I recently caught up with an early-stage founder who’s building an interesting business. He had a setback recently and, understandably, is frustrated. Unfortunately, he publicly communicated his frustration with his business partner on social media. The partner was not pleased. The business is at a standstill.

Building a company is harder than most people realize. Setbacks are inevitable. Founders, like everybody else, react to setbacks emotionally—with anger, frustration, fear, etc. But those emotions can’t get in the way of the founder accomplishing their mission. Founders must figure out how to work around or through setbacks.

Over the years, I learned to acknowledge how I was feeling when I experienced setbacks. If I was especially worked up, I made a point of doing my best to avoid taking action until I’d calmed down. I found that talking the situation over with another entrepreneur—someone credible and level-headed—often helped, especially if they’d been in a similar situation.

This founder has put himself in a position where his mission could be jeopardized. His uncontrolled emotional reaction fractured a critical relationship. The emotion has dissipated and he regrets what he did, but he can’t take it back. He’s aware of that, and he’s trying to repair the relationship and overcome the setback. I’m sure he’ll figure things out, but this incident might materially slow down his execution and may have permanently weakened an important relationship.

Last week I wrote about two of my takeaways (see here and here) from an interview with the founder of Carlyle Group, David Rubenstein. David shared a lot of great nuggets, including some that would otherwise take people a lifetime to figure out. In addition to being a founder, David also hosts The David Rubenstein Show: Peer to Peer Conversations. He’s had the opportunity to interview over two hundred people, some of whom are investors, on his show and work with numerous investors over his many-decades-long career.

Over the years, David has noticed a few traits that great investors have in common:

• Well educated – They aren’t high school dropouts.  
• Good at math – Their math skills are above average.
• From an average family – They were raised in a blue-collar or middle-class family.
• Willing to own mistakes – They’re willing to recognize a mistake, admit it, and get out quickly.
• Generous – They’re willing to share credit for good things.
• Accepting of accountability – They’re willing to take the blame when things don’t go as planned.
• Avid readers – They have a strong appetite for learning and knowledge. They’re constantly reading. I noticed something similar.
• Gratified by the act of investing – The challenge of investing—not just the money—is interesting to them. It’s a matter of mental sharpness and challenge.
• Contrarian – They’re comfortable going against the grain instead of following the path of least resistance.
• Philanthropic – They enjoy promoting the welfare of others.

This is an interesting list. Some of the items I wouldn’t expect. I’m going to think about this list and see if it holds true for the investors I know.

Take a listen to David’s comments on great investors here.

I met with someone recently who’s a self-described contrarian. Contrarians go against popular beliefs, so I was curious to hear his views. As we chatted, I realized he takes the opposite side on most topics. He doesn’t have a strong belief in his positions; rather, he strongly values doing the opposite of what everyone else is doing.

Being contrarian—in a positive way—isn’t about doing the opposite of what everyone else is doing for the sake of being different. Just because everyone isn’t jumping off a bridge, that doesn’t mean you should.

The contrarians I admire go deeper. They understand what others are doing, but they don’t stop there. They try to understand why others are doing what they’re doing. Then they develop an informed position on what’s wrong with the action others are taking (i.e., why it’s incorrect). Then they figure out if there’s a better way. If they find a better way, they take that path, and they have conviction about their position because of the process they’ve followed, as just described.

Earlier this week, I shared a takeaway from an interview with the founder of Carlyle Group, David Rubenstein. I enjoyed that interview and had many more takeaways. Some of them were presented casually as simple, common-knowledge concepts that nevertheless take some people a lifetime to figure out. Understanding the power of some of the concepts David shared, and implementing them, can change your trajectory. Here’s another trajectory-changing takeaway: you can create your own luck.

When David was starting Carlyle, he didn’t want to build a firm that was all white males. He approached Gracia Martore, a female executive of Latino descent. She declined to join the firm but suggested he talk to Bill Conway Jr., who was transitioning out of a telecommunications CFO role. David had never heard of Bill, but he called him. They connected, and Bill became a cofounder of Carlyle.

The big takeaway from this story is that you can create your own luck. Luck is about the probability of a favorable outcome. You can increase the probability of good things happening, and create your own luck, by taking certain actions. In David’s example, he networked and chatted with people, which led to opportunities. Not the opportunity he was aiming for (Gracia), but a great one nonetheless (Bill).

If you want to achieve outsize success, you can increase the chances of it happening by creating your own luck.

Take a listen to David’s comments on creating your own luck here.

This is my one-hundred-fifty-third weekly reflection. Here are my takeaways from this week:

• Biographies – There’s a lot to be learned from entrepreneurs who are no longer with us or at the tail end of their career. Wisdom learned over a lifetime is invaluable.
• Decision-making – I want to start developing and using more mental models to help make decision-making in complex situations easier.
• Rational thinking – Rational thinking is something I view as an advantage. I’ve observed that some people are rational thinkers in some areas of life but irrational in others. Thinking rationally in all areas of life is the key. It’s easier said than done.

Week one hundred fifty-three was a mediocre week. Looking forward to next week!

David Rubenstein is the founder of Carlyle Group, a publicly traded private equity firm in DC. The firm has about $373 billion in assets under management as of this writing. David is a good example of what I call investor entrepreneurs—investors who have an entrepreneurial spirit and found their own investment firms rather than work for someone else. I’ve been learning more about David’s outsize success and the founding of Carlyle. I listened to an interview he gave recently at Wharton’s Private Equity & Venture Capital (PE/VC) Club.

