Jerry Neumann – Why Venture is Hard - [Invest Like the Best, EP.134]

Episode Summary

Executive Summary: Patrick O'Shaughnessy and early-stage investor Jerry Newman examine how venture capital has changed as funds proliferate, why gut-based investing is overrated, and which sources of startup advantage still matter. The conversation argues for disciplined, evidence-based investing grounded in risk, value creation, and durable barriers to entry.

Main Topics: Venture capital proliferation (Priority: 5/5): A flood of new funds has changed pricing, competition, and founder incentives. Incentives and short-termism (Priority: 5/5): Small funds and fast re-raises push GPs toward traction over durability. Risk vs. uncertainty (Priority: 5/5): New ventures are hard because outcomes are unknowable, not just probabilistic. Sources of competitive advantage (Priority: 5/5): Brand, expertise, and value-chain redesign matter more than generic network effects. Schumpeter and innovation (Priority: 4/5): Profit comes from creating value or efficiency before competitors copy it. Gut investing critique (Priority: 5/5): Intuition is weak without repeatable patterns and usually blocks learning. Example investments (Priority: 4/5): Case studies like Unsupervised, SILA, and Edmit illustrate his framework in practice.

Key Arguments: More funds mean more bidders, which can inflate prices and favor weaker business models. Newer GPs often need quick wins, so they may favor short-term traction over long-run potential. Venture risk is mostly uncertainty about the unknown, not easily captured by probabilities. Network effects are increasingly scarce and often only apply to smaller opportunities now. IP is usually weak in tech because workarounds are easy; pharma is the exception. Brands can be powerful moats, but they are expensive and capital-intensive to build. Value-chain redesign can block incumbents even when products are easy to copy. Gut investing fails because pattern matching needs stable signals and enough repetition. Judging founders by prior relevant success is more predictive than instinct alone. LPs should back GPs who have done the job before and have a repeatable process.

Data Points: Active venture investors in tech: about 100, 120 - Jerry's earlier scraper found only this many active tech VCs New funds started: 800 - He cites reading that 800 new funds started in the past five, six years Smaller new funds: $5 million, $10 million, $15 million - Typical fund sizes for newer managers Ad tech revenue milestone: $0 to $5 million in billings - A common early growth pattern that often plateaued Trade Desk early traction: 3 years - He says traction was remarkably low after three years AI PhDs at Bonsai.ai: 15 - Used as a temporary expertise barrier to entry Trade Desk raise: $6 million - He cites the company's capital efficiency before IPO U.S. college average discount: 50% of the list price - Department of Education figure he mentions for college pricing Case-study improvement: 20, 30% improvements - Unsupervised clients reportedly saw KPI gains of this size Harvard outcome study: no statistically different - People who got into Harvard but didn't attend had similar outcomes to those who did Stuyvesant cutoff study: just below vs. just above - Students near the admission threshold had similar outcomes

Pivotal Quotes: "if you can't think through to the end game like Ored, do these people really have some sort of sustainable competitive advantage?" — Jerry Newman: On the need to assess long-term defensibility, not just early traction "I think venture capital is the part of finance where there are no processes." — Jerry Newman: On why every investment requires fresh judgment rather than a fixed playbook "You can't use pattern matching to find good companies." — Jerry Newman: On why intuition is a poor substitute for structured analysis

Implications: Investors should focus less on speed and stories and more on repeatable evidence of durable advantage, while staying open to where new moats actually emerge.