Musings #27: Circle of Competence

Jan 30, 2021 5 MIN

Musings #27: Circle of Competence

“I’m no genius. I’m smart in spots—but I stay around those spots.”

— Tom Watson Sr., Founder of IBM

“You have too much of semiconductor in your resume, Anand. You need to diversify if you want to be a successful VC investor.” This was advice from a trusted VC mentor when I told him I was going back to a cushy job at Intel Capital (Intel’s VC arm) post business school. I was 32 at that time and thought my life was all settled, but this was a wake-up call. I did have deep expertise in semiconductors but did not know much about any other space.

Cut to today – I have investments across a range of industries – particularly marketplaces across consumer tech, B2B, and Fintech. It has taken more than a decade to build knowledge in these diverse sectors, and still a lot to learn. But, I wanted to shout out to that mentor for pushing me to expand my Circle of Competence (CoC) – our topic for today.

What is Circle of Competence?

“You have to figure out where you’ve got an edge. And you’ve got to play within your circle of competence. The size of that circle is not very important; however, knowing its boundaries is vital.”

— Charlie Munger.

Regular readers know that I admire Buffett and Munger and have written about them in the past. Both are very disciplined investors who stick to their core principles and areas of expertise while making investment decisions. Whatever area we work in, there is probably an expert we admire. Take a minute to identify one such person. Now, if we look, there are a few characteristics of these experts:

  • They always look to learn more.
  • Never afraid to say, “I don’t know.”
  • Know when and from whom to ask for help.
  • They tend to have narrow focus areas.
  • They tend to make fewer avoidable mistakes.

Range vs. Circle of Competence

But, you might ask, didn’t we discuss the “Power of Range” and why generalists have an advantage across professions (professional athletes, musicians, artists to businesswomen). Yes, indeed, range is an advantage. But that is till you figure out your area of specialization. For example, Federer being good in a range of sports made him a better athlete and contributed to his longevity at the top of his game. Generalists also develop a broad range of tools that they can draw from for solving problems in their core area of competence. That is why Munger’s quote above resonates – you need to find your edge and then stick to it.

Challenges of sticking to your Circle of Competence

But, there are several challenges in sticking to your CoC. The most common reason why we venture out is boredom. It is tough to stick to one area. For example, I have seen many successful people switch domains entirely, and the main reason being boredom. But, by doing this, they throw away their inherent advantage in their core area of expertise. It is like Federer winning one grand slam and then saying I’ll now switch to golf. As tempting as this might be, let’s watch out for this.

The flip side of this is the Circle of Comfort. In my own story, stepping outside the “semiconductor” comfort zone or the decision to return to India in 2009 when the VC industry here was in its infancy were all uncomfortable decisions. But, these were pivotal decisions that helped shape my career. Some of us find our comfort zones and rarely step out of this. The main reason for this is our fear of failure.  But, we must step outside our comfort zone and take calculated risks to achieve our true potential in any area of life.

It applies even more early in our career when we are trying to find our sweet spot. In fact, it might be best to develop our range early on and to find an area we are truly passionate about. In hindsight, I should not have worked in the same industry (and company) for seven years (going back to my mentor’s criticism). I could have packed in two to three experiences in my twenties.

Growing your Circle of Competence

But, once you find that area you want to specialize in, there is no substitute to focus and deliberate practice to master that area. For me, that passion is venture investing. It took me a few years to find a footing in this space and the 10,000-hour principle applies here as well. I would have spent that much time with startups since starting out in this field. Though I would be the first to admit there is still so much to learn.

When I look back at my early days as a VC, a few things that helped:

  • I had some great mentors to learn from in the partners I work(ed) with. They are all experts in the craft and could distill their learnings and pass them on. Lesson #1 – pick your mentors wisely.
  • I was open to meeting as many startups across various industries and spending hours studying different spaces. It was intimidating at the beginning since these founders were experts (imagine talking to MIT Professors who spent decades researching an area as a fresh VC). But, I was willing to dive in and learn as much as possible in prep for these meetings. Lesson #2 – Be ready to slog it out.
  • I enjoyed picking a sector and diving deep into that area. For example, early in my VC career, I did a deep dive in LED lighting (which I knew nothing about). I spent two to three months reading all about this new space (at that time) and talking to over thirty experts (all through mining the network). It helped develop a strong network, and by the end, I could hold my own with anyone on this topic (and the fund I worked with invested in the space). Lesson #3 – deep dive into specific areas to develop expertise by reading extensively and talking to experts
  • It gave me the confidence to then start exploring more sectors. Lesson #4 – rinse and repeat

What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence . The size of that circle is not very important; knowing its boundaries, however, is vital.

– Warren Buffett

That’s my story from the investment world. But, I’m sure we can all apply it to our professions. Here are some questions to ponder:

  • Have I identified an area I’m passionate about that I want to stick to and become an expert at? Will this be a rewarding experience for me if I were to do it for the next decade of my life?
  • If not, how can I figure out that area? Who are some mentors who can help me on this journey?
  • If yes, how can I become an expert in this area? What should I be doing differently to develop and expand my circle of competence?

That’s about all for today. Here’s to learning more about our circle of competence and to overcoming our fears to step out and expand our circle to become the best version we can be. Leaving you all with a song by thirteen-year-old Sparsh Shah, who has Brittle Bone Disorder but still “Not Afraid” to take the stage.


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