Diligence Gap Paradox

Shaan Puri shares his perspective on the reality of "smart money" in venture capital, highlighting that even the most prestigious firms and investors make significant mistakes, particularly around due diligence. His insights stem from observing major investment failures from top firms and funds.

Key Points:

• No Such Thing as "Smart Money":

  • Top firms (Andreessen, Sequoia, Tiger, Tribe, Softbank, Paradigm, Alameda/FTX) all made terrible financial decisions at huge scale
  • Even smart people make fundamentally flawed investment decisions
  • Being smart doesn't prevent making dumb decisions in a complex game

• The System is Structured for Fund Manager Success:

  • Fund managers get rich regardless of performance through management fees
  • Managing billions means making hundreds of millions in fees even if investments fail
  • The game is "rigged" because managers profit whether or not investors make money

• Due Diligence Reality:

  • Large investments ($300M+) often receive surprisingly little due diligence
  • Example: Paradigm invested $290M in FTX without catching fundamental issues
  • Investors often rely on others' participation as validation instead of doing proper research

• Key Lessons:

  • Don't use big-name investor participation as validation for investments
  • Think independently rather than following "smart money"
  • Can't outsource your conviction in an investment to others
  • Even respected investors can make colossal mistakes

• Important Reminders:

  • Smart people can do dumb things
  • Having unfair advantages doesn't make someone a better investor
  • Mental shortcuts based on others' involvement are dangerous
  • Need your own conviction rather than relying on others' backing

The core message is that even the smartest investors make fundamental mistakes, and their involvement shouldn't be used as a primary signal for investment decisions.