The Big Sort (Strange Loop Canon)

Newsletter essay, Strange Loop Canon, August 14, 2023. By Rohit Krishnan. Subtitle: “Weird markets and venture strategies: a look at what changed and a prediction.” Originally published in The Diff.

Title note. Disambiguated from The Big Sort, Bill Bishop’s 2008 book, which already owns the short title in this wiki.

Key Takeaways

• Venture is the only primary-capital equity vehicle. “When you buy from the stock market that money doesn’t really go to AAPL or MSFT, it goes to another person who sold the stock to you… This means VC is uniquely focused on building up a future that actually doesn’t yet exist.” You cannot do Buffett-style reasoning about a future resembling the present.
• You can only do negative diligence. “Reasons to believe will always be illegible” — by definition a primary investment goes into a company that does not yet exist as a business, so all you can rigorously do is find reasons to pass.
• All investing reduces to two rules: the rate of return available, and the risk the investment goes to zero. Everything else — specialisation, diligence, leverage — is a way of moving one of those two numbers. Banking sits at one end (collect the spread, lose the whole principal), venture at the other.
• The math forces the behaviour that looks dumb. To beat public markets a fund must return 3–5x over its ten-year life. Since many positions go to zero, the winners must do 10–30x. Hence Thiel’s one law — invest only in companies that can return the fund — and hence “the idea of the ‘safe 3x’ always seemed dumb.”
• The core structural claim: a large chunk of VC returns now come from privatising the public-market thesis of past decades. Microsoft, Apple, Google and Facebook went public far smaller than Snowflake or Stripe. The $100M→$100B trajectory got de-risked, so it got sped up, so megafunds arrived to take it. SoftBank’s Vision Fund looked like lunacy in venture and ordinary in public markets. “The lines have become increasingly blurred.”
• The consequences Krishnan draws, by seat: the individual who got rich on innovation has a harder road (there aren’t as many Microsofts); the institutional investor can no longer treat tech as easy alpha; the quant benefits from weirdness; the early-stage VC is “not building for the public market or for buyouts, but for later stage VCs”; and large-cap PE is in luck, because operational muscle — not financialisation — is now the scarce skill, and “there are badly run companies at $1B, $10B and $100B.”
• The line worth stealing: “There are no atheists in investing foxholes.” Also: “all happy investors are unique in their happy theses, while all unhappy investors are unhappy in the same way: that alas the world remained too irrational to see the light of one’s thesis.”

Connections

• Saved by Kyle in the same note as The First-Movers Disadvantage In Banking, and the pairing is the point: banking punishes novelty because the loss ratio dominates; venture requires novelty because the return cap dominates. Same two variables, opposite settings.
• Feeds Capital Allocation and Investment Returns — specifically the MOIC-vs-IRR and fund-returner arguments that On the Nature of Long-Term Holds works from the other direction.
• Josh Wolfe and the Odd Lots episode are the article’s jumping-off point — Krishnan’s read is that even a very smart VC explaining venture leaves outsiders confused, which is itself evidence for his thesis.
• The “early-stage VC builds for later-stage VC” conclusion is a supply-chain framing of venture worth holding against Kyle’s own Venture Capital writing.