Occasionally I get asked by people interested in venture capital how they can become a better investor. As I’ve written about before, success in venture is ultimately about convincing founders of great companies to select you as their lead. Easier said than done. Unfortunately, I know of no secret recipe that infallibly works to win those competitive deals. But I do have some general observations that might help if you’re looking to break into the investing world.
1. Play to your strengths
My first suggestion is to stop asking other people what they did, in the hope of mimicking their path. You are not them, and what worked for them make not work for you. Each investor needs to find their own path. You won’t be successful by playing to other people’s strengths. You’ll be successful by playing to yours.
When I broke into Venture it was 2006 and most VCs were generalists. I had spent the last 10 years in web 1.0 companies and only knew about the consumer web; I knew nothing of enterprise or infrastructure. Rather than compensating for my lack of knowledge in enterprise, which had delivered great returns for all of my partners, I doubled down on consumer. Since there were few investors who brought relevant consumer web expertise at that time, I stood out from other VCs in competitive deals. That was the vector that got me into my first few deals. That was great back then, but it won’t work for you today as now there are plenty of consumer specialists. You can’t just follow someone else’s path.
My partner Alex Taussig’s superpower is his incredibly analytical brain. He often takes a company’s data, works through it, and delivers new insights to founders from their own data. Things that are obviously true and useful once he presents them, but were unknown to the company until he teased them out. I’ve seen him take a few datapoints from a conversation with a founder and derive meaningful insights about the business, despite having imperfect information. He uses his 10 years of experience as an investor to connect the dots. When he does this, he plays to his strengths. It makes founders get excited about having him as a board member. That’s what works for him. It may not work for you if that isn’t your superpower.
You need to figure out what you are uniquely good at, as well as what you’re uniquely bad at, and then turn your bugs into features. Suppose you’re young and have little operational experience. Instead of compensating for your weaknesses (you don’t need to go work for a startup for 10 years to gain operating experience!), spend time amplifying your strengths. What can you do that people in their 40s can’t? Can you go out and network more in the evening than they can? Do that. Do you have more time to dig into new, untapped areas than traditional investors (where no one is an expert)? Do that. Do what others cannot.
Another example, suppose that you have a business or arts background, but you’re not deeply technical. You don’t need to go get a Masters in CS, or even to do a coding bootcamp to compensate. Instead, play to your strengths. Are you closer to pop culture than the average VC? Use that insight. Focus on categories that don’t need deep technical experience (e.g. e-commerce, marketplaces, SaaS) and build expertise in understanding go-to-market and industry structures.
Many great investors have made investments in multiple fields. But top investors didn’t get smart in all these areas at once, they learned each area, one at a time. You don’t need to become an expert in a variety of different areas at once.
Instead, pick one sector, spend nearly all of your time in it, and become an expert in it. That is how you can differentiate yourself against a more experienced investor who is spread more thinly across multiple sectors. Founders can tell the difference.
Ideally, pick a sector where there are few experts already. There are plenty of experts in SaaS or e-commerce and you’ll never catch them from a standing start. Pick a new, emergent sector. Two years ago, my partner Adam Goldberg went deep on Crypto, well before the run up of 2017 when it became fashionable again. Now he is an expert in the field on both a relative and absolute basis. Crypto isn’t something that you can ‘minor’ in, and VCs who dabble in crypto while also focusing on other areas can rapidly find themselves out of their depth or without full context in a rapidly changing ecosystem. He’s now Lightspeed’s resident expert, and that is because he put in the hard work to learn everything about the space. It will be far harder for you to try to become an expert in crypto now though — there are many people with too much of a head start. But you should keep your eye out for the next sector of opportunity where there are still few experts.
Of course, you want the sector you chose to become important. You can’t totally control that, so you have to hope for the best. Crypto and Autonomous vehicles worked out. Nanotech and Cleantech less so. Ideally you choose a sector that is of intrinsic interest to you anyway.
3. Being right is more important than being contrarian
There is a myth that to be a great investor, you need to be contrarian. But once the numbers are in, most good companies are obvious to everyone. People may disagree about price, but they all agree about the opportunity. That is no reason to stay away. Actively trying to be contrarian is not a useful strategy.
Success in venture is path dependent. Getting associated with good companies early in your career build momentum throughout your career. And since venture careers tend to be long, it doesn’t actually matter if you don’t make 100x on your first investment. What is more important is that you get associated with good companies.
Now at the beginning of your career, all else equal you won’t “win” a competitive deal that is obviously interesting to many people. One way to make sure that all else is not equal is to be willing to stretch on valuation. Investing in that first great company can be transformative for a career. I stretched on valuation in some of my early investments, in companies like Bonobos and Playdom, and this helped me get into more good companies later on.
The best returns come from being contrarian and being right. We invested in Snapchat at a time when other VCs didn’t see the opportunity, and it worked out well for us. By the time it became obvious to others, the valuations floated up very quickly. But early in your career it’s more important to be right than contrarian. So optimize for investing in high quality companies first, rather than focusing on being contrarian. Truth seeking will get you much further.
Good luck finding your first great investment!
You only need one to put you on the path to success. And when you find that first great investment, call me before you call anyone else; I’ll gladly mark up your next round!