Investing in the Messy Middle: The Criticality of Tacit Knowledge

Investing in the Messy Middle: The Criticality of Tacit Knowledge

When it comes to investing, there are various strategies and approaches that individuals can take. Some investors focus on established companies, while others prefer to support early-stage startups. Scott Belsky, a seed-stage angel investor, falls into the latter category. He has been investing since 2010, primarily in consumer, marketplace, and "transformation by interface" companies. Belsky's main areas of interest revolve around product development, such as crafting the first mile, structuring design-driven teams, and optimizing user experience.

One key aspect that Belsky emphasizes is the importance of narrative in positioning a product. He believes that a product's story matters not only for external marketing but also for the team's perspective of their own creation. He admires teams that value initiative over experience, as they are often the ones who can navigate the challenges of the "messy middle" - the stage between an idea's conception and its successful execution. Belsky supports mission-driven teams that prioritize design and exceptional product experiences. He finds that the best teams are not only imaginative but also grounded in reality, leveraging existing forces to their advantage. These teams are driven by empathy for those who suffer from a problem and are constantly striving to improve their product.

While Belsky focuses on investing in early-stage companies, he highlights the criticality of timing. Knowing when to invest can make all the difference in the success of a venture. This concept aligns with the idea of tacit knowledge, which refers to knowledge that cannot be easily expressed in words alone. Tacit knowledge is learned through imitation, emulation, and apprenticeship. It involves internalizing the principles behind actions rather than relying solely on explicit explanations.

Learning through tacit knowledge is particularly valuable in domains that require complicated judgment and solution selection. These skills are difficult to acquire through explanation alone. The process of gaining expertise in such fields involves finding a master and working under their guidance. Warren Buffett's years spent under Benjamin Graham serve as a prime example of this approach. Deliberate practice, on the other hand, is more suitable for domains with established pedagogy, such as music or math.

Tacit knowledge is often overlooked but holds immense value in expertise. It allows for creative problem-solving and intuitive decision-making that is common among expert operators. While there was a trend towards trying to encode tacit knowledge into expert systems, researchers found that this approach limited people's ability to build expertise. It is more effective to focus on gaining tacit knowledge directly rather than waiting for breakthroughs to make it explicit.

For those interested in developing expertise and leveraging tacit knowledge, the field of Naturalistic Decision Making (NDM) offers valuable insights. NDM methods focus on understanding how experts make decisions in complex and uncertain environments. By studying these methods, individuals can gain a deeper understanding of tacit knowledge and apply it to their own domains.

In conclusion, investing in early-stage companies requires a blend of strategic thinking, design-driven product development, and an understanding of the criticality of timing. Embracing the concept of tacit knowledge can enhance an investor's ability to make informed decisions and support teams that value design, exceptional product experiences, and problem-solving through empathy. Here are three actionable pieces of advice for investors:

1. Prioritize narrative: Consider the importance of a product's story not only for external marketing but also for the team's perspective. A compelling narrative can inspire and drive innovation.

2. Embrace tacit knowledge: Recognize the value of learning through emulation, apprenticeship, and internalizing principles. Tacit knowledge allows for intuitive decision-making and creative problem-solving.

3. Explore NDM methods: Naturalistic Decision Making offers insights into how experts make decisions in complex environments. Studying these methods can enhance your understanding of tacit knowledge and its application in various domains.

By incorporating these strategies, investors can navigate the messy middle and support teams that are poised for success.