The P-score: successfully identifying great early stage companies

We founded Creative Capital Studio, based on a human capital approach towards investing. We recognize the importance of creativity which was already emphasized by McKinsey and World Economic Forum in 2017 and 2018 respectively.

Like all other investors, this will require us to make investment decisions. We investigated many traditional investment decision-making frameworks (e.g. the 4 Ts: Thesis, Team, Traction, Timing) and concluded there was a need for change. Almost all frameworks are based on gathering (financial) evidence and the historic performance of companies and/or individuals ignoring the fact that historic success doesn’t guarantee future success. We wanted to adopt a people-centered, forward-looking model and thus we created the ‘P-score’ decision framework based on 3 Ps: People, Purpose, and Potential.

Inspiration

In a creative capital studio, everything starts with creativity which requires inspiration. To understand our thinking, we would like to share some of the quotes of people who inspired us to use a different approach when making investment decisions:

Bill Gurley: “Being ‘right’ doesn’t lead to superior performance if the consensus forecast is also right.”

Andy Rachleff says: “What most people don’t realize is if you’re right and consensus you don’t make money.” It is a bit strange that most people don’t realize this truth and yet it is common sense: you simply can’t be part of the crowd and at the same time beat the crowd, especially after fees and costs are imposed.

Jeff Bezos: “You just have to remember that contrarians are usually wrong.”

Bucking the crowd’s viewpoint in practice in the real world is not easy since the investor is fighting social proof. Robert Cialdini said: “social proof is most powerful for those who feel unfamiliar or unsure in a specific situation and who, consequently, must look outside of themselves for evidence of how best to behave there.” Great investors have acquired skills in knowing when to be contrarian.

Andy Rachleff: “Investment can be explained with a 2×2 matrix. On one axis you can be right or wrong. And on the other axis you can be consensus or non-consensus. Now obviously if you’re wrong you don’t make money. The only way as an investor and as an entrepreneur to make outsized returns is by being right and non-consensus.”

Buffett puts it this way: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”.

Howard Marks: “To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them — ideally all three.”

Peter Lynch said once: “To make money, you must find something that nobody else knows, or do something that others won’t do because they have rigid mindsets.” This search is best done by people who are curious, imaginative, and hard-working.

Marc Andreessen: “If something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate ‘non-consensus’: in sort of practical terms, it translates to crazy. You are investing in things that look like they are just nuts.” “The entire art of venture capital in our view is the big breakthrough for ideas. The nature of the big idea is that they are not that predictable.” “Most of the big breakthrough technologies/companies seem crazy at first: PCs, the internet, Bitcoin, Airbnb, Uber, 140 characters. It has to be a radical product. It has to be something where, when people look at it, at first they say, ‘I don’t get it, I don’t understand it. I think it’s too weird, I think it’s too unusual.’”

Being willing to intelligently take this leap of faith is one of the main differences between the venture firms that consistently generate high returns — and everyone else. Or like Plato says: “Courage is knowing what not to fear”. The ideal startup business is a combination of half-crazy and great convexity (big upside and small downside).

Geoff Lewis: “The best time to invest in a company is when it’s most in violation of a popular narrative.”

In 2010 the popular narrative was “Cleantech is dead”. Who would have imagined the success of Tesla? Narrative violations are highly idiosyncratic, so unearthing them is admittedly more art than science. It is the search for companies that cannot be easily categorized at all. Violating the narrative today will come to define profound new truths tomorrow.

Simon Sinek: “ We should invest in people not ideas. A good idea is often destroyed by bad people and good people can always make a bad idea better.”

It’s a well-known practice that if you invest in a talented team and give them the freedom to create, they will be able to test, experiment, and build something successful. You might even invest in a team and give them the freedom to experiment with multiple concepts for a company, instead of focusing on just one.

Steve Jobs: “Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves.”

Get to understand your customers’ desires and motivations, without losing sight of the fact that you are the expert. Pushing for small efficiency gains and incremental changes based on passive data may help your margins initially, but truly understanding your customer is what incites a revolution.

Albert Einstein: “Imagination is more important than knowledge. For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution.”

Imagination is required to construct insightful theories to explain observational data. Most of the theories we can think of turn out to be incorrect, but through a process of examination and refinement, we eventually weed out the incorrect theories and arrive at the best surviving model we can come up with. We need both imagination and analysis to carry this process forward.

Dwight D. Eisenhouwer: “In preparing for battle I have always found that plans are useless, but planning is indispensable.”

In reality, most plans are rendered useless almost as soon as they are put in motion. There is still some value in the original plan, however. It defines the goal or the outcome we desire. And that’s the most important part of the original plan — that the destination is clear; the reason, the purpose you’re on a journey in the first place.

But, this doesn’t take away the need to continuously have at least a high-level overview of the plan (objectives, key results) and spend sufficient time on planning; people should always know why but also need to know what, how, and when.

“Times change, technologies change, markets change. To survive, the best leaders realize that their businesses must change as well.”

There is no bigger destroyer of creative potential than the misguided decision to persevere. A company that cannot bring itself to pivot in a new direction on the basis of feedback from the market can get stuck in the land of the living dead, neither growing enough or dying, consuming resources and commitment from employees and other stakeholders but not moving ahead.

Startup productivity is not about cranking out more widgets or features. It is about aligning our efforts with a business and product that are working to create value and drive growth. In other words, successful pivots put us on a path toward growing a sustainable business.

Every startup should have a regular “pivot or persevere” meeting. In my experience, less than a few weeks between meetings is too often and more than a few months is too infrequent. A startup that never had such a meeting is probably not the right investment opportunity.

Nike: “Strong alone, unstoppable together.”

What makes a successful startup team? The common answer is prior startup experience, product knowledge, and industry skills predict the success of a new venture. We tend to disagree: stellar teams have the right combination of hard skills and soft skills. Experience and expertise only lead to better performance if team members share their knowledge and have a common vision for the company.

Guy Kawasak: “Ideas are easy. Implementation is hard.”

Successful implementation is all dependent on the team. It does not matter how great the idea is if you cannot pull it through. Actually, it often is better to have just a “good enough” idea and a great (or promising) team as a starting point than the opposite.

Mahatma Ghandi: “A burning passion coupled with absolute detachment is the key to all success”.

Passion is one of those intangibles that drives an entrepreneur, gets them through the good times and the bad times, and ultimately dictates the success of any startup. If you are not passionate about what you are building, you might as well pack up your bags right now, as your startup will never work.

Result

Creative Capital Studio is a gathering of creative minds. Our views do not reflect the consensus of the crowd and thus we are likely to outperform a market since a market by definition reflects the consensus view.

We are less focused on “pain” and frequency of use. The combination of painful and frequent might seem like the holy grail but it also attracts relentless competition. We rather envision the future and determine if there is room for a big idea (blue ocean). We rather fail unconventionally than succeed conventionally.

We strongly believe a passionate team of creative people with a purpose and persistence will be able to continuously come up with the right plan to generate profit in the end.

We are humble and love to learn, connect and create together. We make our investment decisions based on 3 key aspects of an early-stage company: People, Purpose, and Potential.