David believes that culture is one of the most important things in an organization. He was purposeful in crafting the culture of his firm, and it’s been a competitive advantage and part of Carlyle’s brand. David was asked what’s needed to build a great culture. He shared something I didn't anticipate: persuasion skills. He went on to say that life is about persuading others to do what you want. Family, coworkers, friends, spouses, everyone—if you can persuade people you’re right and get them to do what you want, it’s an advantage in life and helps build a great culture.

He explained how to persuade people:

• Writing – Effective writing is important because it helps you communicate your point succinctly, which can persuade others.
• Talking – Oral persuasion is about making your case by speaking. If you can speak clearly and succinctly, that will help you be persuasive. Practicing helps.
• Actions – Leading by example is an effective way to persuade. Do what you want others to do to set an example that they’ll follow.

David is right. Persuasion is an important life skill that can be a superpower for entrepreneurs who lead other people. Culture is about how people act while they execute the company’s mission. Effective leaders are good at persuading their teams to act in a manner that aligns with the company’s core values.

I read a quote that stuck with me:

What the wise man does in the beginning, the fool does in the end.

                                                                                  – Warren Buffett

If you find an asset that’s underpriced and buy it, eventually others will realize it’s underpriced and buy it. As others buy it, the price goes up until it’s no longer underpriced. As the price continues to rise and the asset becomes overpriced, it draws more attention and people buy based on momentum. Eventually, the asset becomes so overpriced that the price begins to decline, causing a loss for those who bought at peak price because of momentum.

The wise man spurns consensus and goes against the grain, potentially realizing an outsize return. The fool values consensus and follows the crowd, potentially incurring a loss. Consistently successful investors are comfortable acting on their high-conviction, nonconsensual views.

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I’ve been learning more about successful investors. I want to know what led to their outsize success and why they’re able to repeat it. One common trait I’ve noticed is probabilistic thinking.

Most people are binary thinkers. They think only in terms of an outcome 100% happening or not happening. But binary thinking doesn’t reflect the reality of the world. Most outcomes aren’t 100% guaranteed because the world is full of randomness and uncertainty. There is usually more than one possible outcome, each with a probability of happening (even if it’s small).

These investors understand this and factor probabilities into their decision-making. Outsize returns usually result from betting on non-consensus outcomes that have a probability and return profile the investors like. For example, when the prices of assets are falling continually, most people think to sell to avoid further losses. These investors will buy (non-consensus) if the probability of these assets rising is higher than them falling further and the return could be outsize.

They also understand that probabilities and outcomes are different. The probabilities of an outcome can be on your side, but that doesn’t ensure a favorable outcome. Randomness and other factors are still present. When your desired outcome doesn’t happen, that isn’t a reflection on the quality of the decision. It just means the probabilities didn’t work out in your favor this time.

A founder asked me for some feedback because he’s not sure what to do. He has a team member who isn’t pulling his weight. If he keeps the team member, a critical part of the company will continue underperforming. The team is small, fewer than ten people, and everyone, including the founder, is stretched thin. If he parts ways with the team member, he will have to do this person’s work until he finds a replacement.

After more conversation, this founder acknowledged that he’s wanted to let this team member go for some time but has avoided it. He isn’t sure how he’d manage his current workload, do this team member’s work, and recruit a replacement simultaneously.

This is a common early-stage founder dilemma. The founder knows what he needs to do but isn’t sure how to do it. Said differently, the decision is easy, but the implementation is hard. I was in this exact same position as a founder. I learned that it’s better to rip the Band-Aid off and deal with the pain than to let the problem linger and turn into a bigger one. Taking on the departed team member’s work wasn’t ideal, but it better prepared me to train the next person and motivated me to get the right person in place so I could reduce my workload.

When faced with an easy decision but onerous implementation, I learned that delaying the decision isn’t feasible and can make bad situations worse. I needed to make the tough decision and view its implementation as a learning experience. Just as I’d figured out other seemingly impossible parts of entrepreneurship, I could figure how to navigate the side effects of decision-making too. Ironically, when it was done and I was on the other side of it, I realized that anticipating going through with decision had been way worse than doing it. I always wished I hadn’t waited so long (especially with personnel changes)!

Yesterday’s post was about in-kind distributions that venture capital (VC) funds make to their limited partners (LPs). A friend pointed out that some larger funds, such as Sequoia, A16Z, Thrive, and a few others, may be focusing more on making in-kind distributions to their LPs. These and other firms are starting to become registered investment advisors (RIAs), which my friend assumes is related to making in-kind distributions. I’ve been reading about funds becoming RIAs, and I don’t think it’s related to making in-kind distributions to LPs.

A VC fund that makes an early-stage investment in a company doesn’t need to be an RIA to do in-kind distributions. If one of the fund’s portfolio companies goes public or is acquired in a deal where some or all the purchase price is paid in stock of the acquiring company, the general partners can distribute that equity to their LPs. There may be reasons to wait to do so: for example, an IPO lockup period or wanting the acquirer’s equity value to increase before distributing stock to LPs. There are nuanced rules around VC funds holding a material percentage of fund assets in something other than private companies, but I won’t get into those details.

All the firms my friend mentioned are run by very smart people who have had a lot of success over several years. I don’t have any inside information on their strategic reasons for becoming RIAs, and I’m curious and plan to learn more. I wouldn’t be surprised if it’s related to their ability to invest in and hold a broader variety of assets for a longer period. Said differently, I wouldn’t be surprised if it allows them to expand their firms into areas outside traditional venture capital investing.