I spend a lot of time consuming and processing information to inform my thinking. This thinking is what eventually informs my investment decisions. I believe that success in VC is determined at least as much by the quality of your investment decisions as by how much value you add to the business post-investment. So the time I spend consuming and processing information is very important.
There are two types of information that one can access. These are public and private information.
Public information, by definition, is information that everyone has. And since everyone has access to this information, it’s difficult to gain a competitive edge when investing based on public information.
A great example of public information is news articles. By the time something is covered by the media, the action has already taken place. As a result, any returns to be gained based on acting on the information in the article have already been taken by others.
The fact that public companies need to make most of their information public is why it’s much more challenging to generate outsized returns in public markets than in private markets. In the public markets, you’re making investment decisions based on information which is accessible to everyone willing to put in the time to research, read, and understand it. Trading based on insider (in other words private) information is illegal. To produce a return, you need to have an insight that others who have access to the same public information don’t have. That’s challenging and rare.
In private markets, however, having an insight that others who have access to the same information don’t have is just one way to make money. And it’s the difficult way to do it. The second and relatively easier way is to have access to information that others don’t have.
This private information comes largely from personal connections. Whether it’s an entrepreneur you’ve backed who shares the new business idea that their friend is working on, another investor who tells you about a company that they’ve decided to invest in for which they can’t fill the entire round, or another opportunity that you discover because of your local network in a particular geography, it’s these personal connections that give you an edge when investing in private markets.
This is also why being able to make follow-on investments in your winners is so important. As an existing investor in a company, you have private information about what’s going well at the company and what isn’t which others don’t have, and you’re able to use that private information to inform your investment decision.
You want to act on opportunities before they hit the news. You want to be front-running and helping create the news. And having a unique insight is just one way to do that. Having access to private information is the second and easier way.