Tag Archives: Investing

Letting winning founders take you on the journey

I was recently thinking about the investments which I passed on that turned out to be big winners. There were two common threads across these investments:

1. I understood the importance of the company’s market and the company’s high level approach to attempting to win in this market. However, I couldn’t clearly envision the exact path that the company was going to take to achieve this outcome.

2. I was very impressed by the founders’ attitude, intelligence, ambition, competitiveness, and diligence.

Bringing these two observations together, here’s my learning:

Sometimes you will sense a market opportunity but not see the exact path which a company will take to win. This is due to a combination of two reasons. The first is that you don’t know the market in as much depth as the founder and the second is that even the founder acknowledges that he doesn’t know the exact path and will be discovering it as he goes along.

However, you may be fully convinced that the founder is a winner.

When this is the case, you should let the founder take you on the journey. Since he’s a winner, he has a good chance of discovering the path. And as he does, so will you.

In other words, an investor’s role is to know A, have a good idea of what B looks like, and to partner with the people who are most likely to get from A to B. It’s OK to not know the exact path between the two points.

Investing time

When you invest money in a startup, you actually invest a lot more than that. You embark on a journey which will likely take at least 18 months and maybe longer than 10 years.

18 months is the shortest path to a successful exit that I’ve seen. It’s also how much runway most funding rounds offer in the event of failure.

And if you catch on to a big winner you’ll likely want to see it play out for as long as possible so this may mean a journey longer than 10 years.

So, in addition to money, you also invest your time in a startup. You spend time strategizing with the founders, helping the startup recruit, pitching the startup to other investors, solving founder problems, but also problems among investors and between founders and investors.

And while money is replaceable, time is not. If you invest in the wrong startup, you spend the precious moments of a finite resource on a business that gets less and less likely to succeed each day. The feeling of lost time hurts a lot more than the feeling of lost money.

As a result, when I’m evaluating whether to invest in a company, I’m not simply deciding whether to invest money in the company. I’m deciding whether it’s worth investing time in the company.

This forces me to hold potential investments to a higher standard. And more importantly, it makes me spend a finite resource in the way that I believe will create the greatest value.

Math, pattern recognition, and investing

Pattern recognition is essential to successful investing. Identifying which data points carry signal, which are noise, and assigning weights based on the predictive powers of those that carry signal while building a diversified portfolio that allows for the overall portfolio to succeed even if individual investments fail due to the incompleteness and incorrect assessments in your data set sit at the heart of investing.

And math is arguably the best subject to study if you want to develop your pattern recognition skills. Math is all about identifying patterns that link inputs to outputs. A mathematical equation is simply a pattern expressed in written form.

I think that a big part of why I enjoy investing is because of the underlying math and pattern recognition skills it involves.

An investor’s edge

There are three types of competitive edges that an investor can have. These are an informational edge, an analytical edge, and a behavioral edge.

Having an informational edge means having access to people, facts, or data that others don’t have. For example, local investors often have an informational edge over those that fly in to a country to invest or those that invest in a country from abroad because their on the ground presence lets them spend more time meeting with founders and collecting information about what interesting startups are working on.

Having an analytical edge means that you rely on the same information as others but have a unique insight which lets you arrive at a different conclusion based on the same information. Your perspective is your edge. Being able to see the second or third order effects of a particular action within a system is an example of an analytical edge. However, as this example shows, although these second or third order effects may escape most people, a small number of others will also likely see them. So having an analytical edge is pretty rare.

Having a behavioral edge means that you’re not exposed to an emotional shortcoming that disadvantages other investors. Examples of this include being able to invest in a founder or domain that other investors shy away from due to deeply ingrained prejudices, or investing over a longer time horizon than others.

If you don’t have an informational edge, an analytical edge, or a behavioral edge when making an investment, the investment can still be successful. However, your success will be due to luck, not skill. And in the long run, luck cancels out.

So, before making an investment, it’s useful to ask which, if any, of these competitive edges are letting you capture an opportunity that others are missing.