Business Plus Science Equals Technology (Lessons from Complexity Theory, the Startup Landscape, Angel Investing, and More) – Naval Ravikant on Appetite for Disruption (Part I)

Check out the Appetite for Disruption Episode Page & Show Notes

Key Takeaways

  • Early employees at a startup take on the same risk as the founder, but without similar compensation and control
  • Technology moves the human race forward
  • “An ideal founding team has one person good at building technology or product, and one person who’s good at selling, so that person can raise capital, recruit employees, communicate the vision, and keep people motivated” – Naval Ravikant
  • “At the very early stage, most investments are made based on the quality of the founder, how well they’ve thought through the problem, how well they can articulate a solution, and what evidence they have if they’ve already started building it out”Naval Ravikant
  • Lessons from complexity theory:
    • Extremely complex systems emerge from simple rules
    • When building a product: “If something isn’t working, if the community you want isn’t emerging, then you probably need to go back and remove something much more than you need to add something”Naval Ravikant
    • Great companies replace complexity with simplicity for the end-user

Intro

The Game Theory of Venture Capital

  • “Raising venture capital is this weird transaction where an entrepreneur has to go from knowing nothing about the dark art of venture capital to suddenly having to negotiate a complex term sheet”Naval Ravikant
    • And that first term sheet is usually the most important…
  • Having gained a ton of entrepreneurial experience throughout his career, Naval set up Venture Hacks to share advice to those new to the field, specifically related to raising money
  • “A lot of game theory is really just understanding people’s incentives and motivations, how they’re going to interact with you given their incentives and given yours, understanding the long-term consequences of how things will play out, and being able to read signals instead of words, because a lot of the time, in business, people will say one thing and mean another” – Naval Ravikant

Early Startup Employees Take on Equivalent Founder Risk

  • “I think, now, that lot of people who moved to technology hubs and joined startups, they’re betting their livelihoods on startups, even if they’re not founders themselves” – Naval Ravikant
    • “These are people taking significant pay-cuts, putting their family and time at risk, so they have to become much savvier about evaluating what a good equity offer is”
    • “I would say the least knowledgeable people in the space right now are the early employees at a startup. Very often, they’re taking on the same risk that a founder does without the compensation, without the control, and without the visibility.”
  • “On the recruiting side, I think we’re going to have to educate and compensate early employees at startups much better. They’re going to have start thinking like founders in terms of evaluating the things they’re looking at and being able to figure out what their offers are worth, who they should be working for, and what’s a reasonable bet and what’s not.” – Naval Ravikant

The Ideal Startup Team

  • 🎧 “An ideal founding team has one person good at building technology or product, and one person who’s good at selling, so that person can raise capital, recruit employees, communicate the vision, and keep people motivated” Naval Ravikant
    • But, in the fintech business, you also need a regulatory expert 

AngelList Talent

  • AngelList Talent is a HUGE driver of people into the startup world
    • There are 25k startups currently recruiting on the platform and over 1 MM active candidates
    • “Probably half the startups in the English-speaking world, and two-thirds of the startups in India, are actively recruiting on AngelList Talent” – Naval Ravikant

How Naval Fell in Love with Tech

  • “I’ve always been interested in business and science… All my heroes are scientists, and I wanted to be in science, but I also wanted to make money… And so, if you intersect business, or money, and science, you get technology.” – Naval Ravikant
  • “The technology industry moves the whole human race forward… Pushing the wave of technology faster and further creates more abundance for the human race.” Naval Ravikant
    • Everything we take for granted – cars, electricity, the internet – they were all meager technologies at one point

The Infrastructure of Innovation

  • “In terms of open finance, what crypto’s doing is kind of interesting… To me, there’s even a level above that’s more interesting – this idea of decentralized networks. Today, if you look at the internet, too much of it is run by a small set of companies.” Naval Ravikant
    • Just think – we have one search engine, two large “taxi dispatchers,” one friends/family social network, one photo network, one video network, one online retailer, etc.
      • “The internet has ended up being extremely centralized. That’s not necessarily good for the future.”
      • “To me, the trend of decentralization, in crypto, is an important piece of financial infrastructure where you can have things that are funded, governed, and controlled by distributed groups of people from all over the world”

How Naval Decides Which Companies to Invest In

  • “There’s no specific checklist. You can create a checklist, but usually, you throw it to the wind when you meet a good company.” – Naval Ravikant
  • At the early/seed, stage:
    • The team is important
    • Any evidence of having product-market fit is important
    • Naval prefers tech companies
    • If the company has a marketplace characteristic or network effect underneath, it’s more likely to be valuable long-term
    • You should want to use the product yourself
    • Regulatory dynamics are crucial to understand
  • 🎧 In general: “At the very early stage, most investments are made based on the quality of the founder, how well they’ve thought through the problem, how well they can articulate a solution, and what evidence they have if they’ve already started building it out” – Naval Ravikant

Venture Capitalists vs. Angel Investors

  • VCs tend to look for companies that have large markets and that can exit by going public
    • Angel investors also consider this, but not as much early on 
  • VCs are much more selective with their investments, whereas angel investors diversify to a greater extent
    • For this reason, angel investors are more likely to find a complete, crazy outlier

First Principles Thinking

  • “The first thing you learn by reading great scientists is you have to understand everything from first principles. I don’t believe in memorizing things… In science, you can’t fake it.” – Naval Ravikant
    • Richard Feynman was Naval’s hero in this regard – he was a “true first principles thinker”

Lessons from Complexity Theory

  • Naval has also taken an interest in complexity theory, reading the likes of Brian Arthur and Stephen Wolfram
    • “This applies well to understanding how internet businesses work. Internet businesses are highly complex, they have high network effects, low marginal costs of distribution, and large scale economies. The strategy around them, a lot of it can be gleaned by knowing how complex systems work.” – Naval Ravikant
  • What exactly is complexity theory?
    • It states: Extremely complex systems emerge from simple rules iterated many times
    • “Almost every working complex system that we see in the world today is the result of a very simple set of rules that worked” Naval Ravikant
    • An example: From a simple set of rules on Twitter (hashtags, only using 280 characters, etc.), extremely complex behavior can result – massive learning, political movements, tribe mentality, etc.

How might complexity theory apply when building a product?

  • Throwing in a bunch of features early on = complex
    • Instead, aim to have a small number of activities that users are repeating over and over
      • “If something isn’t working, if the community you want isn’t emerging, then you probably need to go back and remove something much more than you need to add something” Naval Ravikant
  • Take Twitter, for example – it works well because users are constrained to 280 characters
    • “Because the rules are so simple, Twitter can be adapted to more things and used in more ways. Whereas, for example, Facebook was designed a certain way – to alert your friends and family of what you’re up to. As it scaled, and they had to build Facebook business pages, it turned into a mess. All these pages operate in a different way with different rule sets… On Twitter, a business uses the same exact tools that a normal user uses. Facebook needs to keep rolling out new pages and new products for every new use case, whereas with Twitter, the same small set of rules keep getting used over and over.” – Naval Ravikant
      • In summary: “You can get more complexity out of simplicity than you can out of complexity”
  • 🎧 “A lot of the great companies replace complexity with simplicity for the end-user” Naval Ravikant
    • For example, Google made the hard problem of searching for something on the web extremely easy 

Check out the Podcast Notes for Part II