Hype and Bright Lights vs. Hunger and Being in the Background

This Thursday (4/25) at 8 PM will be prime time for hundreds of thousands of sports fans in downtown Detroit. The Lions, Pistons, and Red Wings seasons are over. And the Tigers are off. However, 54.4 million people watched the same event last year – over 3x the audience of an average regular season game. 

The NFL Draft has been broadcasted since 1980, but the rise in viewership, interest, and even ad costs has been spectacular. I used to watch the draft in the 1990s, then again, I was also a dorky kid who also happened to love sports (and statistics). Most average fans did not pay close attention to the draft in the 80s and 90s – but even casual fans are tuned in now. 

This is not a sports blog, and I’m not a sportswriter (though I always thought I’d be a sportscaster as a young kid) - so I’ll stay in the venture capital lane. While there are far more than 32 venture funds, and more than 1,696 deals per year - there are a ton of parallels with the NFL draft.

The first pick always gets the most attention, scrutiny, and spotlight – especially these days (where teams can, and do make huge trades). The next 9 picks receive plenty of attention as well - since they’re usually the highest rated players at their position (or a QB). Most of these players have also been on the national scene for years, and discussed ad nauseam on team’s message boards. General Manager’s careers (or jobs) have hinged on making smart trades, picks, and outmaneuvering their divisional rivals. After all, 1 amazing pick can alter the trajectory of a team, and a city. 

While the top 10 picks are splashed in the spotlight, and do (usually) make an impact on their teams - the rest of the draft is potentially far more important. Patrick Mahomes was drafted 10th and Christian McCaffrey 8th, but Travis Kelce was 63rd, and Brock Purdry was literally the last pick in the 2022 draft. The 49ers are not exactly strangers to receiving massive returns on less hyped picks…Joe Montana was drafted 82nd, Jerry Rice 16th, and Terrell Owens 89th. While the Patriots 199th pick (Tom Brady) in 2000 was an almost unreal outcome, later draft picks have had a shocking impact on the NFL. 

Based on the NFL’s Top 50 draft picks, only 17 were top 10 draft picks. The top pick took 6 of the 50 slots. And, only 2 of the top 10 players on the list were top 10 picks. While football is not venture capital, here are the top parallels from own experience (and partly why I’ve always gravitated to a different thesis):

1. The top picks get endless attention, can name their own prices, and VCs spend more energy fighting for an allocation vs. doing any diligence. However, paying top tier prices for incredibly risky assets removes some of the upside - and also increases the odds that the founding team will try to spend/raise their way to a big outcome. If the timing is great (i.e. hitting scale in 2020 or 2021), the returns can be great. But, in most normal (or bad) market environments, the odds of betting on primarily busts is very high. And, if there are no huge hits successful (IPO or bust), the portfolio will be…disappointing to say the least. 

2. The best deals are not always the obvious ones - especially at the pre-seed stage (where I primarily invest). When a founder/company has a basic product, very limited revenue, and a team of 2-5 people - there are basically no real data points. And, no real corporate history. VCs rely on a bunch of different tactics to determine potential (I mainly use body language, industry/product characteristics, and founder attributes), but accuracy is notoriously elusive. My best deals were some of the least obvious ones - all pre-seed, and all under $25k ARR. All but one was valued at less than $4m pre-money (or cap), and every founder was a first-time founder. Two are well on their way to being unicorns - and I’m not even trying to find unicorns. So, their massive success was partially luck, and timing. 

3. Hunger and hustle often come from feeling slighted, overlooked, and underrated. Tom Brady is the perfect example of this mentality - of taking those 198 picks before him personally. When a founder can easily raise big rounds at huge price tags right out of the gate, it can remove the hunger - and change the way they look at money (mainly spending it). The truly huge outcomes do need some liftoff velocity, but when raising money is cheap and easy - it dramatically ramps up the risk of a bust (write-off). Money is thrown at everything quickly, and if it’s ever removed, or greatly reduced, the company can get stuck in dangerous quicksand. It’s also much easier for a VC to walk away - if the company gets too far underwater vs. its preference stack, investors will just write it off. This is the equivalent of a Zach Wilson or Trey Lance (or several others) - where the teams want out at basically any cost. And once the growth dissipates, so do investors (especially for former high fliers, or hyped up deals). 

I tend to completely avoid the hyped, and spotlighted silicon valley style deals - for one, I (deliberately) have virtually no network in silicon valley. I would also have major heartburn paying the prices, or having to spend all my energy fighting for an allocation. Plus, my portfolio mechanics cannot stomach heavily binary outcomes, and a high write-off rate. I prefer to bottom fish in the latter rounds, and pick founders with a chip on their shoulder. I may (very rarely) stumble upon a Tom Brady type of investment (with an equivalent outcome), but it’ll mostly be by accident (and luck). My game is to invest where few others are investing, pay reasonable prices, and count on solid (but smaller outcomes). I like living away from the spotlight and backing hungry founders who want to prove everyone wrong - after all, I can relate. I never thought I’d get a fund(s) off the ground. And, I still feel a very real hunger to show up the people that passed on me. Once that switch flips, it’s very hard to turn it off (or on). 

Most great NFL teams have a superstar (or two) - but a far greater number of impactful role players. Most of these role players are very strong positional players - and many were later round draft picks. I don’t need superstars in my portfolio - I need strong positional players. The linebacker that shuts down the running game. A safety that keeps everything in front of him. A quarterback that limits mistakes, and lets others around him shine. At the end of the day, I don’t need to find superstars. My thesis relies on finding the diamonds in the rough - the positional players that take pride in their role, and quietly thrive. This style of investing is not sexy, not necessarily exciting to most investors, and is oddly unappealing to many prospective investors. However, I wouldn’t change a thing. I prefer to draft my team when most fans have tuned out, and prefer to work with founders after they’ve been passed over, and underestimated. You cannot buy a chip on the shoulder, or a will to win. But, you can find some amazing steals in the bargain bin. After all, Shannon Sharpe and Jamal Anderson were 7th round picks. Terrell Davis and Tom Brady were 6th round picks. And, Kurt Warner wasn’t even drafted.