Rumsfeldian sorting
"There are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know." - Don Rumsfeld
Let’s say you’ve been a VC for a few years, and you’re starting to get confident about picking “minimum viable deals” out of your deal flow - the ones that pass all the initial filters like strong team, good traction, big market, etc. Within that set, the difference between a 2X TVPI fund and a 5X TVPI fund might be the difference between picking the top 5% vs. top 1%. This is a hard sorting problem, and there aren’t many funds ever making more than 3X TVPI.
While I haven’t nailed it yet, I do have a heuristic for sorting into good/great/incredible categories based on founder conversations. And it happens to map to this oft-quoted knowledge structure above.
The good founders know what they know, and they know it by heart. They can speak without notes about their business for a long conversation, quoting key numbers and KPIs effortlessly, and they’ll nail the KPIs and signals known to be important for their sector, especially in areas where they outperform the competition. But they don’t proactively mention what they don’t know - they want to appear smart and prepared! If you ask them a question and they don’t know the answer, a good founder won’t try to spin it, they’ll just admit they don’t know but will find out and get back to you.
The great founders do all of the above, and in addition, they’re hyper aware of what they don’t know. They’ll proactively devote part of the conversation to highlighting how they plan to fill in these knowledge gaps. Sometimes it’s through a product lens, by emphasizing how they’re getting “out of the building” and testing their product with customers to learn about their customers’ priorities and figure out what’s missing from their solution (e.g. Lean Startup Method). Other times it’s through a business lens by highlighting risks and the processes designed to reduce them. Or it could be an iterative method for finding the best customer segment to reach for on the marketing front. Lastly, these founders are painfully aware of skill gaps on their team and talk about how they will fill those gaps.
And then there are the incredible founders. In addition to everything above, incredible founders know there are unknown unknowns lurking out there, and have a plan to deal with them. These founders have designed internal learning processes to discover the unknown unknowns for their particular sector/market.
They might be collecting and transforming information from customers and partners in ways that may seem like a waste of time initially. Examples include strategically open sourcing internal tools to build community, exposing internal APIs to partners to force them to become more robust, creating industry “consortiums” of both allies and competitors, and spending time on “things that don’t scale” (e.g. Amazon’s Voice of the Customer philosophy, Google’s 20% time). There are also tactical mechanisms like documenting input assumptions and running “stress tests” under a range of scenarios, or on the product side, simulating disasters to uncover hidden code or process bugs (e.g. Facebook crashing its own data centers after Hurricane Sandy)
Incredible founders seem to be able to see around walls, anticipate industry shifts, and shrug off losses and headwinds. That’s in part because they’re constantly battling to shrink the surface area of their unknown unknowns.
When a movie review complains that the plot was advanced by changes in the external environment, rather than the protagonist’s own actions, that’s the opposite of how incredible founders move through the world. Incredible founders seem to possess an almost magical ability to bend the world to their will, and be the prime movers of their story.