From the outside, the venture capital business looks like a
cozy & easy profession, one to jump in to “in my next career, after being
an entrepreneur for a while.” TechCrunch
and Forbes (and many other media outlets) feed the entrepreneurial ecosystem
with talk of unicorns & articles of fundraising success & stories of
innovative opportunity. And, on the face
of it, venture investing looks like a walk in the park…. that venture investors
sit around all day, meet cool entrepreneurs, and, every so often, pick a lucky
entrepreneur & hand them a check.
Boom! Easy job, let’s get back to
the golf course.
I find this perception to be extremely irritating, not to
mention fatally-flawed. Like anything,
being good at anything requires practice, practice, practice, and investing is
no different. Oh, and practice takes
time, lots of it, years, many years, of hard work. “And, all the great investors I know work
their asses off. Anyone who thinks it
can be easy to succeed at investing is being simplistic and superficial, and
ignoring investing’s complex and competitive nature.” These are the wise words
of Charlie Munger and Howard Marks.
When I got in the venture capital business in 2000, the common
wisdom was that it costs $20-30 million of “lost” investments to train to
become a venture capitalist. Mark Heesen recently wrote: “Venture capital is a
lifelong apprenticeship. The business of
investing requires equal parts logic and intuition; the yin and the yang; the
alpha and the omega. As in life, much
can be taught by books but most is learned on the battlefield, where a few earn
the honors, most become martyrs, and the rest carry scars for a lifetime.”
Let’s take the Malcolm Gladwell rule of 10,000 hours. For simplicity’s sake, let’s say your typical
venture capitalist spends only about 50% of their actively doing
investing-related work; the other 50% is spent with administration,
fundraising, marketing, recruiting, networking, and other random crap. Assuming a 50 hour work week, that’s 25 hours
a week spent “investing” across 50 workable weeks a year, or 1,250 hours of
practice in one year. So, to reach the
10,000 hours, one needs 8 years of practice, which, interestingly, is roughly
the average “life” of a venture-backed company.
But, since it takes 4-5 years to deploy a fund, in order to truly log
& quantify those 10,000 hours of practice, one probably needs 12-13 years
in total.
Becoming a great investor takes a lot of time, so I beg people
to reconsider their perception that it’s a job you do “after you’ve cut your
teeth as an entrepreneur.” More
importantly, being an investor and being an operator have few commonalities. For one, operators build & sell products whereas
investors simply move money around. An
investor’s key focus is the “deal” whereas an operator’s key focus is the
“team.” Operators are managers whereas investors are advisors. I could go on, but this is a post about the
skills it takes to BE an investor.
It’s a profession in of itself, for which some people are
better suited to do. Just like I could
likely never be a “world-class” coder (my mind is not wired that way and, oh, I
have logged the hours) or an accountant (despite being good at numbers, I just
can’t buy in to the GAAP religion) or a high-school teacher (frankly others are
much more nurturing than I ever could be) or many other professions which I
won’t go on about because this also isn’t about me.
Howard Marks recently wrote: “The goal in investing is
asymmetry: to expose yourself to return in a way that doesn’t expose you
commensurately to risk, and to participate in gains when the market rises to a
greater extent than you participate in losses when it fails.” Although venture capital is a wildly
different business to distressed debt, the fundamental investment principles of
adjusted risk-reward thinking still apply.
Traditional investment concepts like value versus growth and
concentrated versus diversified very much apply to the venture capital
industry, and have a meaningful impact on returns.
So what makes a good/great professional investor? I’ve written up this list based on my
experience as a PE/VC investor, but I do believe it applies to any type of
professional investor. The ultimate list
of skills & traits that can be attributable is never-ending, but as I see
it if you don't have the following eight (8) characteristics, you might think
about a different profession.
- Solid communications skills are critical. Investors need to be able to communicate effectively and sell colleagues on their ideas; ability to identify variant perception and articulate the mitigants to that perception.
- Have an intensity which leads one to form forward-thinking positions and ahead of the crowd of other lemmings. Be a non-conformist.
- A good nose for making money, first & foremost; e.g. investing is about returns not just backing a cool product. Be aware of not only absolute profit/loss, but also return on capital. There is an opportunity cost to everything.
- Have conviction with respect to investment recommendations but still have confidence to constantly re-evaluate fundamentals; i.e. know when to cut your losses.
- Self-aware, able to identify his or her comparative advantage. Know what you’re good at and know when to step aside.
- Ability to develop and stick to an investment thesis & strategy, over the course of many years. Understand the difference between luck, skill, and timing.
- Comprehensive and probing analysis; in-depth research with a strong analytical underpinning. Attention to detail… the opportunities lie in the detail.
- The need and commitment to be the best, to be focused on perfection “as an investor” because that’s ultimate why you’re paid, so stay focused.
This last point to reiterates the opening of this post. Being a good developer, being a great
leader/manager, being a great startup entrepreneur, being a great CEO, or being
a great networker takes a lot of specific practice & work and, as
importantly, does not equal being a great professional investor. There is very little correlation
between any of those successful in those professions and one being a good
investor.
If you’re meant to be an investor, then be one. Ask
yourself… what do you excel at?
.
