One of the most important Fundera board meetings I ever participated in took place in 2016. We were reviewing sales productivity metrics and one of our independent board members, Phillip Riese, asked about our compensation plan. When we explained that everyone was paid a healthy base salary and that we didn't need a bonus plan because everyone was super sharp, talented, mission-driven and cut from a different cloth, jaws hit the floor. I was promptly reprimanded and then pat on the head for my naivety. It was then that I learned a critical lesson: incentives drive behavior.

It's a phrase I find myself repeating over and over again. I learned it well while building Fundera. Need to solve a problem? Hit a target? Do something spectacular? Incentives work wonders. Incentives are one of the most powerful tools people have to inspire the behaviors needed to drive desired results. They are deeply embedded in virtually all systems: political, economic, social, environmental, etc. Sometimes incentives produce phenomenal outcomes, and sometimes they create havoc. They are a double edged sword as too much focus on driving short and medium-term results can come at the expense of long-term mission and vision. For operators, a balanced scorecard can help to mitigate detrimental effects.

One industry where incentives can create misalignment between businesses and customers is venture capital. This thread by Rob Go does an excellent job illustrating the point.

https://twitter.com/jaredhecht/status/1480731447602388995

And this Dan Primack observation succinctly explains the oppositional dynamics.

https://twitter.com/jaredhecht/status/1527476981465481235

The fundamental interests of most founders are oftentimes directly at odds with those of their investors. It's worth stating that I am huge fan of venture capital. I've worked with many firms and partners across GroupMe and Fundera that I deeply respect. It's a remarkable tool to create something out of nothing and build and scale businesses. That said, for most founders and employees, optionality is an important thing to preserve in order to optimize for beneficial financial outcomes. But VC makes almost all of its economic returns on a handful of outlier grand slams. 3-5x returns on any individual company are nice, but they do not make or break an individual fund. They're rounding errors at the end of the day. But a $50-$100 million outcome can be economically life changing for founders and employees that haven't over-capitalized and own a meaningful percentage of their companies. This is a unique friction that exists in the industry, and it's critical that founders are cognizant of its existence.

Once you fully grasp the concept you begin to notice how incentives influence virtually every institution in our society. For instance, this insight from Palmer Lucky will make your head spin.

https://twitter.com/PalmerLuckey/status/1530604282998710272

When you're frustrated with the way something works, this realization helps you get to the bottom of why things are the way they are in the first place. For people who like to reason in first principles, it's a powerful tool to get to Why.

Now when I set out to build something or tackle a problem that's loaded with complexity, one of the first things I try to understand is the role and influence of incentive structures.

At the beginning of my junior year of high school my English teacher, Dorothy Palme, gave me a D minus on a paper I wrote. It was the first grade below a B I had received in my entire academic career. I was flabbergasted and livid. I stayed after class to ask her why she gave me the grade and she walked through all the reasons. What it boiled down to was that I was a poor writer. I left the classroom even angrier after getting the feedback. Like the little brat I was, I brought the paper home to my parents and exclaimed that I had been cheated. They read the paper and I'll never forget their reaction. They unanimously supported Mrs. Palme's assessment that I couldn't write worth a damn. They said so themselves and I knew they were a combination of disappointed and embarrassed.

Mrs. Palme was the best teacher I ever had. Over the course of the year, she worked with me to transform the way I approached writing. She taught me about introductory prepositional phrases, how and when to appropriately use adverbs, how to coherently structure my thoughts, and so much more. She did it all on her own time outside of class, too. Her lessons will stay with me forever and it's not hyperbolic to say that she changed my life for the better.

Most teachers would have played it safe. Perhaps they would have graded the paper a B minus or a C. But Mrs. Palme wanted to teach me a lesson - that I could and must do better. It was a lesson that required her to be brutally honest, and to roll up her sleeves and take the time to help me if I wanted to fix it. And while I hated the lesson in the moment, it fondly sticks with me to this day.

The Mrs. Palme's of the world are far and few between. Over the course of my professional career, I haven't encountered a lot of people who had the courage to tell me how it is. There are two investors and board members I've worked with that particularly stand out:

I have been trying my best to have an open mind when it comes to politics and worldviews. I try to understand and question my biases so I can feel confident that my opinions and beliefs are informed ones. I consider my political orientation Left/Progressive. I don’t agree with all Democrat policy. I think most politicians, regardless of party, are inept and care more about preserving power and their jobs than they do legislating. But I do believe that the government can be a remarkably effective tool to make Progress and help people.

As part of my quest to have a more comprehensive and empathetic understanding of people's political inclinations, I follow a lot of Republicans that I think are very intelligent and successful people. I try to learn about what is most important to them, politically speaking. The common denominator seems to be fiscal policy.

I understand that people don’t like taxes.

I understand that people don’t like it when the government spends lots of money.

I understand why people think the federal government is bloated and ineffective.

I understand why people don’t like their business regulated.

I understand why people are vocal about these issues. But I do not understand your silence when children are regularly massacred in schools in this country. It’s a preventable epidemic and it does not happen anywhere else. And like it or not, this is a political issue.

Is this not your line? And if it isn’t, do you have one? When is enough enough?

