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I’ve been reading the book “The Black Swan” recently on the recommendation of my two partners.  I had heard about the book for years, but it never made it off my “to-read” list until now.

One of the concepts that the book discusses is the way we think of risk differently when we are generating profits vs. when we are minimizing losses.  The simple illustration goes something like this:

If someone gave you the offer of $100, no strings attached, vs. flipping a coin for the chance of winning $200, what would you choose?  Although both options are mathematically equivalent, most folks would choose the $100.

On the flip side, if things were reversed, and you could either lose $100 for sure, or have a 50% chance of losing $200 or nothing, what would you choose?  Most people in this situation tend to prefer the possibility of losing nothing, even though there is the 50% chance of a larger loss.  

This illustrates a simple point that we tend to be irrationally risk tolerant in protecting capital.  Social scientists call this loss aversion.

This has major implications for the venture business in the realm of follow-on investment decisions.  It’s a part of the business that doesn’t get much attention, but consider this:  I think it’s safe to say that well over 50% of a typical venture firm’s capital actually comes in after the initial investment round of financing for a company.  So even if a fund is supposed to be “early stage” focused, the reality is that the bulk of their capital is going into the follow-on investments in the B, C, D and later rounds. 

I didn’t realize this before I went into VC, but most VC firms are lifecycle investors, meaning that they have large reserves and expect to participate in most of the follow on rounds for companies that are doing reasonably well.  One would think that the follow-on investing decision for VC’s would be an easy one.  After all, no one has more information on a company than the existing investors and board directors.  Therefore, they should be very well equipped in figuring out which companies deserve follow-on capital, and which ones don’t.  Even though the follow-on capital is usually at a higher cost base than the earlier investments, this should be concentrated in the “best” companies, and should perform very well from a risk adjusted basis (even before considering the protection from being higher up in the preference stack).

Case closed right? Wrong.  There are a lot of reasons why follow-on financings might happen when they shouldn’t, causing VC’s  to “pour in good money after bad”.   

• Loss Aversion.  As discussed above, the uber-reason this happens is that one is irrationally risk tolerant when trying to preserve capital.  Or put another way, once you have a vested interest (time or money) into a company, you are willing to take irrational risks to protect your investment.   

• Delayed Gratification.  No investor wants to see a “zero” on their track record, and no investor wants to report “zeros” to LP’s.  This is true even though a small -100% return today might be much much better than a big -80% return in 5 years.  The pressure of needing to raise a future fund, looking good in front of your partners, trying to get promoted, trying to look like a clever guy in the twitterverse, etc leads to unnecessary risk-taking in follow-on financing decisions.  Even though almost every firm says they evaluate follow-on rounds like “new deals”,  I think this is actually far from reality.

• The Signaling Death Spiral.  Let’s take the hypothetical case of a company raising a series B that is doing ok, but not great.  The existing investors will often say they will support the company but have an outside lead price the round.  The new investor will ask the existing investors if they are “in” for their pro rata as a signal that it’s worth investing.  If an outside lead is willing to price and lead a round, it’s very very hard for the existing investor to say “you know what, I don’t believe in this.  I’m going to pass on this investment and risk that the whole deal blows up” (note that this is different than the follow-on dynamics of VC led seeds, where the investor will have a much smaller % of capital at risk and knows that they are buying 5 options to make 1 true investment.)  So in this scenario, a follow-on round gets done, and both parties are heavily influenced by the fact that the other is investing.  Puzzling no?

• Confirmation Bias.  This is the tendency for people to favor information that confirms their preconceptions regardless of whether that information is true or complete.  When layered in with Loss Aversion, it creates a deadly combination.  Because an investor is averse to losses, he/she is biased against any data that suggests that the initial investment decision was a mistake and will gravitate towards information that supports a follow-on investment.  

• The Bridge to Nowhere.  Even if a company is really struggling, the following logic is very appealing: wouldn’t you be willing to spend $2M to save the last $8M?  Because investors usually buy preferred stock, they get paid first and so they only need the company to sell for the value of the preferred stock to get their money back.  As a result, you often see struggling companies raise inside rounds under this logic (often crushing the employee’s equity in the process).  But many times, this round of “bridge” financing ends up being a bridge to nowhere.  

So, follow-on investing ends up being a much more complicated endeavor than it would first appear.  Clearly, there are some firms out there that have a great deal of discipline about follow-on financing and have been very successful.  But I think that this is a very very easy way to falter as an investor because it’s so natural to fall prey to these pitfalls.  As some super-angel funds increase in size, it will be interesting to see how they deal with these hurdles as well.  It’s easy to say that one will “pile in on their winners”, but the ability to do so will cut both ways. 

