Remember Season 1 of Severance? That masterpiece that had many of us hooked.
Then came Season 2. Same formula, different execution. Somehow the magic faded (in any case for Shub and me).
We see this pattern not only on TV but also in our jobs. Formulas that work brilliantly eventually lose steam. In venture, this isn't just about entertainment. It's about survival.
This Week On Practical Nerds - tl;dr
Moving from traditional software to SaaS required unlearning old models
Most 10x funds backed emerging markets (geographically or thematically) before they were obvious
Primary information building beats following startup publications and VC opinions
🎧 Listen To This Practical Nerds Episode
Moving From Traditional Software To SaaS Required Unlearning Old Models
How Do Successful Companies Reinvent Their Playbooks Over Time?
The Severance analogy hits harder than we first realized. We're watching a show where people literally sever their work memories from their personal ones. In venture, we face something similar. The skills that made us successful yesterday might be the exact ones holding us back tomorrow.
Think about the software giants. Microsoft, Adobe, SAP, Intuit. These companies didn't stumble into their current dominance. They underwent brutal transformations. They sold software on CD-ROMs. They charged hefty one-time license fees. Then the cloud happened.
The transition wasn't smooth. Moving from on-premise to SaaS meant accepting near-term revenue hits. You're trading large upfront payments for small monthly subscriptions. The cash flow takes a beating. You need serious conviction to push through that valley. Not vision. Conviction based on understanding where technology was heading.
We asked ourselves a tough question during our discussion. If you were an executive at Microsoft during the CD-ROM era, did that experience make you better equipped for the cloud transition? The answer isn't straightforward.
Some knowledge transferred. You understood enterprise sales cycles. You knew how to build relationships with IT departments. You grasped the pain points customers faced with software deployment. These insights remained valuable.
But you also developed blind spots. You got comfortable with the economics of license sales. You built processes around physical distribution. Your mental models assumed customers wanted to own software, not rent it. These assumptions became liabilities.
The same pattern plays out in venture. Shub pointed out something critical. He's backed supply chain and marketplace companies. They've achieved scale. Now he's getting intellectually excited about something different. Inventions. Deep tech. Hardware-oriented ventures.
This creates a classic dilemma. Do you stick with what works? Or do you retrain your compass? The risk cuts both ways. Jump too early without sufficient knowledge, and you're making bets you can't properly evaluate. Stay too long in your comfort zone, and you miss the next wave entirely.
We both went through this evolution at Foundamental. The early years required unlearning. We had to question every assumption we brought from previous experiences. We still question them today. The process never stops.
In our view, the companies that survive multiple decades don't just execute well, they also deliberately unlearn their own success formulas before those formulas become constraints.
Most 10x Funds Backed Emerging Markets Before They Were Obvious (Feel Free To Fact-Check Us)
What Separates Outperforming Funds From The Rest?
We spent some time analyzing top-performing venture funds. The ones that returned 10x or more to their investors. We wanted to understand what drove that outperformance. The pattern surprised us with its clarity.
More than 50% of the value in these exceptional funds came from emerging markets. Either geographically emerging markets or topically emerging opportunities that weren't obvious when the investment was made.
Consider Airbnb. Brian Chesky got rejected dozens of times. Investors couldn't see it. The idea seemed absurd. Strangers renting air mattresses in their apartments? That's not a business. That's a liability lawsuit waiting to happen.
Those investors weren't stupid. They looked at Airbnb through existing frameworks. Hotels have been around forever. The hospitality industry has established players with massive advantages in brand, distribution, and trust. A startup trying to compete seemed doomed.
But Airbnb wasn't really in the hotel business. It was creating an entirely new category. The investors who saw this weren't smarter. They had prepared minds for what was emerging.
We've watched this play out in construction tech. Between 2019 and 2024, we had countless conversations with investors who applied B2C commerce playbooks to B2B construction ventures. The advice was often useless. Sometimes actively harmful.
These weren't bad investors. They'd achieved success in e-commerce. They understood growth loops, customer acquisition costs, viral coefficients. All that knowledge was real. It just didn't transfer to construction, where sales cycles span months, decisions involve multiple stakeholders, and implementation requires deep technical integration.
The e-commerce bubble created a cohort of investors who struggled to adapt. They'd built expertise in one domain. When that domain cooled, they had two choices. Find fewer concentrated winners in the same space, or learn new hunting grounds. Many chose poorly.
Here's a sobering reality that reinforces this point: Only 3.3% of unicorns graduate to decacorn status. That's lower than the graduation rate from seed to Series A (50%) or even seed to Series B (25%). Think about that. A smaller proportion of billion-dollar companies reach ten billion than seed companies reaching Series B.
