Do you really need a big, fat, expensive book on venture capital, when a thousand blogs can give you answers instantaneously? Surely, in this day and age of free content, why would you want to pay an ungodly amount to buy a book? And who has time to read these days?
And you must surely know, no book will teach you how to be a great investor — you have to get out there and start investing. Like learning to ride a bicycle. A book can only do so much. The learning comes from doing.
But what is the best way to become a good investor — to build a structured approach, to build your foundation, and to build a strong core? Maybe this book can help. The business of venture capital not only presents basic principles, checklists, and frameworks, but also shares philosophies and wisdom of the ages. At its very core, an investor has the ability to understand risk and then make a probabilistic bet against that risk. We do this to achieve outstanding “venture-like” returns, well above some other asset classes.
On the face of it, the business sounds easy. I mean — how hard can this be? As they say, any fool can write a check. Everybody knows the obvious of investing: “Buy low, sell high.” But how many can do it consistently across macroeconomic changes, with evolving technology cycles, competitive landscape, regulatory dynamics, and management teams? The sands of time keep shifting. Entropy prevails. All that is valuable is being eroded by the new waves. Your role as an investor is to make sure you can stay balanced, find music in this cacophony, and find the right signal.
In public equities, trading strategies include a “momentum” driven approach. You invest in a stock that has a high level of buy–sell activity. This momentum drives the price. In a frenzy, everyone jumps in and the price starts to go up, but very few pause to step away from the herd. To ask, “Why is this happening?” is not the mind-set of the momentum investor. They are well trained to make several short trades and know when to get in, when to get out. The “value” investor — someone like Warren Buffett — studies the company's financials, its value proposition, the ins and outs of the sector, competition, product pricing, defensible moats, and more. The intellectual effort for understanding value is much more different and strenuous than the herd mentality momentum-based trade. Bear in mind that we are not here to make moral judgments against momentum trades nor demonstrate superiority of any kind — we are merely choosing a path, based on our strengths to get to a destination. I was a herd trader, too, until I could develop my own muscles and confidence. Success can come from many paths, and you have to choose what works best for you. I have tried both approaches and can tell you one is far easier than the other, but the rewards of a well-planned strategy are immensely gratifying — both intellectually and financially. It is like a game of chess — only in this case, you have n number of opponents.
One of the primary goals of this book is to help you to build the muscle — manage risk effectively, shield yourself from all the biases, and get to the promised land.
The second goal is a bit more subtle — what kind of a person will you become in this journey? As a venture capitalist, we are not just trading stock — we work with people. That indomitable human spirit in founders comes to you. They bring their dreams, their life-time aspirations — if we cannot look beyond their fancy PowerPoint decks, we are to blame. Those dreams are a part of this package. If we only chase financial outcomes, are we being short-sighted and self-serving? Wall Street may choose to operate that way, not Sand Hill Road. Not venture. A typical VC interacts with the portfolio founder multiple times a week — a Wall Street trader may never know the name of the management team members. We become intimately aware of the founder's day-to-day dilemmas and their sleepless nights, their joys, sorrows, anxiety, and depression — all of these come with this package as well. So the next time you make an investment, remember that you are not just making a trade — you are putting on fertilizer to help sprout the founder's dreams. Of such dreams will come a better tomorrow. If there is a gale storm in the middle of the night, you better get out of bed and get out there. Do your best to protect those saplings.
And this business will not disappoint — you will find the best and worst of human behaviors when you make (or lose) big money. Because there are two primal drivers — those imposters called greed and fear. This business brings all the highs and lows of these two demons. Dysfunctions within venture funds, their founding teams, CEO desire for global dominance, street fights with competition, slick maneuvers, politics, ego, drama — you name it, and this business has it all. Not getting caught up in this theater and still staying true to yourself can be a challenge. I could share some great stories of power, greed, backstabbing, and more, but I will save the gossip and entertainment for People magazine. My goal was to bring out the best of this business and leave the reader empowered and inspired. To stay persistent and focused over the long haul despite all these primal challenges requires some tenacity. How do you build a fair and balanced core in your ethos, your DNA, and your daily persona?
Until our portfolio company becomes an enduring milestone, we must fight their fight with every inch of our lives, blood, sweat, and soul. Our work is done not when we make great returns but only when we help fulfill the dreams of founders. To forget this basic rule of venture investments is to forget our purpose. For it is not our goal to mindlessly multiply small pieces of green paper and proclaim Midas list ranks on our resume — that is a fool's errand for those who, while getting rich, leave behind a trail of carcasses of broken dreams. We are here to help those dreams come one step closer to reality. We are here for empowering the crazy ones with our gifts of time, money, intellectual insights, and our wonderful relationships. All of this to serve for the greater good of society. That should be our singular goal.
To find the founder whose vision is to serve for the most good of the society is not an easy task. In the beginning, all founders sound alike — their mission statements filled with zeal and passion. They serve up PowerPoints to our demand for “billion-dollar” markets. It is your job to dissect the frothy shapeshifters from the authentic forces of good. How do you make value judgments when faced with the promise of fantastic returns? Juul — the e-cigarette vaping company — grew the fastest in recent years, raised the most amount, and can generate the best returns for their portfolio. But if you were to make a lesser return in another company, say one that's addressing cancer, would that align with your values? Would your limited partners (LPs) be happy? Would you be satisfied with the trajectory of your career?
Indeed, “values over valuation” has been one of our larger business challenges — if we chase the promise of an IPO and triple-digit IRR but damage the socioeconomic fabric, where do we draw the line? I know one prominent investor who chooses to not use the portfolio company's technology for defense markets. The CEO was blunt — our technology can kill a lot of people, but we will never sell it for that purpose. The company would be valued at least 10 times more if it went down that path, but its bedrock values keep it on course, staving off the monkeys of greed. If you do not establish the foundation of values, you could make money, lots of it — but then you might feel purposeless, adrift in the sea of capitalism.
What set of values will become your internal compass to help you make the right decisions when you stand at the tougher crossroads of our business? As you build a framework of values, this work is like a journey, best illustrated by C. P. Cavafy's poem “Ithaka”:1
Better if it lasts for years,
so you're old by the time you reach the island,
wealthy with all you've gained on the way,
And we are here only for a short while, even though VCs are desperately trying to solve for death.
Come now, you who say, “Today or tomorrow we will go into such and such a town and spend a year there
