5 Lessons from my first 5 years in Venture

Here are 5 lessons I have learned (sometimes expensively) during my first 5 years investing… Many of these lessons are also directly applicable to my personal life, development and pursuit of happiness & fulfillment as a person.

  1. Fewer strong, genuine, honest relationships are better than a million loosely held “connections.”

Whether you are a seed stage investor or a growth investor, building a robust network is a fundamental part of your job. Discussing or testing ideas and theories with people looking for similar things can be very valuable. Sharing investment opportunities or introducing founders you have previously invested in to later stage investors can be of mutual benefit. However, there is a tendency in the venture industry to feel like you must blanket every firm or every person with “coffee chats” or “monthly calls” as a way to stay connected so that you don’t “miss out” on what may be the next big thing. With so many firms and so many people, the reality is you will likely share and receive your best opportunities, thoughts and discussion with a very small amount of people with whom you have a deep, honest and trusting relationship. Finding a balance between quantity of connections with quality of relationships is a constant battle when time is so scarce. My advice is to spend time and energy deepening your best relationships rather than adding more loosely held connections.

“The best way to find out if you can trust somebody is to trust them” -Ernest Hemingway

2. Conviction is not binary

Conviction is commonly a self-described strength of early stage investors and supporters of startups. By definition to be an early stage investor you have to believe in people, markets, models and businesses before their success is obvious. However, after years of observing the good, the bad and the ugly of early stage startups, I have seen the many shades of gray in the spectrum of “conviction” and believe constantly checking and re-evaluating beliefs or opinions is required of early stage investors and operators. Information is so imperfect, incomplete and subject to change at the early stage of a company, blindly holding onto beliefs with such a small amount of the picture in frame is irresponsible. I have strong opinions and beliefs when I make an investment, but with so many variables, both seen and unseen, strong opinions must be loosely held and subject to change when your information or facts change.

“When my information changes, I alter my conclusions. What do you do, sir?” Economist John Maynard Keynes

3. Money doesn’t solve fundamental problems

Raising capital has become a media spectacle and a scoreboard for many startups. Many people believe success or failure in their business is subject to ability to raise capital. I have discussed my belief with a handful of people that the risk of failure in startups is not very well correlated to the valuation or amount of capital startups have raised (mainly between Seed and Series B). Said another way, on average a Seed stage company at $5M valuation with $1M in the bank is not 5x as risky as a Series A stage startup at a $25M valuation with $5M in the bank (this is part of the reason we invest at Seed stage). In fact, with so much capital in the market many companies prematurely raising capital with flawed models can be a kiss of death as it is seen as a false signal of success and the only thing more capital will do is delay the eventual death of a flawed business. The art of early stage investing is knowing when you are ready to leverage capital to scale vs. when to continue iterating on your business model.

“A startup celebrating raising capital is like celebrating that you bought condoms before a date” -Stanford Professor Steve Blank

4. You need to believe in things most people do not, early

This has been said many times in many ways, but it is so overwhelmingly important to success in venture it cannot be under emphasized. Perhaps there are some firms or individuals who have the capital, model or ability to wait until it is *somewhat obvious* that there is a high probability a startup is capturing massive value. However, I am not in that position and I don’t expect anyone who will read this blog is in that position either. If you only try to get into “hot” or “oversubscribed” funding rounds, where you seek comfort in the opinions of others, over some period of time you are unlikely to make the type of returns required to stay in this business. The word contrarian is grossly overused in VC, you are only contrarian if you believe something most people do not believe AND are correct. If you believe something most people do not believe and are wrong, you are just an idiot with an opinion inferior to the majority of the population.

“There are three ways to make a living in this business: be first, be smarter, or cheat. Well, I don’t cheat. And although I like to think we have some pretty smart people here in this room, it sure is a hell of lot easier to just be first.” -John Tuld, Margin Call (2011)

5. There isn’t always a lesson

Sometimes you’re just wrong, even when you did everything properly and systematically evaluated an investment. Great companies and great founders are often times not great companies or great founders on day one of their journey. This is why rate of learning is such an important trait to look for in founders and CEOs. If picking and investing in early stage businesses was easy or logical, the upside would not be nearly as great. Information and markets change, companies pivot, unforeseen opportunities emerge. Venture Capital is far more art than it is science. Pattern recognition usually reverts to the mean, while the largest outcomes or “Black Swans” may not follow any particular pattern. Many investors conflate why a company was successful and why they did (or did not) invest, in hindsight. Some great investments are made for completely the wrong reasons, and yield spectacular outcomes. This is a crazy business that is not always logical. Good luck!

Nassim Nicholas Taleb said it better than I can when he stated:
What we call here a Black Swan is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme ‘impact’. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
I stop and summarize the triplet: rarity, extreme ‘impact’, and retrospective (though not prospective) predictability. A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.