Every additional billion in valuation statistically decreases graduation chances by 30%. This seems backwards. Unicorns have solved the hard problems. They're well-resourced with proven products, established partnerships, and experienced teams. Yet compounding becomes exponentially harder, not easier. This isn't just about execution. It suggests that finding the next emerging opportunity might be more valuable than trying to pick winners in mature categories. The 10x fund returns we studied support this. They didn't come from backing the safest unicorns. They came from identifying emerging markets before consensus formed.
You'd think this lesson would stick. It didn't.
Then came AI. We saw the same investors pivot hard. They brought the same pattern matching from commerce to artificial intelligence. Different technology, same problem. They were applying outdated mental models to emerging opportunities.
The founder-focused strategy seems like a solution. Many of the oldest venture firms claim they've cracked the code on founders. They say they're founder-driven. They focus on the people, not the market. This lets them navigate phase shifts without constantly relearning domains.
We see the appeal. We even know a few investors who've successfully executed this strategy over decades. But here's what we noticed: they don't work at big firms.
Think about it. The same big firms that backed Apple, Nvidia, and Intel in the 1980s should have been first in line for Anduril, right? They understood hardware. They'd seen frontier technology companies succeed before. They had the pattern recognition.
They weren't there. They passed. Many said hardware wasn't their thing anymore. So are you really founder-focused if you're already excluding entire categories? If you tell founders you don't do construction or you don't do hardware, you've made a market judgment. You've decided certain opportunities don't fit your thesis.
In our experience, the most successful venture funds treat phase shifts as their core business model. They systematically hunt for emerging opportunities before consensus forms.
Primary Information Building Beats Following Startup Publications And VC Opinions
How Do You Build A Prepared Mind For Emerging Opportunities?
Shub has developed a specific methodology. He calls it primary knowledge building. The term is deliberate. He's not talking about reading TechCrunch or following other VCs on Twitter. He's not scanning startup newsletters or tracking trending topics.
He means understanding the fundamental makeup of an industry. What's technically possible? What are the hard constraints? Why did previous winners succeed? What advantages do incumbents have that make them difficult to displace?
This creates a foundation. When you encounter a company in that space, you're not starting from zero. You've built a mental map of possibilities. You understand the chess board. You know which pieces matter and how they move.
Primary Knowledge Building vs. Following Narratives
How exceptional VCs spot opportunities before they become obvious.
No startup will perfectly match your mental model. That's not the point. The point is you come equipped to the conversation. You're not completely unprepared. You won't miss important signals. You also won't get dazzled by vision that lacks substance.
We've both seen the alternatives. Investors who have no knowledge foundation in a space can't evaluate properly. They either dismiss everything because they don't understand it, or they get too easily impressed by founders who speak confidently about the future.
Neither approach works. The first leaves you blind to genuine innovation. The second turns you into a mark for anyone with charisma and a compelling narrative.
The alternative to primary knowledge building is following narratives. Web3. Climate. Climate 2.0. AI. Energy. Defense. Every year brings a new narrative cycle. Investors pile into whatever's trending. They convince themselves they're early. They're usually late.
Shub made a crucial observation. The best insights come from grassroots action at the company level. Not narratives. When you see genuine momentum building without hype, that's signal. When conditions are aligning for a change and there's a void waiting to be filled, that's opportunity.
The tricky part? Distinguishing between what you're convincing yourself is true versus what's actually reflected in future reality. This is where primary knowledge becomes critical. It's your reality check.
I shared my own approach. I'm obsessively curious about information that enables decisions. There's a mantra someone beat into me early in my career: information without decision is useless, decision without action is useless. If information doesn't lead to action, don't bother collecting it.
This filters my learning. When I see information that helps me make investment decisions, I become a sponge. I'll spend entire weekends digging in. But if it's just nice-to-know information, I deprioritize it. I'm a pragmatic prioritizer.
This mindset keeps me in constant survival mode. I assume we're always in a phase shift. The world doesn't pause. We're the millennial generation - the first to experience life before and after the internet, before and after mobile phones, before and after social media.
A journalist recently told me something striking. By Thursday of any given week, you've consumed as much information as a medieval person absorbed in their entire lifetime. It's hard to prove definitively. But it checks out.
That information deluge is accelerating. We feel constantly chased. We have to cope with filtering massive amounts of noise to find actionable signal. The generation after us won't feel this pressure the same way. For them, the bombardment is normal. It's their baseline.
