As I read the Berkshire Hathaway 2008 Annual Report, a thought kept popping into my mind that had also come up over and over again while reading Bogle’s Enough: True Measures of Money, Business, and Life. “Be an investor, not a speculator.”
As a venture capital investor, I have a long term time horizon on my investments. Since I’m investing very early in the life of a company, I’m usually an investor for five or more years. Sometimes I’m an investor for over ten years. I’m rarely an investor for less than a year, although it happens occasionally.
I don’t invest directly in the public markets and I haven’t for a long time. Periodically I end up with a public company stock as the result of the sale of a company I’m an investor in to a public company, or via that mythical thing called an “IPO”. In these cases, I have a very specific strategy for exiting my position in the public company over time.
I do have public market exposure, primarily through a combination of index funds (and equivalents) and some hedge fund investments with friends. However, I pay zero attention to this on a daily, weekly, or monthly basis. When I look at the aggregate performance over any meaningful period of time, it is irrelevant when compared to my performance as a VC and angel investor.
When I reflect on this, I realize that I spend 99.9% of my time as an investor and 0.01% of my time as a speculator. Whenever I realize that I’m in a speculative thought process (such as noticing the Dow on CNN on the ubiquitous airport TVs), I immediately try to stop. My goal is to spend 100% of my time as an investor.
Not surprisingly, there’s a huge amount of noise going around the system about speculation that is masquerading as investment. Worst, the two get conflated on a regular basis in the context of what the government should be doing (e.g. incenting “investment” when they are merely either "incenting speculation” or “encouraging speculation”). Of course, the endless stream of talking heads in the media don’t help this distinction.
When I read Buffett or Bogle, the distinction between investment and speculation is painfully clear to me. I believe that much of the pain the global financial markets are feeling right now is a direct result of speculation. As a result, I’m trying to come up with some simple parables for “investment vs. speculation.” For example, “if you don’t understand what you are investing in, it’s speculation.” Or, “if your time horizon is less than two years, it’s speculation.”
One of values I’ve always adhered to is that “I’m an investor, not a speculator.” Now that the government is deeply in the mix, I think we need to spend a lot more “system time” thinking about how to incent and motivate investment, and how to avoid speculation.
Yet again an article in the New York Times bemoaning the demise of venture capital – this one is titled Maybe We Should Call Them Venture Pessimists. “Optimism is in short supply”, “the quarterly Silicon Valley Venture Capital Confidence Index has reached its fifth consecutive quarterly low”, “there is understandable concern over the pressures on the VC business model”, and “the venture community should expect substantial structural changes to occur” are some of the snippets.
Whatever. I’m not going to put any energy into debating the structural dynamics of the VC industry. I’ll leave that to other people as that’s not my thing.
Several years ago I decided to spend the rest of my professional life (I’m 43 – so let’s say 20 years) dedicated to advancing innovation in the domain of software / Internet. I do that by being a VC – investing early in new technologies and markets that have long and broad arcs and creating market leading companies that transform the way we use this stuff. My “job” – in its most crass form – is simple – take a box of money and turn it into a much bigger box of money. The essence of my job is much more complex, extraordinarily challenging, and extremely satisfying.
The basic fuel for all of this is entrepreneurs. Period. VCs are an small piece of the overall ecosystem. A highly visible piece, but just a piece.
So the contrarian in me is delighted by the spreading pessimism. Fewer VCs? Fine – that just means that the people that stay with the business believe in it, are good at it (since if they aren’t they won’t be able to raise the capital they need to participate), and all the people that become VCs to simply “manage assets and make money” will disappear over time. Or evolve into something else that maybe someday isn’t called a VC anymore.
I think the next 20 years of innovation around software and the Internet will make the last 20 years look like child’s play. And while the vector of negativity and pessimism continues to follow a steep upward slope, it’ll eventually crest. In the mean time I don’t see an endpoint to the human animal’s desire to innovate.
I wake up each day delighted to be alive. Delighted to be involved in creating new things. Thankful that I’m an American and – in Warren Buffett’s words – drew a great ticket in the ovarian lottery. And I’m optimistic. Very optimistic.
