The index mindset

Index funds have come

to dominate public
markets. But the shift
towards indexing is
spreading across tech,
careers, and culture too –
in what I call the index
mindset.

Through the 1980s, gut-driven

active fund managers on Wall Street
dominated money management and
ridiculed index funds as “a sure path
to mediocrity”. Sure, index funds’
fees were 80-90% lower than those
of active managers, but aiming for
average is un-American.
Yet as active
managers underperformed the
index 80% of the time in the coming
decades, the argument favoring
passive funds became a no-brainer:
why pay higher fees for worse
performance?

Even Warren Buffett, famous for his

concentrated portfolio, now tells us
to simply invest in index funds.
Correspondingly, public index funds
have doubled their market share in
the last decade – a multi-trillion
dollar transition from active to
passive assets.
This pro-index tendency pervades
the private tech markets, startups,
and even our culture through what I
call the index mindset: a focus on
preservation over
creation, optionality over
decisiveness, general over specific.
Public companies are an obvious
thing to index, but the index mindset
manifests in many domains:
Internet and software companies
are far less risky than they used to
be, even at the early stages: there
hasn’t been a venture vintage since
2002 with negative median
returns. Big tech is now huge tech.
Risk-averse people and money
have flooded in. When people have
something to lose, they protect their
downside – think of wealth
managers, encouraging a “safe” mix
of stocks and bonds. The tech
industry has too much to lose.

Indexing may be the correct default

for public investors, but can be
dangerous when replicated in other
domains. The public markets show
us the second-order effects of
indexing, so we can learn how it
affects the private markets, startups,
and culture.

Indexing in the public

markets
Given the index mindset has
snowballed the longest in the public
markets, we can see that when the
plurality of investors are passive,
the implications are not passive at
all.

Record-low interest rates since the

1980s enticed retirement money to
flow into the US stock market. With
low fees and returns that were hard
to beat, index funds
Source: Newfound Research

Venture fund indices prioritize

momentum over value, such that
fundamental business
characteristics matter less:
efficiency metrics and company-
level
profitability give way to growth.
“Checkbox” investment strategies
from the last decade won, which
was in essence frontrunning future
index fund algorithms. 

Public macro investor Michael

Green speculates that index funds
weaken mean reversion
characteristics: overvalued things
should be purchased less, but
market cap-weighted index funds
purchase them more. We’re already
seeing this in growth stage
investing: companies that check
enough boxes are purchased with
increasing price agnosticism.
To make outsized returns in venture
capital, you need to believe in
companies when others don’t. But
for the last decade, many investors
who claimed to be VCs were
actually index investors chasing a
checklist of 3x+ growth, 100%+
NDR, 70%+ margins, and recurring
revenue. These investors
are commoditizing overnight, just
like stock brokers on Wall Street in
the 1980s.

Most seed-stage investors have a

high-volume investment approach:
the conventional wisdom is that
“you can’t know which company will
return your fund, so take a lot of
shots.” This could accelerate
significantly into a true seed index
that aims for high market share and
deployment pace: a scaled seed
index fund still doesn’t exist. But
things start to break down at this
stage: seed investors
often act as advisors to fledgling
companies, which doesn’t scale.

VC is commoditizing more broadly –

finance types have flooded in,
growth funds are raised and
deployed far more quickly,
investment teams have scaled, and
deal-level competition has
intensified. It is no longer the
boutique asset class that small
funds were betting on. You need
scale to make an indexing strategy
work – this could drive a
consolidation era of venture capital,
with far fewer funds.

Indexing in startups
The index mindset has pervaded
startups, too. Employee tenure
is short and shortening, with many
employees opting to collect a
portfolio of equity across several
companies, hedging
their downside along the way.

The proxy war of the index mindset

in startups is quadratic vesting:
employers are trying to combat
micro-tenures with back-weighted
vesting for employee equity. This is
partially a function of scale: tech is
now a place where normal people
come to build careers, not just
nerds tinkering around.