For us, we remember the alternative. We appreciate how much we need to sift through. This puts us in a unique position. We're primed to accept that change is inevitable. We don't resist it. We expect it.
A colleague recently went through this evolution. He'd spent years in a particular geography. He developed strong opinions about that market, the investors there, the founders. Then something shifted. His views changed dramatically.
I called him and we discussed it. He'd been going through an internal conflict for weeks. He'd watched investors in that market justify investments for absurd reasons. One investor wrote in a memo that they were backing a founder because "he was a debater in high school."
What does that even mean? How is that relevant to whether this person can build a successful company? It's not. It's random pattern matching masquerading as analysis.
Our colleague had seen enough of this to rethink his entire approach. He realized he needed better frameworks for evaluating founders and opportunities. The surface-level attributes weren't enough.
We see this constantly. Investors say things like "I felt good about the founders" or "they're aware of their blind spots." These statements mean nothing. Half the human population is probably aware of some blind spots. That's not a differentiating insight.
It's confirmation bias. Investors decide emotionally that they want to invest. Then they construct rational-sounding arguments to justify the emotion. The debater argument. The "good feeling" argument. The blind spots argument. They're all post-hoc rationalizations.
There's a deeper irony in the blind spots claim. If a founder confidently asserts they know all their blind spots, they're demonstrating a profound lack of self-awareness. By definition, blind spots are things you can't see about yourself. If you knew about them, they wouldn't be blind spots.
This is confirmation bias within confirmation bias. The investor is impressed that the founder knows their weaknesses. The founder is actually revealing they don't understand the nature of blind spots. Both parties are deluding themselves.
We don't follow startup publications to stay current. We don't track what other VCs are saying. We try to build primary knowledge. We try to understand industries from the ground up. We try to develop frameworks for evaluating opportunities before they become obvious.
When we encounter a venture in that space, we want to be ready. We want to engage substantively. We want to be able to separate genuine innovation from hype. So that we can identify which assumptions are reasonable and which require too much faith.
We think that deep industry knowledge built from primary sources lets you spot emerging opportunities while others are still reading about trends in newsletters. By the time something becomes a narrative, you're already too late.
A Perpetual Adaptation Framework
We've covered three critical insights about surviving phase shifts in venture capital. Let me tie them together into something actionable.
First, recognize that successful execution in one era doesn't automatically translate to the next. Microsoft's CD-ROM distribution expertise didn't make them naturally great at cloud services. Your success backing e-commerce doesn't mean you'll excel at construction tech. The knowledge transfer is partial at best. Embrace unlearning as a deliberate practice.
Second, understand that exceptional returns come from emerging markets and categories. This isn't about being contrarian for its own sake. It's about having prepared minds before consensus forms. More than half the value in 10x funds comes from bets that seemed non-obvious when made. This means phase shifts aren't obstacles to avoid, they're opportunities to hunt.
Third, build knowledge from primary sources. Skip the startup publications and VC echo chambers. Understand industries from first principles. Know what's technically possible. Study why incumbents succeeded. Identify the structural advantages challengers must overcome. This foundation lets you evaluate opportunities with clarity rather than getting swept up in narratives or missing genuine innovation.
The framework is simple: Assume you're always in a phase shift. Build primary knowledge continuously. Minimize assumptions before making bets. Stay curious about information that enables decisions. Filter ruthlessly for what matters. Act on what you learn.
We're not trying to predict the future. We're trying to recognize it slightly earlier than others. That small timing advantage, repeated consistently, compounds into exceptional outcomes.
The playbooks that worked will expire. Accept it. Prepare for it. Make it your competitive advantage.
You Can Find More Analysis On The Practical Nerds Podcast
Spotify: https://open.spotify.com/show/1Q86tEwusNGwAmRdDqjFL4
Apple: https://podcasts.apple.com/de/podcast/practical-nerds/id1689880222
Foundamental: https://www.foundamental.com/
Subscribe to the Newsletter: https://www.linkedin.com/newsletters/practical-nerds-7180899738613882881/
Companies Mentioned
Airbnb: https://www.airbnb.com
Microsoft: https://www.microsoft.com
Adobe: https://www.adobe.com/
Intuit: https://www.intuit.com/
Autodesk: https://www.autodesk.com
Anduril: https://www.anduril.com/
Follow The Practical Nerds
Patric Hellermann: https://www.linkedin.com/in/aecvc/
Shub Bhattacharya: https://www.linkedin.com/in/shubhankar-bhattacharya-a1063a3/
#VentureCapital #EmergingMarkets #InvestorPlaybooks #PhaseShifts #StartupInvesting #FundamentalVentures #DeepTech #FounderSelection