One of the most important Fundera board meetings I ever participated in took place in 2016. We were reviewing sales productivity metrics and one of our independent board members, Phillip Riese, asked about our compensation plan. When we explained that everyone was paid a healthy base salary and that we didn't need a bonus plan because everyone was super sharp, talented, mission-driven and cut from a different cloth, jaws hit the floor. I was promptly reprimanded and then pat on the head for my naivety. It was then that I learned a critical lesson: incentives drive behavior.

It's a phrase I find myself repeating over and over again. I learned it well while building Fundera. Need to solve a problem? Hit a target? Do something spectacular? Incentives work wonders. Incentives are one of the most powerful tools people have to inspire the behaviors needed to drive desired results. They are deeply embedded in virtually all systems: political, economic, social, environmental, etc. Sometimes incentives produce phenomenal outcomes, and sometimes they create havoc. They are a double edged sword as too much focus on driving short and medium-term results can come at the expense of long-term mission and vision. For operators, a balanced scorecard can help to mitigate detrimental effects.

One industry where incentives can create misalignment between businesses and customers is venture capital. This thread by Rob Go does an excellent job illustrating the point.

https://twitter.com/jaredhecht/status/1480731447602388995

And this Dan Primack observation succinctly explains the oppositional dynamics.

https://twitter.com/jaredhecht/status/1527476981465481235

The fundamental interests of most founders are oftentimes directly at odds with those of their investors. It's worth stating that I am huge fan of venture capital. I've worked with many firms and partners across GroupMe and Fundera that I deeply respect. It's a remarkable tool to create something out of nothing and build and scale businesses. That said, for most founders and employees, optionality is an important thing to preserve in order to optimize for beneficial financial outcomes. But VC makes almost all of its economic returns on a handful of outlier grand slams. 3-5x returns on any individual company are nice, but they do not make or break an individual fund. They're rounding errors at the end of the day. But a $50-$100 million outcome can be economically life changing for founders and employees that haven't over-capitalized and own a meaningful percentage of their companies. This is a unique friction that exists in the industry, and it's critical that founders are cognizant of its existence.

Once you fully grasp the concept you begin to notice how incentives influence virtually every institution in our society. For instance, this insight from Palmer Lucky will make your head spin.

https://twitter.com/PalmerLuckey/status/1530604282998710272

When you're frustrated with the way something works, this realization helps you get to the bottom of why things are the way they are in the first place. For people who like to reason in first principles, it's a powerful tool to get to Why.

Now when I set out to build something or tackle a problem that's loaded with complexity, one of the first things I try to understand is the role and influence of incentive structures.

At the beginning of my junior year of high school my English teacher, Dorothy Palme, gave me a D minus on a paper I wrote. It was the first grade below a B I had received in my entire academic career. I was flabbergasted and livid. I stayed after class to ask her why she gave me the grade and she walked through all the reasons. What it boiled down to was that I was a poor writer. I left the classroom even angrier after getting the feedback. Like the little brat I was, I brought the paper home to my parents and exclaimed that I had been cheated. They read the paper and I'll never forget their reaction. They unanimously supported Mrs. Palme's assessment that I couldn't write worth a damn. They said so themselves and I knew they were a combination of disappointed and embarrassed.

Mrs. Palme was the best teacher I ever had. Over the course of the year, she worked with me to transform the way I approached writing. She taught me about introductory prepositional phrases, how and when to appropriately use adverbs, how to coherently structure my thoughts, and so much more. She did it all on her own time outside of class, too. Her lessons will stay with me forever and it's not hyperbolic to say that she changed my life for the better.

Most teachers would have played it safe. Perhaps they would have graded the paper a B minus or a C. But Mrs. Palme wanted to teach me a lesson - that I could and must do better. It was a lesson that required her to be brutally honest, and to roll up her sleeves and take the time to help me if I wanted to fix it. And while I hated the lesson in the moment, it fondly sticks with me to this day.

The Mrs. Palme's of the world are far and few between. Over the course of my professional career, I haven't encountered a lot of people who had the courage to tell me how it is. There are two investors and board members I've worked with that particularly stand out:

I have been trying my best to have an open mind when it comes to politics and worldviews. I try to understand and question my biases so I can feel confident that my opinions and beliefs are informed ones. I consider my political orientation Left/Progressive. I don’t agree with all Democrat policy. I think most politicians, regardless of party, are inept and care more about preserving power and their jobs than they do legislating. But I do believe that the government can be a remarkably effective tool to make Progress and help people.

As part of my quest to have a more comprehensive and empathetic understanding of people's political inclinations, I follow a lot of Republicans that I think are very intelligent and successful people. I try to learn about what is most important to them, politically speaking. The common denominator seems to be fiscal policy.

I understand that people don’t like taxes.

I understand that people don’t like it when the government spends lots of money.

I understand why people think the federal government is bloated and ineffective.

I understand why people don’t like their business regulated.

I understand why people are vocal about these issues. But I do not understand your silence when children are regularly massacred in schools in this country. It’s a preventable epidemic and it does not happen anywhere else. And like it or not, this is a political issue.

Is this not your line? And if it isn’t, do you have one? When is enough enough?