It’s a little in vogue these days for seed stage investors to bash on larger VC’s.  It’s kind of fun, and in many cases, the criticisms have merit.

But most folks agree that having home run potential almost always means raising VC money to the tune of tens of millions of dollars.  Large VC’s fill this capital need, and also can add a lot of value through the lifecycle of the company.  Also, some of these partners and firms have been in the investing game for a long time and have had success in different economic cycles, so there is a lot to learn from them.  

Here are a couple practices I admire.  Full disclosure, I’ve worked at one VC firm (Spark Capital) and haven’t seen the inner workers of any of the others, so these thoughts come from my own external observations. 

Bessemer’s Road Mapping Discipline

David Cowan described the road mapping process for Bessemer in an old blog post. Talking about being thesis driven is easy, actually doing it is a lot of work.  It’s one thing to be interested in general themes and navigate towards “heat” in the market.  Many many investors do this and claim to be “thesis driven”.  But that’s not accurate, and that’s not what road mapping is.  It’s actually doing real work to develop an independent point of view on where markets are going and what technological innovations will help make this happen. 

I think this leads to very smart investing, but also is a huge benefit to the entrepreneur.  It’s great to know that your investor has a lot of depth in your area to offer, and it also helps smooth out the fundraising process when a partner has already pre-sold their roadmap internally and can quickly say “no” when it’s clearly not a fit.  

As a side note, I think this is why Bessemer has had such a great track record of developing and training very thoughtful entrepreneurs and investors over the years (for example: Chris Dixon, Larry Cheng, Waikit Lau, etc). 

Spark’s Tenacity and Conviction

I debated whether to include something from Spark since I’m biased.  When I was interviewing with Todd and Santo, one of the attributes they really focused on was my level of tenacity and conviction (I ultimately told them the story about winning over my wife after many years, but that’s a different tale altogether). 

The venture business is very competitive and it’s challenging for new entrants to compete against heritage firms that have been around for many years.   But in 5 years, Spark has emerged as a very strong player across the country.  This comes from deep conviction that there is no reason why they can not gain access to the best investments (regardless of location) and the tenacity to prove to entrepreneurs that they would be the best partners for the long haul.  I’ve heard other East Coast investors say “I’m not going to pursue that west coast deal… I don’t think I have a realistic chance to win it”.  But I never once heard anything like that at Spark.  

What’s particularly impressive is the firm’s deep activity in NYC.  Long before it was in vogue for Boston VC’s to hop on the Acela, Spark was already pounding the pavement and building a strong reputation in New York.  Over the past four years, Spark has been one of the two or three most active investors in the city with over 15 portfolio companies.  It’s difficult to have the tenacity and conviction to lead, but that’s the only way to separate yourself from the pack. 

Accel’s Barbell Strategy

Quite a few firms talk about employing a “barbell strategy” where the firm focuses on very early stage investments as well as participating in later rounds of high-fliers.  The skill set for identifying and evaluating these investments is pretty different, so I think firms tend to be a little better focusing on one end of the spectrum or the other.

But I think elite early stage firms do have an unfair advantage compared to later stage investors in winning great late stage deals.  Often, these firms have stronger brands and a stronger networks of portfolio companies and entrepreneurs to draw from.  Making late stage investments can be very lucrative in a world of discontinuous returns.  Greylocks’ investment in Facebook seemed crazy to many at the time, as did Benchmark’s Twitter investment (although both will probably work out quite nicely for each firm).  

But the firm that has been in the news the most recently at this stage is Accel. Of course, there was Groupon at $250M (they went from crazy to genius pretty quickly).  But more recently, there was Altassian and Squarespace.  But Accel is obviously a very strong early stage investor as well (Cloudera, Facebook, Playfish, etc)  Very impressive. 

***

Of course, there are many other firms I admire but this post is already starting to look like an overly long love-fest. Would love to hear other people’s thoughts on admirable VC practices in the comments!

Quick post today that came to me on the subway.  During my time in Venture Capital, I was surprised to see how many “rules” there are that have become gospel in the industry.  At the same time, I was surprised how little convincing evidence there was behind these rules aside from common industry wisdom. 

But markets and businesses all change, and venture capital is no different. Rules change, and players that fail to adapt become obsolete.  I remember when guys like Union Square Ventures and First Round Capital starting breaking some typical VC rules, I heard folks at other firms voice a bunch of criticisms that seem pretty silly in retrospect. 