In day-to-day strategic trade offs,

the index mindset also reigns. In
marketing, conventional wisdom
says to eventually build a portfolio
of distribution channels to prevent
concentration risk, instead of
focusing on your best channel. In
sales, it’s generally preferable to
have lots of small customers versus
a few whales. In positioning,
startups try to check as many boxes
for as many customers as possible,
instead of resonating deeply with a
narrow audience.

Even founders, who are on the

highly concentrated end of the
indexing spectrum, have started to
diversify. Secondary sales happen
earlier and are more common than
ever before. Many founders have
side hustles as angel investors, or
even as part-time fund managers.

The limits of the index model are

clear when it comes to company
formation. In a world where people
speak in probabilities, it is easy to
forget that great startup ideas and
teams stem from intelligent design,
not evolution.

Founders can’t afford to index their

market: a seed round only allows for
a
handful of product bets, particularly
in a mature ecosystem with
immense company-level
competition. As Keith Rabois put it,
“product market fit is forged, not
discovered”.

Indexing in culture
We can also see the rise of the
index mindset in culture, in the form
of diversification and risk avoidance.

In philosophy, we’ve seen a shift

from a singular truth in moral
absolutism to a multitude of truths
within moral relativism. In physics, a
shift from a deterministic Newtonian
physics to probabilistic quantum
mechanics.

In politics, globalism swiftly replaced

nationalism in the political zeitgeist
post-
World War II. This is the easiest to
see vis a vis the establishment of
the European Union and the Euro, a
way for the member states to bet on
an index of other countries instead
of themselves.

Private life has also become

indexed. Just a few decades
ago, marriage at a young age was
common, with one partner assigned
for life. Today, Tinder allows people
to diversify their relationship capital
across an index of dozens of
partners.

Even career choices have become

indexed and hedged. Nearly 40% of
Harvard grads work in banking or
consulting after graduation –
choosing a basket of potential
career opportunities without
committing themselves to one. And
the projects within consulting and
finance jobs
are indexed across many industries
and disciplines.

Parents encourage the index

mindset, too, disguised as well-
roundedness: a collection of
hobbies and extracurricular
activities that make their children
broadly appealing to academia and
industry.

When America was founded, it was

a frontier. Each citizen had minimal
possessions. Over the centuries,
Americans have accumulated
financial and relationship capital,
giving themselves something to
lose. This wealth went parabolic in
the 1960s, and since then, we’ve
become afraid of taking risks:
marriage comes six years later,
schooling lasts 5 years longer.

The index mindset is comfortable –

 avoiding decisions requires the
least amount of effort. But if you
index across every domain, you
lose your differentiating features,
becoming an average of everyone
else.

Indexing in the 2020s

The index mindset emerges in any
highly liquid market, and technology
supercharged liquidity in many
markets: financial markets, job
markets, dating markets.
Regardless of our participation, the
index mindset is here to stay.
The biggest consequence in tech is
already here: ecosystem-level
inflation as money floods into tech
indices. Investors must pay higher
valuations. Startups must
pay employees more. Sales and
marketing teams must pay more to
acquire customers. Private tech
inflation will only accelerate. If opex
inflation outpaces pricing (revenue)
inflation, then tech could become far
less profitable.

Other consequences like fragile

valuations are harder to see.
Employees should be wary of
assessing startup equity in the
context of index fund valuations.
VCs should be careful about how
price changes represent
fundamental business changes;
maybe their markups should be
reported on a volume-weighted
basis. Venture backing doesn’t
qualify companies like it did in the
early 2010s.

As the world shifts towards

passivity, you have a personal
choice: join the index, or avoid it
entirely.
Adopting the index mindset is the
easiest default. You don’t have to
think too hard. And it often works, if
you get the highest-order bit correct:
indexing the tech sector in 2010
was a great decision. It can also be
useful as a jumping off point;
purchasing a basket of crypto or
biotech stocks, for example, may
encourage you to learn more about
the technological frontier.

