Minute VC podcast.
Frank spoke about the state of valuations today, the importance of clarity of thought, what separates QED from other VCs and why the feedback loop is much different as an investor than it is as an operator.
Listen to the full episode here
Here are eight insights from the episode. Be sure to check out the full discussion to dive much deeper.
On Frank's relationship with QED co-founder and managing partner Nigel Morris, who Frank has worked with for 28 years:
It's a little bit of an odd couple, but it works. Nigel has this immense amount of energy is expansive in his thinking. He's very pluralist. I think of him as having intellectual ADD -- anything that is interesting, he finds interesting. And I'm very much a reductionist. I actually like doing very few things, but doing those things extraordinarily well, in fact, I don't like doing things if I don't think I can be the best at it out of anyone out there. So putting the two of us together is really interesting because he expands my thinking and I tend to shrink some of the things into a smaller number of things that we can actually bite off and make work. We balance each other there, too.
On levering his Capital One experience in the early days of QED:
When Nigel and I first founded QED, we were doing it because this was a niche thing that we understood. We were going to do it, whether it was a big ecosystem or a small ecosystem, because it's all we actually understood. We understood financial services. There wasn't even a name called "fintech." There wasn't a word to describe this entire ecosystem that's evolved. But what we knew is we knew payments and we knew lending and we knew investments, and we knew a little bit about capital markets. We ultimately knew about the core tenants of banking, so by knowing banking, we knew where there were opportunities in the space.
The way that QED has won deals is that we're all ex-operators that aim to be the best advice that you can get from any of your advisors around the table. We're there at the line of scrimmage with a servant's mentality to help the founder actually succeed.
On why clarity of thought makes a huge difference between a great VC and a poor VC:
I describe clarity of thought that if you were to ask someone the same question five days in a row or five weeks apart or a year apart from asking the question originally, would you end up with the same answer from that person?
And the only way that you can say yes to having the same answer from the person is if they understood why they made that decision in the first place and there's logic behind it. So we talk about superpowers all the time. I think clarity of thinking is one of my superpowers where if you take any of the businesses that I actually underwrote over the past 12 or 13 years, and there are hundreds of them that I've dug into deeply, and there are probably a few thousand of them that I've actually looked at over that period of time. If you gave me a few minutes just to review the last investor day, I could tell you precisely why I made a yes or a no decision. You're going to get the same answers from me, whether you asked me today or a year from now, and it's going to be the same answer that it was five years ago.
So once you have that clarity of thought, you can now anchor your decisions around frameworks, you can anchor your decisions around what you believe and didn't believe in the moment based on the information that you were seeing, then you can study outcomes. Then you can study what happened within the companies.
On the state of valuations and pricing discipline:
It is exciting and disappointing at the same time. The environment that we're in, ultimately I think outcomes are bigger than anyone expected them to be. That's a very interesting observation, more than else and should factor into what a company is ultimately worth. But at the same time, a lot of capital has flowed into what is a pretty shallow asset class. People think of venture as a very large asset class, but if you study it relative to the truly large asset classes, it's tiny, it's getting larger. And I think that's why it's attracting capital. You know, companies have been staying private longer. That means the area under the curve of where you can make money, as bigger than it's ever been.
On outliers and breakout companies:
The one truism in venture is whatever the financial plan is that a founder puts in front of you just isn't going to come true. It doesn't mean you shouldn't analyze it. In fact, I spend a lot of time analyzing plans because I think about the plans as a numerical articulation, a financial articulation of how the founder sees the future playing out. And there's actually a lot of insight in financial plans that people ignore. I find it lazy underwriting when they say, "well, the plan isn't going to happen. So why should I spend time on it?" But there's a lot of embedded information that you can pull out of plans by having conversations with the founders and understanding what they expect to happen when they expect it to happen, why they expect it to happen.
On what it takes to win deals:
Historically, the way that QED has won deals is that we're all ex-operators that aim to be the best advice that you can get from any of your advisors around the table. And not advice that's generic about what you need to do to grow up to be a great company five years from now, but more importantly, what should you be doing tomorrow. It's a very different type of advice. We can give advice on what the company should grow up to look like in five years, but we can actually get down to the granular unit of what are you actually working on. How could we be helpful to kinking the curve on outcomes? Is there something that we could do to actually help you avoid mistakes or sharpen the pencil on your learning agenda, actually find resources that can help you kink the curve on outcomes in different ways? But we're there at the line of scrimmage with a servant's mentality to help the founder actually succeed.
On Team-and-TAM investors:
There are Team-and-TAM investors that basically say, "look, this is a talented group of people. They're going to figure things out. We don't know what those things are. It's a big enough space, big enough opportunity, just give them capital and let them go." And by the way, there's nothing wrong with that. I'm just not a Team-and-TAM investor because I want to be on the journey with them. I want to have the conversations about what we're going to do tomorrow to figure things out. And if I can't see a path based on what, you know, in the moment to building an interesting business, then it's just hard for me to get conviction
On the feedback loop cycle time as an investor as opposed to as an operator:
When you're an operator, you get daily results. There's something that's just so pure about that. Every day you have targets, every day you see whether you're hitting your targets or not. You have goals that you can measure in hopefully days, weeks, months, quarters, years -- it depends on how difficult the goals are, but these are short timeframes relative to venture investing.
In venture, you have to get things right over extended periods of time in order to build any business of size. So the feedback loops are different. The conviction that you have to have around the decisions that you make are different. You have to be much more thoughtful about each and every decision that you make because you make fewer of them and they have bigger consequences.