The funny thing is that when everyone plays by the same rules, it creates market opportunities for those who can figure out how to defy the rules and do so intelligently.  It’s just supply and demand.  

Below are a couple “rules” that I think are worth breaking:

1. “We only invest in consumer companies that have a live product and traction”. 

Ok, this is actually a relatively new rule brought on by the capital efficiency of internet businesses.  But I think investors have swung a bit too far in this direction.  This rule basically means that you will only invest in a) things that are really on fire and you have to pay way up for and/or b) things that have traction but have no obvious business model. It’s a strategy that has worked for some.  But I think that this tends to disqualify some really ambitious products that just can’t be launched without meaningful investment.  Also, “traction” doesn’t just mean a lot of users. I’m usually much more impressed with a company with few users but really interesting unit-level metrics vs. something of more scale that could just be a flash in the pan. Finally, I think that some of the risk of investing in something pre-product is reduced by backing a team with a really good product process suited to the discovery phase of the business.  Oh, and a good early stage investor should be perfectly comfortable and helpful in implementing this process. 

I like how one angel investor described their focus on Venturehacks: “Strong preference for pre-product teams led by product-minded folks”. Refreshing. 

2. We only invest in companies going after billion dollar opportunities. 

I’ve blogged about this one before. I have two thoughts here.  First, at the early stage, investors honestly have no clue about whether a company has billion dollar potential.  What look like dinky toys to some can turn out to be monster companies, especially when the company is inventing markets, not capturing share of existing markets.

Second, the fact that most VC’s are going after companies of this scale (which they need to given their fund sizes) it says to me that there is a funding inefficiency for companies that can exit comfortably and capital efficiently at sub $100M levels.  By the way, this is where the bulk of M&A activity happens.

In my view, because of my first point, quite a few companies that may seem to be mid-sized exits might actually turn out to be venture scale.  Also, there may be some really interesting market segments out there that no investor is spending time in because it doesn’t meet this threshold (but perhaps reliably churns out mid-sized exits with reasonable risk).  

And by the way, since when was a $50M exit considered “small”? That’s pretty darn good for an entrepreneur, and will free them up to make a huge swing next time. 

VC’s always talk about the “deals” they have done.  The word is thrown
around like crazy and is ingrained into the VC vocabulary (deal flow,
deal pipeline, my deals etc).

I think “deal” is one of the ugliest words in the business.  It’s
really a terrible word for everyone.

For entrepreneurs, it belittles their companies and their personal
sacrifice.  I once even heard a prominant executive recruiter call his
placements “deals”.  I will never work with this guy.  Entrepreneurs
and executives are people. Their companies are their babies.  They
aren’t transactions.  They aren’t deals.

For LPs, it’s terrible because it connotes that the job is done when
the “deal” is closed. It’s obviously not - that’s when the work really
begins. For younger VCs, it creates a really bad motivation to “get
deals done”, which is not the objective of the game.

When I first started in this business, I saw that I was letting this
word creep into my vocabulary.  My former colleague Santo saw the word
in an offsite deck I was preparing and reminded me: “we don’t do
deals.  We make investments.”.

I want to strike this word out of the VC business.  Maybe no one else
cares, but there has to be something better.  ”Investments” works, but
it’s too long.  ”Opportunity Pipeline” is way better than deal flow,
but is too long as well.

Any other suggestions?  Let’s get rid of this ugly word.

This past Friday was my last day at Spark Capital.

It has been a privilege to be a part of this team.  I have grown in ways that I didn’t expect, and was glad to be part of a firm that allowed me to interact with such wonderful entrepreneurs and early stage investors each day.  I owe a lot to the partners at Spark for their support and mentorship and am proud to say that I was a part of building this firm over the past several years. 

When you end something and embark on a new adventure, it’s always important to look back. I didn’t really intend to become an investor when I moved back to Boston from Silicon Valley.  But I did, and I learned so much that it’s hard to distill into a few points.  But here are a few highlights:

1. The value of diversity.  In starting a company, there is a big temptation to form a team that looks just like you.  Either in terms of personality or ability.  It’s especially true in private equity partnerships, because the team of partners must work together to make difficult investment decisions.  But in the case of Spark (and in many successful founding teams) it’s diversity that creates great outcomes.  I’ve always respected the way that the Spark founders surrounded themselves with people with a fair bit of non-overlapping backgrounds and personalities.  At times, it creates more tension and conflict.  But if diversity is coupled with mutual respect, the conflict leads to more creativity and better decisions.  