In the investing context, you can

frontrun the index: compete on
speed, think about where the index
is going, and try to get there first.
Maybe you invest in companies that
are ESG friendly, suspecting they’ll
earn a premium in the index moving
forward. Or you invest in a lot of
early-stage startups before they
enter the index.

Trusting the index fully can be

dangerous.
Index funds are reminiscent of the
CDOs of 2008: don’t worry about
the underlying assets, we were told,
and trust ETF algorithms and tax-
loss harvesting to optimize returns.
When nobody pays attention to the
details, things can go wrong. The
index may hold a lot of junk under
the surface.

Many of the most successful

individuals have thoroughly rejected
the index mindset. Elon Musk, for
example, isn’t spreading his bets
– in fact, he’s buying more of his
companies’ shares. And Warren
Buffett, despite preaching index
funds, has 75% portfolio
concentration in five stocks.

Indexing provides a safety net

against failure, so it can be hard to
reject. But you can start small.
Every index has underlying
assets that are below average, so
you can start by identifying which
components are weighing it down.
This could be empty relationships,
weak investments, or unfulfilling
hobbies. Over time, narrow the
index into a handful of bets, each of
which you can staunchly defend.

Abandoning the index mindset may

be more valuable than ever. When
everyone is indexing, their collective
trance distorts reality. That’s your
opportunity. There isn’t a singular
answer about when to adopt versus
abandon the index. But the index
mindset is sedative, a substitute for
conviction. And conviction pays off,
as Howard Marks succinctly put it:
“if you wait at a bus stop long
enough, you're sure to catch your
bus, while if you keep wandering all
over the bus route, you may miss
them all.”
became the dominant sub-strategy,
now constituting 14% of the US
stock market.

Everyone knows that “past

performance is not indicative of
future results”, but nobody believes
it. In the case of index funds, it has
been indicative. Index funds are a
reflexive asset: because US funds
have attained consistent returns,
retirement money pours in, driving
asset inflation and more buyers.

In the public markets, investors can

no longer solely rely on the DCF
model of investing. As index fund
capital flows approach 50% of the
stock market, the indices
themselves distort asset prices. It is
important to ask ourselves, why
should a low-conviction index bet
generate any
return at all? There must be some
external force: that’s retirement
savings pouring into the assets
behind you. As index funds became
a generational asset class, their
returns were driven as much by
demographic trends as by the
underlying companies’
fundamentals.

The common intuition is that when

everyone zigs, you zag... but index
funds make another zig the optimal
strategy. There is an uncomfortable
pyramid scheme dynamic to capital
flows: your investment performance
is aided by the volume of capital
behind you. The retirement
savings capital inflows could revert,
but are alive and well for now.

The importance of capital flows

back-propagates into privates, too.
Blackrock, Vanguard, and State
Street are the largest
buyers of public companies. Given
every private investor underwrites
valuations based on what the next
round’s investors will pay, all private
investors are beholden to the IPO
buyers as the Series N+1 investors.

When capital inflows increase for

private markets, it reinforces the
indexing approach, in the same way
that public index funds become
reflexively good.

Indexing in venture
capital
The index mindset is more obvious
in venture capital than in any other
asset class. Tiger Global, the
private tech index fund, dominates
VC partner meeting discussions.
Those VC firms themselves are
scaling and diversifying. And the
increasingly popular venture capital
job
itself is the ultimate indexed career,
a bet on a basket of companies.

Growth investors often use a

framework of how quickly an
investment will be “in the money”; in
other words, how quickly another
growth investor will pay more for it.
This is implicitly a bet on capital
flows more than intrinsic company
value. And when everyone thinks
this way, momentum becomes self-
fulfilling. Capital flows govern the
public markets, where index funds
prevail. This is increasingly true in
venture capital.