A few months ago, I wrote that courage is one of the last remaining competitive advantages in venture. But I think there are a few more, and I’m going to write about those too.
The etymology of trust is from the word “traust” in Old Norse, meaning strong. Trust is not a squishy concept – it’s a bet you make on someone’s character before you have proof.
A personal story about the compounding value of trust over time:
I invested in Joe and Aaron when they started their first company with Amanda more than a decade ago, which they ultimately sold to Etsy. The outcome wasn’t life changing, but that experience was formative for us because it was early in our careers and we did right by one another. After leaving Etsy in 2017, Joe, Aaron and I decided to work on something new. We were all interested in crypto mining, so the first thing we did was build a bitcoin mine in Oregon to learn more. The mine itself was not a venture scale business, but in the process we learned to work together on hard things, about our strengths and weaknesses, and it further strengthened our trust in one another.
Those learnings eventually became the foundation for Bison Trails, the first institutional grade staking company in the crypto industry. At the company’s formation, Joe and Aaron decided to grant Notation founder shares in the new company, to recognize our belief in them and work to date together. That was not contractually required. It was a gift, built on top of a decade of trust and partnership.
(Bison Trails was eventually acquired by Coinbase for more than $1B+ three years later).
This type of long-term partnership, built on handshakes and a lot of trust, is harder to come by these days. Trust is eroding in our government institutions, regulatory bodies, technology companies, banking system, startups, venture and Silicon Valley at large. In just the past few weeks, Delve was exposed as a fraudulent scheme, North Korean hackers exploited Drift Protocol for an estimated $285M, Anthropic’s red team itself questioned whether or not their new model Mythos can be trusted, highlighting numerous zero day hacks it exploited. The investor side of the question, albeit slightly more anecdotal, is not much better – I’m regularly seeing renegotiation of terms post term sheet, wildly outsized secondary rounds at early stages, later stage investors cramming early stage investors – short term optimizations abound. I was at a dinner recently where participants estimated fraud across startups and venture capital in the mid to high single digits. That sounds about right.
There’s probably no better example of the erosion of trust than the handshake deal protocol, originally proposed by Paul Graham in 2013, and viewed as gospel in Silicon Valley for many years afterwards. Up until the past year, I had never experienced someone walking from a handshake. I’ve seen it three times since. Words carry less weight than they used to – and so today the handshake deal is mostly dead.
Why does trust matter?
– Capital formation costs — Markets run on trust at their foundation – contracts can’t and don’t cover everything, and the gaps are filled by trust. To the extent founders and VCs can’t trust what’s not written, contracts will get longer, more verbose, and legal and transaction fees will rise, regardless of AI efficiencies. This feels perhaps less relevant today because capital is abundant, but there will come a time when that’s not the case, and embedded distrust will make the downturn lengthier and more painful.
– Longevity — Venture, at least historically, was a multi-iteration game. Partnerships could exist over many funds and companies. In fact, some of my most meaningful relationships with founders, like Bison Trails, as well as other co-investors were formed in what are now decade+ partnerships. Single-transaction thinking produces single-transaction outcomes. Even good outcomes don’t necessarily compound if trust isn’t built into the core of the partnership. That limits what we’re all capable of.
– Maintaining sanity and avoiding cynicism — Put simply, this work is a lot more fun doing it with people you trust. People who will honor their word and take care of one another. Zero-sum environments create cynical and hardened people – just look at New York real estate or the hedge fund business. Startups are built on wild, inspiring optimism – the fewer trustworthy optimists, the greater long-term risk there is for the ecosystem at large.
Why does trust remain a competitive advantage?
Trust really matters when you really need it. When Robinhood struggled with capital requirements post-SVB, Ribbit famously stepped in and led a $500M capital injection within 24 hours, which turned out to be a fantastically prescient investment. That required courage, but it also required high degrees of trust amongst all parties involved. Warren Buffet played a similar role during the financial crisis with Goldman Sachs. There will come a time again when trust is needed, and the founders and VCs who have built-in trust reserves will outperform.
Unlike courage, which requires just a few singular moments, trust requires living it and proving it every single day over a long period of time. There are no shortcuts. You can’t instruct someone to trust you. In fact, “just trust me” might be one of the scariest statements in the English language.
Almost every venture firm in the industry now talks about their value add, which often includes large services teams. I think trust is worth 10x more than the best services team in venture. Just look at Founders Fund and Thrive as two examples – little to no services teams and a lot of trust with the founders they work with. It’s also worth mentioning that no matter how trustworthy the individual person, or in this example VC, if you’re working at an untrustworthy firm, it doesn’t matter. VCs operate within the constraints of their employers.
So what does a founder or an investor or even an LP do in a trust eroding environment? Sam Altman suggests you should get comfortable “getting screwed a little.” I agree with that. It’s the cost of doing business today in this environment. Keeping one’s word, honoring the handshake, even if it means you get a little screwed today, will pay dividends in the long-run.
But you should also verify now more than ever. Pick up the phone and meet everyone that person has ever worked with. Don’t ask them for 3 references, ask them for 15 or 20 or 30. Make the calls. Do on book and off book. Do the work to try and understand who you’re getting into business with – if it’s someone also playing multi-iteration games over the next decade, like Joe and Aaron.
All the capital, brand, revenue, AUM, employees, podcast appearances, or whatever else, cannot buy you trust. It’s proven again and again over long periods of time – everyone has the capacity to do the right thing and earn trust from the market, no matter if you’re a large firm or a small firm, or a pre-seed startup or pre-IPO. And it’s ultimately a competitive advantage that will only become more important over time, if you choose to play the long game.