2. The role of a good board member.  I had limited exposure to boards prior entering Venture Capital.  My leadership professor in B school, Rob Kaplan, actually encouraged me to take a class on boards of directors.  In retrospect, I should have taken his advice.  What’s interesting is that board members can range from being damaging, to non-existent, to ridiculously helpful.  A good board member wears many hats: from business development guru, to CEO coach/shrink, to product strategist, etc.  And this is all under the umbrella of fulfilling one’s fiduciary responsibility to the company’s shareholders (and to the investor’s own Limited Partners).  It’s the ultimate unstructured job, but it’s also one that brings considerable influence (mainly through the levers of approving a company’s budget and hiring/firing senior management).  Obviously, I have a lot more to learn in this area over the coming years, but it was great to be able to watch experienced board members add value to companies on a regular basis. 

3. The art of evaluating people.  There may not be another job where you have to make snap judgements on people so frequently.  In a given week, I probably meet 15 people for the first time in 1:1 type meetings (and many more in group settings).  And if we are digging in on a potential investment, we really go deep and spend a lot of time with the team and do a bunch of reference checking.  Over the past couple years, I hope that I’ve developed some pattern recognition for the kinds of entrepreneurs that I think will be successful and would be a good fit for me to work with.  I’ve also learned some tricks to structure the way I evaluate people that allow me to drive towards objective criteria vs. just gut feel (btw, I recommend Geoff Smart’s book or paper for anyone looking for a good framework for this).  Finally, I’ve also learned that you want to be diligent in reference checking, and really try hard to find some real negative feedback.  No one is perfect, and exceptional people are often polarizing.  It doesn’t pay to ignore or avoid the negative feedback.  

There are plenty of other learnings that I will continue to share in the coming months on this blog.  But this all begs the question: What’s next?

The answer is that I’m starting something new that I am very excited about.  My co-founders and I have already begun laying the groundwork, but we aren’t ready to talk openly about what we are doing just yet (stealth mode is back in vogue again, after all.)  That said, I’ve always been a pretty open and transparent guy, so I’m sure I’ll be sharing more details soon.  

In the meantime, I’m going to continue to be active in the local entrepreneurial eco-system, and will continue to be an advisor to startups that I’m excited about.  I’m also planning to make a number of small angel investments along the way as well.

Stay tuned for more!

Seems like VC’s are starting to bring in more new folks again.  It’s refreshing to see. I think Venture is very much a young person’s job and it behooves firms to have a flow of really good, smart, scrappy young folks helping out (although there are obvious challenges to the associate role as well). 

If you are lucky enough to be interviewed for such a job, here are a couple practical pieces of advice. Frankly, I wasn’t prepared enough on these dimensions myself, but I guess I was lucky :)  

1. Know and have opinions about a VC’s portfolio.  It’s amazing how many people interview and really know very little about a firm’s portfolio companies.  Don’t be afraid to call our babies ugly, but a least know them and have an opinion about them. 

2. Have a couple early stage companies that you love and think would be good investments.  Be able to talk about why they are interesting and why they will be big winners.  This is the bulk of the job after all, so it’s important to be able to demonstrate your judgement and knowledge about early stage companies. Earlier the better - don’t say Facebook or Zynga, for example. 

3. Have a strong and differentiated point of view on a couple timely and relevant topics.  For example: what will the IPAD ecosystem look like in 1 year? How is immigration policy impacting entrepreneurship? Show clarity and depth of thought through these topics that we are thinking about. 

4. Be yourself.  It works, and finding the right fit is way more important than joining the best brand-name firm. 

Good luck!  Unfortunately, now that I’ve blogged about this, you might get very different questions, at least if you happen to interview at Spark. 

This is a quick post that has been sitting in my draft folder too long.

I watched Mike Maples‘ presentation about “Thunder Lizards” a little while back.  It was a good talk and hopefully I get to meet him in person soon. 

Here’s what stuck out to me: venture investors talk about investing in “home runs” all day long. We know that it’s a hit driven business, so we all talk about going for big wins.

But there is a subjective difference between a thunder lizard and a home run (or a 10x, or a “Billion dollar company”, or whatever”.  I forgot about it until I heard Mike’s talk.

The “800 LB Gorilla” is a good image too, but funny enough, it’s usually used to talk about the big incumbent in the space (ie: Google, Facebook, Adobe, etc). 

Thunder Lizards destroy the terrain that they pass through.  They eat everything in site, and only get more ferocious as they grow.