The nice folks at Down to Business have republished my post The Priorities of a Venture Capitalist.
Down to Business is a website and online show that is a fresh take on the business Q&A. Host Pat Croce cuts through buzzwords and jargon to find out what drives the people who are revolutionizing business in the worlds of media, technology, entertainment, fashion, and beyond.
It’s got some fun stuff on it.
A well worn tradition of most venture capital firms is the Monday Meeting. While there are several variations of it, including having it the meeting on Tuesday or Friday in an effort to be counter-cultural, most venture capital firms gather on Monday’s to review their portfolios, have companies come in and present for follow-on rounds or new investments, and ponder the state of the universe.
I expect there will be a lot of pondering today. Given that it’s only 1:23pm and I’ve already received several missives commenting on the Sequoia RIP article (including a skeptical email from someone forwarding the VentureBeat article stating that Sequoia raised the largest new fund in Q3), it’s clear that many VC firms are sitting around today discussing ways they can "help" their portfolio companies in these "uncertain times."
Get ready for a flurry of two things from your VC. (1) Questions. (2) Advice. Not necessarily in that order. Occasionally you’ll get a demand here and there.
If you are a first time entrepreneur, be forewarned that this is normal. The questions and advice usually start on Monday afternoon or Tuesday morning (due to the timing of a partners meeting) a few weeks (or months) after the environment has changed. Of course, a cynic could (appropriately) ask "where were these questions last week." Welcome to the world of VC-backed companies.
Given that you now know this is coming, my recommendation regarding the questions is to actively engage your VC(s) rather than simply either (a) answer them or (b) dismiss them. The questions – while often annoying, redundant, or nonsensical – will cause you to think about things you might not otherwise be thinking about. Just make sure you’ve got the whole question, think, analyze, discuss, decide loop on a short cycle so you can iterate quickly as the environment changes again (either for the better or for the worse.)
With regard to the advice, my recommendation advice is different. "Think before you act." This doesn’t mean sit around with your thumb up your ass. This also doesn’t mean the advice is wrong. But it definitely means you should apply your (and your team’s) brain(s) to the advice and see if it matches your view of reality. This is especially true when the advice is second or third hand (e.g. I read the Sequoia presentation and here’s what you need to do.)
Don’t forget to bring your towel to work tomorrow.
Congrats to the everyone involved in LeftHand Networks – it was announced today that HP is buying them for $360 Million in cash. LeftHand was born and raised in Boulder and is a large company (and acquisition) for this region. HP is clearly in a buying mood having just completed their acquisition of EDS a few weeks ago.
My partner Chris Wand has a long guest post up on Ask the VC titled How Should I Approach a VC I Don’t Know? Lots of good do’s and don’ts for anyone looking to connect with a VC.
And post #2 is up (I guess post #1 went up yesterday and I missed it since I only read feeds in the morning.) Post #2 is titled Gross and Net Returns and – while it describes them – it has an excellent spreadsheet that go through the assumptions Fred and his partner Brad Burnham made on how they would invest their first Union Square Ventures fund. Fred uses this model as the basis for describing the math of Gross and Net Returns.
Excellent stuff Fred. Keep ’em coming.
Fred Wilson has an excellent post up today titled Venture Fund Economics. It appears to be the first of several posts he’s planning to write on this topic.
"When I write about venture fund returns, there are always comments and questions that lead me to believe that the economics of a venture fund are not well understood. And since most of the readers and commenters on this blog are people who work in the startup ecosystem, I think its important that the economics are better understood. So I am planning on some posts on this topic in the coming weeks."
Everyone that is interested in venture capital in any way should read this post (and presumably the subsequent ones.) I’ll try to remember to point them out when they appear.
The NY Times has a great short article up titled The I.B.M. Acquisition Machine: A Seller’s Perspective. It has several quotes from Pierre Haren, the co-founder of CEO of Ilog which IBM acquired on Monday for $340 million.
I’ve been involved in the sale of two companies to IBM. While a brief article, the comments Haren makes ring 100% true with my experience.