From Dojo to Deal Flow
Miyagi's Lessons and the Art of Spotting VC Outliers
Like many others during the Covid lockdowns a few years ago, I found myself watching the spin-off series Cobra Kai to relive nostalgic memories of the original The Karate Kid movie from my youth. Revisiting that now familiar tale, I’ve come to better appreciate Daniel LaRusso’s martial arts journey which began with skepticism, staring at a seemingly old, rusty car, ready to apply wax. “Wax on, wax off,” Mr. Miyagi instructs. To the uninitiated, these tasks seem far removed from the kicks and punches of karate. But Miyagi, with his wisdom, wasn’t merely teaching karate; of course he was instilling a muscle memory of foundational movements to drive towards eventually seeing & acting beyond the ordinary. In a climactic revelation, Daniel realizes that these unorthodox methods weren't distractions but were in fact the very essence of his training.
Venture capital investing follows a similar arc. There is plenty of conventional wisdom which directs our focus towards a set of rules and best-practices, the “wax on, wax off” in our world. My partner Rob and I have preached in this very Venture Upward blog series about the benefits of being in the room where it happens - repeatedly seeing the process of good venture capital decision-making to use as data in training your own internal filter. This “getting your reps in” is an essential part of developing as a young VC (and is why being stuck at a low-volume shop early in one’s career can be detrimental since it limits the data training set). The end-result is the proverbial “VC pattern recognition” - an amalgamation of intuition, analysis, and learned experience used as the foundation for decision-making
Yet, it's the ventures that defy convention, the outliers, that define the power-law distribution of VC success. Looking at some of the top companies in the NextView portfolio over the past dozen+ years, a number of atypical situations (at least for us) are front & center:
Sole Founder: Championing a sole founder sans any technical "building" prowess (rather than a founding team).
Consumer Hardware: Supporting a product that was knowingly going to go under multiple iterations in a much unloved and oft capital inefficient category.
Regulatory Challenges: Backing a product requiring FDA approval, despite our initial lack of experience taking these regulatory risks.
Multiple Business Models: Investing in a startup that simultaneously explored three business models from the start.
Physical Infrastructure: Believing in a company that built vast physical warehouses, challenging the popular lean digital model.
Inexperienced Founders: Trusting founders coming out of undergrad targeting a traditional industry steeped in legacy intricacies and navigation challenges.
Uncapped note: Investing in an uncapped note seed round, challenging the norm that seed entry valuation price is crucial.
In fact, looking at the set of successful investments in our portfolio, I’d say most of them had characteristics that put them outside the fairway, to mix metaphors. An additional example of an outlier in our portfolio is one which just ceased raising venture capital altogether. Instead, they ran profitably in growing to hundreds of millions in revenue until their eventual $B+ exit.
By definition, exceptional investments are exceptions. They break the rules of convention and deviate from the pattern recognition.
This isn’t to say that we should disregard the VC basics. Just as Daniel had to internalize Miyagi's lessons to see their true value, both rising and experienced venture capitalists must deeply understand foundational principles and values such as prioritizing the team, focusing on large addressable markets, seeking competitive moats, prioritizing scalability, recognizing exit opportunities, optimizing entry deal structure, etc. Yet, much like Miyagi's teachings, these principles serve not as a fixed rulebook but as a dynamic compass. They guide, inform, and provide context… yet they mustn’t completely restrict.
The most challenging judgments which we make as VC investors are those in which we recognize we’re deliberately setting aside the usual playbook and pursuing an investment that doesn’t completely fit the mold.
The best VCs are visionaries who discern the exceptional by investing in what’s both non-consensus and correct. It’s in the space between convention and innovation that VC legends are made. As you review the next investment you’re championing, ask yourself: is this a “wax on, wax off” moment or my chance to rewrite the rulebook?