In business terms, I think of them as companies that destroy their competitors and completely re-orient their industries.  The destructive power of these companies also accelerate as they grow.  

Maybe there really isn’t that much of a practical difference between a home run company and a thunder lizard.  But I like the imagery much better.  It reminds me that entrepreneurs of Thunder Lizard companies need to have a healthy dose of violent aggression in the way they go after their opportunity. It also reminds me that usually when a Thunder Lizard is through, industries are usually in disarray and are never the same. 

Finally, home runs are fun, but if you want to kill an 800LB Gorilla, you better bring a Thunder Lizard, or something like it. 

What do Admob, CafePress, Aardvark, Polyvore, and Xoopit have in common?  If you said that they were all backed by great VC’s like Sequoia, August, Benchmark, and Accel, you would be correct.  But did you know that they are also all backed by the same seed stage investor as well?

What these companies all have in common is that they are all portfolio companies of Harrison Metal Capital. With 3 exits in 2009 (Admob, Xoopit, and GeoAPI) Harrison Metal is one of the hottest of an emerging category of investors that some call “Micro VC’s”.  Harrison Metal isn’t alone in their success - there is Maples Investments (SolarWinds, ngmoco, Chegg), Founder Collective (Hunch, 20x200, Milo), and probably another dozen or so firms like these that have emerged over the past 5 years.

What these firms all have in common is a fund strategy and size that is both different from and complimentary to traditional VC’s.  Their investment strategy and sub $50M funds are well suited for the increased capital efficiency of certain sectors and the fact that larger VC’s have difficulty deploying capital in $1M chunks. It’s also a very attractive option for entrepreneurs in that it preserves option value. Mike Maples puts is best:

“Smaller up-front investments create a greater range of exit strategies where everyone wins. For example, if a business raises a small amount of initial capital, then exceeds its early milestones and decides to swing for the fences, it can then raise a larger sum at a higher price, while preserving ownership. If the business is not ready for rapid growth, it preserves the option for an exit at around $50 million, while still delivering a high return for investors.  This dual-track model is less available to companies that raise large amounts of money early.”

It should be noted that most of these fund aren’t shooting for mid-sized wins.  But their size allows them to do quite well with mid-sized wins, and it is well suited for consumer internet investments where it’s often very difficult to predict whether a company has the chance to be big enough to produce “venture returns”.

I think these firms are excellent investments (looking from an LP perspective).  Their strategies fit the times and inefficiencies in the market.  They also do wonders for their local entrepreneurial ecosystems by allowing more companies to get shots on goal and providing the help that sophisticated investors can bring.  They are continuing the work that great angel investment pioneers like Ron Conway who helped (and continues to help) great companies emerge.

As an investor at Spark, which currently invests out of a $360M fund, I am very excited about these guys.  Even though we also do seed stage investments, it’s great to be able to call on sophisticated seed investors that can partner with us and add serious value to companies on hiring, product marketing, and strategy.  These funds also bring a lot of excellent deal flow, and give companies great counsel on how to approach VC’ and how to hit the milestones that matter earlier.  This increases the pool of great companies that we have a chance to invest in and gives us greater leverage on the seed investments that we pursue.

UPDATE: Notch up one more exit for Harrison Metal - Google acquired Aardvark for $50M.

VC’s often ask entrepreneurs of early stage companies questions that they can’t realistically answer.  For example:

1. What’s the cost of customer acquisition? (most entrepreneurs have no clue.  Plus, even with early data, this answer can change radically with scale)

2. What will the product look like in 5 years? (Who knows?  Product evolution is rarely linear.  You may be going after a completely different problem in 2 years)

3. What’s the competitive landscape? (who knows what players will emerge?  Who knows what Google/MSFT/Apple will do to suck the air out of your industry?)

4. How will this business scale to millions of users?

As I type this, I’m almost laughing at myself. I think entrepreneurs are understandably annoyed when they get peppered with questions they can’t possibly have the answer for.

My advice is this: Answer the questions beneath the question. What I think VC’s are really trying to answer are the following:

1. Is this an attractive industry and how do you win? Hopefully, you’ve targeted a VC that has a clue about your industry, but our knowledge is usually not nearly as deep as it could be.  Help us understand the trends, customer challenges, and business levers that matter.

