The Power of Compounding Interest...and Compounding Mistakes

New York might be the home of Broadway, Times Square, and the stock market - but it’s also home to 8 major sports teams. While the Yankees claim the most championships (27) of any team across the major U.S. professional sport, Giants fans might be the most passionate. Giants’ fans will name their own kids after Giants legends, or create lofty nicknames. However, they’ll also turn on a player in a New York Minute. 

Daniel Jones was drafted 6th overall in the 2019 draft - as the heir apparent to Giants’ legend, Eli Manning. However, Jones was quickly viewed as a “reach” from most draft pundits - and drew the ire of Giants fans. Jones ended up taking the reins from Eli in week 3 of his rookie season - and though the Giants struggled to a 3-9 finish, Jones posted stellar rookie stats. In the 2020 and 2021 seasons, Jones was named a captain, and posted generally weak stats (on a bad Giants team). In April 2022, the Giants did not pick up the 5th year option on Jones’ rookie contract - and then Jones showed glimmers of his rookie season (winning a wild card playoff game). In March 2023, the Giants signed Jones to a $160m, 4-year extension. 

Since signing his extension, Jones has produced a 3-13 record, and the 26th (of 31) highest QBR in 2024. While a torn ACL cut his 2023 season short, fans are not patient - or exactly enamored over his production. Given the overreach draft pick in 2019, and generous contract extension in 2023, fans should start booing the team executives too. 

Warren Buffett is famously enamored with compound interest - that “life is like a snowball…the important thing is finding wet snow and a really long hill.” In the Giants case, compounding mistakes are creating a really long hill down to the cellar of the NFL. While picking the right franchise QB is not exactly simple, easy, or cheap (outside of the 49ers) - it does make or break most teams (and GMs). 

The Giants made a classic mistake - compounding one bad decision into more bad, bigger impact decisions. I often see the same situations in venture capital, especially around turbulent market conditions. While each case varies a bit - the most common case follows the same trap:

• The company gets off to a fast start, and has a solid pre-seed/seed round 

• The founder thinks they have the right GTM, right timing, and right hiring plan – then proceeds to dramatically ramp up burn 

• High burn and heavy sales hires does not translate into growth, and 6-18 months later,  the founder raises a bridge 

• The founder cuts burn, has a few wins, and touts a healthy pipeline…then raises another larger bridge from mostly internal investors 

• Fast forward a year or two - and the money is gone, with the same issues and very little growth

The early progress creates a sense of being a possible top tier (or strong) investment - and the quick growth spurts (in between flat growth) create false hope. Given the countless bridges (and rounds), most insiders get sucked into investing across multiple rounds - and into a large total investment. However, the investor eventually looks around, and realizes that they likely flushed a ton of money down the proverbial toilet. And, it’s usually not just one investor that finally wakes up - most VCs tend to wake up around the same time. Once the reality hits the bigger investors on the cap table, the Board often pushes for liquidity, and a way off the ride. In most cases, the offramp is not a pretty one - and investors write off a big part of their total investment. 

Picking the right initial investments, and right reinvestments is not exactly simple, or easy too. Fund managers often have trouble predicting the future, and cannot dust a crystal ball off the shelf. However, funding the right deals will make or break a fund manager - just like picking a QB on an NFL team. General Managers have internal politics and fund managers often have investment committee politics and dynamics. QBs often have to work with the assets (teammates) around them - and founders have to work with their own teammates. The only difference is that QBs are paid handsomely, win or lose (after the contracts are signed)....founders only get paid after they drive a good outcome. 

Daniel Jones and the Giants might end up with a good outcome - this season, or by 2026. And, the boos might turn into boisterous cheers. However, most compounding mistakes within the venture world rarely have happy endings. Once the cap table turns, and the money dries up - the season is usually over. And, the company is not making the playoffs - they’re usually being sold for scraps. Picking the winners is a constant challenge, but avoiding doubling and tripling down on the losers is an equally important part of running a venture fund. The best fund managers invest in great deals - but also continue to ride the winners (and avoid the losers).