QED Investors Co-Founder Frank Rotman joined Harry Stebbings on The Twenty Minute VC podcast.
Frank spoke about the state of valuations today, the importance of clarity of thought, what separates QED from other VCs and why the feedback loop is much different as an investor than it is as an operator.
Listen to the full episode here
Here are eight insights from the episode. Be sure to check out the full discussion to dive much deeper.
On Frank's relationship with QED co-founder and managing partner Nigel Morris, who Frank has worked with for 28 years:
It's a little bit of an odd couple, but it works. Nigel has this immense amount of energy is expansive in his thinking. He's very pluralist. I think of him as having intellectual ADD -- anything that is interesting, he finds interesting. And I'm very much a reductionist. I actually like doing very few things, but doing those things extraordinarily well, in fact, I don't like doing things if I don't think I can be the best at it out of anyone out there. So putting the two of us together is really interesting because he expands my thinking and I tend to shrink some of the things into a smaller number of things that we can actually bite off and make work. We balance each other there, too.
On levering his Capital One experience in the early days of QED:
When Nigel and I first founded QED, we were doing it because this was a niche thing that we understood. We were going to do it, whether it was a big ecosystem or a small ecosystem, because it's all we actually understood. We understood financial services. There wasn't even a name called "fintech." There wasn't a word to describe this entire ecosystem that's evolved. But what we knew is we knew payments and we knew lending and we knew investments, and we knew a little bit about capital markets. We ultimately knew about the core tenants of banking, so by knowing banking, we knew where there were opportunities in the space.
The way that QED has won deals is that we're all ex-operators that aim to be the best advice that you can get from any of your advisors around the table. We're there at the line of scrimmage with a servant's mentality to help the founder actually succeed.
On why clarity of thought makes a huge difference between a great VC and a poor VC:
I describe clarity of thought that if you were to ask someone the same question five days in a row or five weeks apart or a year apart from asking the question originally, would you end up with the same answer from that person?
And the only way that you can say yes to having the same answer from the person is if they understood why they made that decision in the first place and there's logic behind it. So we talk about superpowers all the time. I think clarity of thinking is one of my superpowers where if you take any of the businesses that I actually underwrote over the past 12 or 13 years, and there are hundreds of them that I've dug into deeply, and there are probably a few thousand of them that I've actually looked at over that period of time. If you gave me a few minutes just to review the last investor day, I could tell you precisely why I made a yes or a no decision. You're going to get the same answers from me, whether you asked me today or a year from now, and it's going to be the same answer that it was five years ago.
So once you have that clarity of thought, you can now anchor your decisions around frameworks, you can anchor your decisions around what you believe and didn't believe in the moment based on the information that you were seeing, then you can study outcomes. Then you can study what happened within the companies.
On the state of valuations and pricing discipline:
It is exciting and disappointing at the same time. The environment that we're in, ultimately I think outcomes are bigger than anyone expected them to be. That's a very interesting observation, more than else and should factor into what a company is ultimately worth. But at the same time, a lot of capital has flowed into what is a pretty shallow asset class. People think of venture as a very large asset class, but if you study it relative to the truly large asset classes, it's tiny, it's getting larger. And I think that's why it's attracting capital. You know, companies have been staying private longer. That means the area under the curve of where you can make money, as bigger than it's ever been.
On outliers and breakout companies:
The one truism in venture is whatever the financial plan is that a founder puts in front of you just isn't going to come true. It doesn't mean you shouldn't analyze it. In fact, I spend a lot of time analyzing plans because I think about the plans as a numerical articulation, a financial articulation of how the founder sees the future playing out. And there's actually a lot of insight in financial plans that people ignore. I find it lazy underwriting when they say, "well, the plan isn't going to happen. So why should I spend time on it?" But there's a lot of embedded information that you can pull out of plans by having conversations with the founders and understanding what they expect to happen when they expect it to happen, why they expect it to happen.
On what it takes to win deals:
Historically, the way that QED has won deals is that we're all ex-operators that aim to be the best advice that you can get from any of your advisors around the table. And not advice that's generic about what you need to do to grow up to be a great company five years from now, but more importantly, what should you be doing tomorrow. It's a very different type of advice. We can give advice on what the company should grow up to look like in five years, but we can actually get down to the granular unit of what are you actually working on. How could we be helpful to kinking the curve on outcomes? Is there something that we could do to actually help you avoid mistakes or sharpen the pencil on your learning agenda, actually find resources that can help you kink the curve on outcomes in different ways? But we're there at the line of scrimmage with a servant's mentality to help the founder actually succeed.
On Team-and-TAM investors:
There are Team-and-TAM investors that basically say, "look, this is a talented group of people. They're going to figure things out. We don't know what those things are. It's a big enough space, big enough opportunity, just give them capital and let them go." And by the way, there's nothing wrong with that. I'm just not a Team-and-TAM investor because I want to be on the journey with them. I want to have the conversations about what we're going to do tomorrow to figure things out. And if I can't see a path based on what, you know, in the moment to building an interesting business, then it's just hard for me to get conviction
On the feedback loop cycle time as an investor as opposed to as an operator:
When you're an operator, you get daily results. There's something that's just so pure about that. Every day you have targets, every day you see whether you're hitting your targets or not. You have goals that you can measure in hopefully days, weeks, months, quarters, years -- it depends on how difficult the goals are, but these are short timeframes relative to venture investing.
In venture, you have to get things right over extended periods of time in order to build any business of size. So the feedback loops are different. The conviction that you have to have around the decisions that you make are different. You have to be much more thoughtful about each and every decision that you make because you make fewer of them and they have bigger consequences.