Kevin Rose (TW/IG: @KEVINROSE, THEJOURNAL.EMAIL) is one of the best stock pickers in the startup world. He can predict even non-tech trends with stunning accuracy. He co-founded Digg, Revision3 (sold to Discovery Communications), and Milk (sold to Google). He was subsequently a general partner at Google Ventures, where he was part of the investment team that funded companies such as Uber, Medium, and Blue Bottle Coffee. He is now CEO of Hodinkee, the world’s leading online wristwatch marketplace and news site. He is one of Bloomberg’s Top 25 Angel Investors and one of Time’s Top 25 Most Influential People on the Web. He has a popular monthly newsletter called The Journal.
Kevin is a close friend and we have a regular(ish) video show together called The Random Show, so named because the content and publication schedule are extremely erratic. This profile is also meant to be somewhat random. Why does he get special treatment? Because he was the first-ever guest on my podcast.
He’s in Wealthy because of the next piece here, which focuses on his investment approach.
Spirit animal: Inchworm
Kevin is a pro at psychologically dealing with online nonsense. I was amped up over some persistent, anonymous commenter in 2009, and Kevin asked me two simple questions that I’ve often thought about since:
“Do people you respect or care about leave hateful comments on the Internet?” (No.)
“Do you really want to engage with people who have infinite time on their hands?” (No.)
• One of his favorite tools for habit tracking and behavioral modification
Way of Life app.
Several months ago, I received a text from Kevin stating “I found the grail” with a screenshot of his Dexcom continuous glucose monitor showing his levels at 79mg/dL (which is healthily low) after consuming two beers, a pork chop with honey glaze, 4 slices of corn bread with honey and butter, and a side order of potato gnocchi.
What was the “grail”? 25 mg of acarbose (¼ pill) with food. He learned this trick from Peter Attia (here), who I introduced him to.
Kevin is a rare double threat as an investor: he is excellent at investing in both early-stage tech (Series Seed or A) and publicly-traded stocks. Most who are good at one are terrible at the other.
When I ask him about either, he often asks me variants of the following questions:
“Do you understand it?”
“Do you think they’ll be dominant and growing 3 years from now?”
“Do you think this technology will be more or less a part of our lives in 3 years?”
He’s made dozens of spectacular investments based on his own answers to these questions, plus an added dimension: emotional response. One might dismiss talk of “gut” with a wave of the hand, but, as they say, “once you’re lucky, twice you’re good.” Kevin has replicated his success over and over again.
There are many technically complex approaches to investing, covered ad nauseam elsewhere. Here is one alternative perspective with doesn’t get as much airplay.
Just before heading out on stage at a tech conference, TechCrunch founder J. Michael Arrington asked me, “You’ve invested in a lot of great startups, how do you pick your companies?” I responded, “I trust my gut.” He seemed unsatisfied and told me, “You’ve got to come up with something better than that.”
I’ve always admired the tech investors who construct a big, overarching thesis to frame their investment philosophy. “Software is eating the world,” “the bottom-up economy,” and “investing in thunder lizards,” to name a few.
This type of theme investing is a great strategy for funds, but it never really applied to me as an individual angel investor.
For me, the decision to invest in a startup comes after following a process that is heavily weighted towards EQ (emotional quotient). This process starts with exploring the idea emotionally. Should it pass that hurdle, I then do traditional due diligence, using objective data to validate the entrepreneurs’ assumptions around the quantifiable aspects of the business.
So, how does one explore an idea emotionally?
When evaluating a new product, I take the novel features (not every feature) and exhaustively play out how they might impact the emotions of the consumers who use them. After that, I take the same features and consider how they might evolve over time.
Let’s take, for example, my notes around Twitter (which led to my investment in 2008). I was intrigued by a handful of novel features:
Emotional reaction: Typing 140 characters is quicker and easier than starting a blog. The fear and time associated with writing a long post is non-existent. Updates can be done through text, no computer needed (remember, this was before “apps”). This could be a huge draw for non-technical celebrities.
Emotional reaction: Building a following base feels like a game or competition. Users will encourage their friends and fans to follow, bringing in additional users. This “game” of bringing in your friends and fans is free marketing for Twitter. Following forces public sharing as default. This gives fans a deeper connection with people they admire but do not know. [TF: Twitter also used a “Top 100” most-followed list early on to pour gasoline on competition.]
Emotional reaction: Users are beginning to use the nomenclature “RT” to indicate a “retweet” (this was common practice before the official retweet feature was developed). This ad hoc feature allows users to syndicate messages beyond their social graph, giving a user’s message increased visibility. The real-time nature of Twitter allows news stories to break faster than traditional media (even at the time, my startup, Digg).
In allowing myself to feel these features through the eyes of the users, I can get a sense of the excitement around them.
___________
This type of thinking can also be applied to larger industry trends.
My colleague and friend David Prager was one of the first owners of the Tesla Model S. The second he received the car he graciously allowed all of his friends to test-drive it. What stuck with me most was not the car, but the sound it made. When he dropped me off, he slammed on the acceleration pedal and was whisked up a large San Francisco hill. All I heard was the electric swish/hum of acceleration. For me, this was like so many sci-fi movies I had seen growing up—it sounded like the future.
A few days later, I remember hearing a large city bus trying to climb the same hill. The diesel engine was rattling and struggling, almost as if it were out of shape, fighting for its next breath.
It was clear to me that while consumer adoption would be slow, with technological advances in energy storage (only a matter of time), electric vehicles would be the future of this industry.
These feelings led to me take a position in the company back when it was largely unfashionable.
___________
I’ve actually used this framework more to help me steer clear of bad investments than to find good ones. In evaluating my meetings over the last calendar year, I met with an average of 18 companies before I found one worthwhile of investment. That’s a lot of saying “no.”
For example, the current incarnation of virtual reality gear doesn’t pass my test. Units are large, clunky, require insanely expensive computers, and setup is a mess. The experience, while fun, isn’t an order of magnitude better than traditional gaming.
So, as of right now, I’ve avoided VR investments. At some point (years out), the right mixture of power, size, price, and reality technology will combine into a device that will likely see mass adoption. But as of right now, I’m a pass.
___________
[TF: Kevin did call the explosion of augmented reality (AR) months before Pokémon Go exploded, emphasizing that AR and VR are not the same thing. He was bullish on AR and very bearish on VR.]
It’s important to note: I’m also a believer in objective data and using it to inform decisions, especially in later rounds of financing. But in the early stage, at the seed of an idea, the bet is largely based on the quality of the team and the emotional connection you feel with the product.
Many fellow investors believe the gut shouldn’t be trusted, and chalk up success using it to dumb luck. Certainly, creative intuition varies from person to person. There is no magic formula here. But I do believe we can think of gut intuition as a tool that can be called upon when evaluating ideas with very little data, such as startups that have yet to launch.