Venture Capital and The Superstitious Investor

Nir's Note: This guest post comes from my friend Jules Maltz, a General Partner at Institutional Venture Partners (IVP), a late-stage venture capital firm based in Menlo Park. In this article, Jules admits something few people are brave enough to say here in Silicon Valley -- that luck plays a huge role in success.

I now understand why baseball players are superstitious. During a hitting streak, "hot" players rarely shower. They wear the same clothes and eat the same food. They follow the same routine to an exactness that would make someone with obsessive compulsive disorder proud. They’re trying to keep the magic alive.

But why?

If, as Billy Beane knows, baseball is all about numbers and probabilities, why all the nonsense? There are no “baseball gods” to appease.

As mortal humans, it’s hard to accept this. The chances of getting a hit are different for each player and situation, but always contain an element of randomness. We try to create patterns and order out of the chaos. We try to control the uncontrollable. We wear our smelly clothes to keep the hitting streak going.

Venture Capital is No Different

The longer I work in venture capital, the more I realize that luck or randomness plays a huge part in success. Any VC who tells you she “knew” her investment was going to succeed is fooling herself (and you). Some companies have high chances of success and others have low chances, but nothing is ever guaranteed. Venture capital is a humbling business (oddly filled with individuals who are often far less than humble). The “sure thing” investments rarely pan out. But the companies that start-out as “toys” like Twitter, Facebook, and Square can turn into multi-billion dollar companies. In the end, the gods of randomness smile on some and frown on others. We mortals meanwhile try to figure out the patterns that aren't there like a hotel full of Las Vegas tourists.

So what is an investor to do? Do we put down our chips on a random number and hope for the best? Hardly!

Venture investing is not roulette. There’s randomness, of course, but the odds are more like baseball, where the batter’s chances depend on his natural ability, work ethic, and decision making. We can improve our odds by practicing and making better choices. In the spirit of getting more hits, here are four things I have learned to improve my odds.

Wait for Your Pitch: There’s an old joke that the best way to become a top-quartile VC in your first year of investing is simple….don’t make any investments! Most startups fail so your performance will be better than most. But despite the odds, there is a huge temptation to swing at anything. As an investor, you don’t feel you’re doing your job unless you’re making investments. The industry tends to celebrate the most active VCs rather than the ones with the best returns. But like All-Star baseball players, the best VCs are patient. I know that if I see enough pitches, I’ll eventually meet a company that I can’t stop thinking about. It will literally keep me up at night and I’ll have a sick feeling in my stomach hoping I’ll get to work with them. I’m not sure if this is the same feeling a batter gets seeing a juicy fastball on a 3-1 count, but I like to think so.
Swing Away: Venture capital is about slugging percentage, not batting average. Fred Wilson has a good post on the typical return profile for an early-stage venture capital fund. He writes that you need one investment to return the entire fund, the next 3-4 investments to return it again, and expect the vast majority of your investments to fail completely. The venture capital industry needs outlier grand-slams like eBay, Google, and Facebook. Bunting is a stupid strategy. Too many VCs (and entrepreneurs) pick inherently small markets, opting for the perceived “safe” 2x rather than swinging away. It’s ok to fail, as long as when you win, you win big. If you’re still not convinced, take a look at the number of Hall of Famers who also hold the record for strikeouts.
Improve Your Chances: Why do hitters spend countless hours studying the tendencies of the opposing pitcher? Or years in the batting cage simulating at bats? They know that the right mental and physical preparation increases their chances of an eventual hit. Similarly, the best venture investors understand the market and competitive dynamics of an industry before they invest. They learn from their past mistakes and also remain optimistic and open to new possibilities. In contrast to baseball players, VCs can improve the odds of success after they have swung. Great investors recruit talented executives and partner with them to increase the probability of a win. Like an aggressive base runner, they turn doubles into triples and are constantly pushing their companies to hire the best people and dream bigger.
Remember It’s a Game: Finally, like baseball, it’s important to have fun and remember it’s only a game. Venture capital is a lucky profession, where we get paid to listen to incredible people who are changing the world. There will be good days and bad days. Hot streaks and terrible slumps. But, like a ballplayer playing a game of catch on a sunny summer day, you have to find enjoyment in the process.

As a young venture investor, I wish success were guaranteed so that I could keep doing venture capital for many years to come. Instead, I know there will always be an element of randomness in venture investing. All I can do is work hard and try to get a little better each day…and of course wear my lucky t-shirt!

Jules Maltz is a General Partner at Institutional Venture Partners (IVP), a late-stage venture capital firm based in Menlo Park.

Photo Credit: JD Hancock via Compfight cc

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