Oct 9, 2017 · 27m · 20vc
20VC: Michael Dearing on 5 Key Principles He Uses To Assess Startup Founders, Why Benevolent Dictatorship Is A Beautiful Thing & Why Markets Are Better Capital Allocators Than CEOs
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of The 20 Minute VC, Harrison Metal founder Michael Dearing joins host Harry Stebbings to discuss evaluating startup founders, applying timeless general management principles, and navigating seed-stage capital allocation discipline.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 27.7% of the talking time here. How this is scored →
Harry as informed peer 2.3 Guest teaching 4.1 Guest disagreement 1.5 Harry pushing back 1.5
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 14:40 Convertible debt market criticism
Michael strongly criticizes the convertible debt market as terribly toxic and undisciplined, comparing demo days to a tulip auction vibe.
Hardest push from Harry ▶ 11:11 Harry challenges leadership thesis with market timingHarry directly counters Michael's claim that management kills startups by citing Mike Dauber's claim that timing is the main cause of startup failure.
Biggest teaching moment ▶ 8:37 The 1855 Daniel McCallum railroad management treatiseMichael provides an unexpected historical deep-dive into 19th-century railroad superintendent Daniel McCallum to outline a five-part management framework.
Harry holds his own ▶ 12:30 Harry invokes Peter Fenton on valuation trapsHarry demonstrates industry expertise by quoting Peter Fenton on valuation traps to probe Michael's discipline around price sensitivity.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Michael Dearing's Journey into Seed Stage Venture Capital | 1 | 3 | 1 | 1 | Harry welcomes Michael and asks about his transition into venture capital. Michael explains his organic move from eBay into seed investing and how Jim Getz pointed out the seed stage capital gap. | |
| Assessing Founder Character: Personal Exceptionalism versus Arrogance | 2 | 4 | 1 | 1 | Harry quotes Michael's past view on management killing startups and asks how to differentiate personal exceptionalism from arrogance. Michael breaks down self-criticism versus taker behavior in founder networks. | |
| Balancing Founder Vision with Market Discipline and Velocity | 2 | 6 | 1 | 1 | Michael educates Harry on Daniel Kahneman's dual-processor model and introduces Daniel McCallum's 1855 railroad treatise detailing five core general management principles. | |
| Evaluating General Management versus Market Timing in Startups | 4 | 5 | 3 | 3 | Harry challenges Michael using quotes from Mike Dauber on timing and Peter Fenton on valuation traps. Michael reframes timing as a general management issue and sharply criticizes convertible debt market dynamics. | |
| Reserve Allocation Strategies and LP Capital Management Philosophy | 3 | 4 | 1 | 2 | Harry asks detailed questions regarding reserve allocation models and fund recycling. Michael candidly admits past modeling errors and explains his LP liquidity return strategy. | |
| Quickfire: Literary Inspiration and Transformational Career Failure | 1 | 2 | 0 | 0 | In quickfire format, Michael shares his favorite book and recounts a formative career failure with a shoe retail business that led him to selling on eBay. | |
| Quickfire: Market Philosophy, Capital Allocation, and Historical Inventions | 2 | 5 | 2 | 1 | Michael articulates why free markets outperform CEOs at capital allocation due to explicit opportunity-cost pricing signals, agreeing with Adam Smith's invisible hand. | |
| Quickfire: Executive Judgment in Product Roadmaps and Astro Investment | 3 | 4 | 3 | 3 | Harry brings up Travis Kalanick at Uber when discussing benevolent dictators. Michael neatly sidesteps commenting on Travis while defending executive judgment over relying solely on A/B testing. |
Statements from this episode (14)
Dearing: Founder exceptionalism is independent of pedigree or brand-name experience
“That personal exceptionalism, that sense that they are special, that they are destined for really unique outcomes relative to their peer group, I think that shows up early in somebody's life. And it's independent, quite independent of pedigree or brand name wo…”
Dearing: Great founders subject gut intuition to market discipline
“Every human is walking around with two processors running in parallel. One processor is that gut instinct, that intuitive perception of the world, and the other is the analytic, more rational, and reasonable one. Now, the gut perception of how the world works …”
Dearing: Daily software deployments and rapid prototyping are necessary founder markers
“How fast do they release prototypes? How many days a week do they push new software to production? How quickly do they start sketching an idea versus just talking about it in very macro terms? And how quickly does a pen go to paper? Those are markers of people…”
Dearing: Fundamental general management principles have not changed since 1855
“So that checklist of five things is the same today as it was in 1855 when he first wrote that treatise.”
Dearing: It is a pathetic indictment that basic management makes founders exceptional
“And I also think this checklist of five things that McCallum gave us, if they are good at those five things, they are in the Pathetic indictment of the state of general management that it's that easy to be exceptional, but it really is.”
Dearing: Perfect market timing is impossible, making survival a management challenge
“I would say, though, that if you start with the premise that timing is always slightly wrong, I mean, listen, what are the odds that we invent something, we productize it, and we turn it into a company at exactly the right moment? It's practically impossible. …”
Dearing: Valuation is a VC's primary tool for risk management
“Pricing is the way that we manage our risk. It's the primary tool I have to manage my own risk in the situation. And so as my risk goes up, my price should go down and vice versa.”
Dearing: Seed equity market rounds are priced reasonably
“So I would say on the equity side of the market, I believe for the most part, companies are priced reasonably.”
Dearing: Convertible debt seed market is terribly toxic and undisciplined
“On the convertible debt side of the market, I think it's terribly toxic and about as undisciplined as it could possibly be.”
Dearing: Harrison Metal currently reserves $1.50 per $1 initially invested
“Over time, the way I've funded the reserves pool is varied between taking that ratio all the way up to two to one, back down to now I reserve about a buck 50 for every initial dollar.”
Dearing: Harrison Metal cut reserves over values violations only twice in 100+ deals
“I've rarely come into a situation where I've completely pulled out. I mean, it has happened, but usually for real values violations, you know, dishonesty, and thank God that's only happened, like, you know, two times out of more than a hundred cases.”
Dearing: Initial deal picking drives fund returns, not capital recycling
“I don't consider it a bulk part of the strategy because let's be honest, my numbers call it on a fund are driven by my initial investment picking. So picking is the primary thing I do. If I pick really well, I should generate great multiples and liquidity for …”
Dearing: Corporate capital allocation fails because CEOs lack true pricing signals
“One of the biggest problems with internal capital allocation inside a company is, Very rarely do CEOs have access to true opportunity cost-based prices. And the market's really good at that. The market's really good at saying, well, if you're going to use my f…”