The Subtraction Capital Investing Thesis
At Subtraction Capital, we invest in companies we would work for. Literally, if the fund did not exist tomorrow, Jason or I (usually both though) need to be able to say that we would be totally excited about being an employee at a company for us to be excited about investing there.
There are a few reasons we take this approach. First, the companies that we went to pretty early did quite well. If you thought it was luck, then it was luck three times in a row each, with no fourth time that was not lucky. The odds are so astronomical that even a statistician would probably say that the probability that it is luck is exceedingly low. In addition to the places we did go to work, we each had a very short list of companies that we went deep in the interview process with and seriously considered but passed on for some reason, often having nothing to do with whether we though it would be successful or not. And nearly all of those also have also done exceptionally well.
Which leads to the second reason we invest in companies we would like to work for. The act of selecting a place to work involves a whole bunch of rational, front-brained, cognitive criteria, but it also involves application of our more powerful, subconscious processors. This is what we are employing when we say things like “listen your gut.” So I make my Ben Franklin list, but then I Subtract the noise away so that I can hear the voice of the big cpu in the subconscious.
Finally, most of the time we discover our jobs through referrals from our networks and all of the Subtraction Capital partners have multiple deep, layered networks including the most famous network of all, the “Paypal network.”
Let me run through some of the more important criteria for Jason and I as job seekers:
Location – we would only take a job at a company that we could show up at. So for us, that means Silicon Valley or Salt Lake City (since Jason lives in Park City, Utah and splits time there and in San Francisco).
Subject/Sector/Space – we would only work at a company in a sector we personally cared about deeply. So much of our limited time and energy go into the place we work; we need to absolutely love what we are doing in order to give everything to the startup, which it deserves. Sometimes we see companies in spaces that are hot and popular, but if neither Jason nor I are personally excited about the space or subject, we just can not invest there.
Broadly, we are both interested in the Enterprise/B2B software space vs consumer today, though that could change at some point and we both worked in the consumer space as well as the enterprise space in our operating careers. The Enterprise/B2B space simply feels more deterministic to us, so we believe it has greater potential for us to generate the best returns for our LP’s. I like to say that the consumer space feels like making movies, you can make one that is critically acclaimed and award winning that does not make money, but to do so would be a disservice to our LP’s.
Some sectors we are definitely interested in are ones we have already worked in, like Health Tech, Fintech, Data/Analytics and Marketing/Sales modernization. There is a Warren Buffet axiom that there is a sucker at every poker/business table and if you don’t know who it is, it is probably you. So to responsibly put our LP’s capital to work, we feel like we need to do so in spaces where we have a relatively deep understanding.
One interesting thing is that many spaces about to be disrupted might not have anyone yet with the deep knowledge of both the vertical and software disruption. So the initial team that wins will be a cooperative effort of both. Because of this, we expect to very slowly be adding new sectors within enterprise software moving forward; likely ones that take advantage of our skillset, experience, and interest.
Scale – it takes a very large endeavor to shift the axis of the earth a little bit, and we definitely want to be on a team that shifts the axis of the earth. A starting point here is the ability to have a very large top line run rate. $100m is the smallest of “very large” for software companies in my opinion. And lately, I have seen a lot of funds setting criteria a factor higher than this in order to account for overestimation.
Team – it would be impossible to join a company where I did not want to work with the team. I need to feel that the team is extremely capable, fun to work with, hungry, and just stubborn enough. Winning at a startup means you have to believe you can succeed where many others have failed before and that is a little bit irrational and requires some confidence, ambition, and enough passion to derive a lot of hope. That hope is what drives you to keep pushing harder through the difficult times, which is most of the time. Also the market will teach a winning team constantly so long as the team has the ability and desire to learn. This balance of ambitious stubbornness and pragmatism to respond to the market is exceptionally important in order for startups to succeed.
Mutual desire – I would never want to work for a company that was not really excited about having me there. And no great company would want to hire me if I was not truly excited about the Mission of the company: Mission Motivated. I am also happiest when I am truly useful. Useful = Happy.
Entrepreneurs have unprecedented access and choice in early stage investors. And if an investment is like a marriage, only more permanent, then the early stage investors will be your spouse for the longest time. So hire the investor you would most like to hire on their team. An investor is one of the most important hires you will make. An investor should be someone you want to enjoy the long difficult, insanely fun, and rewarding journey with for the long haul, through the ups and downs. Jason once said at a conference “find an investor that believes the world needs your company as much as you do” and I fully support this notion. Whatever you do, hire your investors for sure.