2. Is this a good entrepreneur? The entire fundraising process is an evaluation of the entrepreneur.  We want to know how resourceful you are, how self aware you are, whether great people will work for you, and whether you can withstand the challenges of a startup.  A lot of the questions I ask are meant to understand how an entrepreneur thinks and will respond to the challenges of the entrepreneurial process.  In a way, I’m also asking myself “if I were interviewing for a job with this person, would these answers give me confidence to work for them?”  Also, I’m trying to figure out whether this entrepreneur is trustworthy and listens to feedback.  It’s great when entrepreneurs realize that I’m hung up on a particular problem about their business and comes back later with a potential solution and plan to test it.  It’s not great when an entrepreneur tells me about a customer they are about to sign and the diligence shows that they’ve only spoken to the company once.

3. Does this entrepreneur understand the business she is getting into? Even if startups have a lot of uncertainty, there is a big difference between entrepreneurs who understand their business and those that don’t.  Experienced consumer internet executives rarely say: “we will acquire customers through word of mouth and Web 2.0 techniques.”  Instead, they have very specific thoughts about distribution partners, specific social media outlets they can tap, how to market effectively through SEM and SEO, etc.  I want to back an entrepreneur who demonstrates intimate knowledge of the industry she is focused on, even if she has never worked in that industry before.  History is littered with previously successful entrepreneurs who failed because they went after a market they did not understand.

4. Will this entrepreneur spend my money wisely? This isn’t just about being cheap.  It’s about investing in the right areas at the right time in the right amounts.  I want every dollar spent to reduce as much risk as possible or increase as much upside as possible (or both).  This usually comes back to #2 and #3.  Good entrepreneurs may say something like this:

“I know I can’t get scale in this business by selling directly.  I need channel partners.  But I DON’T know what customer segments I should be targeting first. So, I will spend a little money to test my product with a bunch of customers before spending a lot of time and money marketing the product and securing a big channel partner.”

Bad entrepreneurs will spend millions of dollars building a product and millions more marketing a product before realizing that no one really wants it.  Shockingly, this happens a lot more than people think.

5. Do I believe in the proposed product? This is very hard to figure out.  Usually, this is answered by a combination of a) customer feedback or b) gut.  Customer feedback means lots of people are using the product (aka traction), or we have called a bunch of potential customers and done technical due diligence and the feedback is positive. Gut means that we have a strong point of view of how the market will evolve and what solutions will be important, and your product meets that vision.

The threshold for this question isn’t as high as the others if I’m satisfied by the answers to questions 1-4.  If that’s the case, then it’s in the bucket of “this is a good entrepreneur going after a big opportunity, and I believe he will use my funding wisely to figure it out”.  For true early stage companies, I think this is the most an investor can realistically ask for.

When I joined the venture business, I was told that the job is a lot harder than it looks.  You need to find great companies to invest in, work hard to make them successful, and work even harder to try to make the most of the ones that aren’t going so great.

But what I found to be much harder than I expected was the process of choosing companies, and having deep conviction about those choices in the midst of vast uncertainty.  It’s also difficult to exhibit clear judgement when you learn more about a company and uncover things you didn’t expect to find.  It’s an intangible quality that I’m going to call investor mojo.  As one of my colleagues Santo wrote in an old blog post:

“If I did not foolishly think I knew everything and would be right most of the time, I could not be in this business. It is hard to be often wrong - historically only 1 or 2 in 10 companies provide meaningful returns - and live with it.”

I didn’t have an appreciation for this because I used to hear about new companies all the time, and always had an opinion.  In fact, I never had a hard time saying “that company sounds really interesting” or “that investment sound really dumb”.  If you look at the comments section after any new investment announcement on Techcrunch, you see a lot of similar comments from folks from all walks to life.

But there is a world of difference between making a passing judgement and really committing your time and money to a company.  Maybe it’s just me, but it’s a completely different exercise when you decide that you are going to love a deal and pound on the table to make the investment happen.

By “pounding the table” I don’t mean that every investment decision is contentious.  But the truth in early stage investing is that almost all companies have a few fatal flaws.  Maybe it’s an inexperienced founder, a product with no traction, or something else entirely.  For almost any new investment announcement, there is bound to be a sizeable population of folks who say “wow, that was one dumb deal.” I’m as guilty as anyone.

But being a great VC is about proving all the doubters wrong.  Actually, that’s true about being an investor in every asset class.  Outsized returns comes from doing things differently from the herd.  As Warren buffet famously said:

“We simply attempt to be fearful when others are greedy and greedy when others are fearful”.

What he didn’t say is that doing this also exposes you to the risk of looking stupid.  Unless of course, you are Warren Buffet and you just bought a railroad.