The general partner at K Fund, Pablo Ventura, thinks that chance has a big effect. The author’s personal look back is a cool way to look at the ideas behind venture capital and investing in early-stage startups.
As a beginner, winning a tournament with high stakes requires luck. Ability is required to make a comfortable living as a professional poker player.
Given the shared emphasis on analytical thinking and consistency, the second scenario is the one most likely to be associated with venture capital. The first best reflects the journey of a founder.
We are all familiar with the tales of venture capitalists placing risky wagers on early-stage companies with innovative concepts. Surely this is evidence of a significant element of luck?
The hardest thing to understand about venture capital is that VCs expect most of the companies they invest in to fail. This may seem counterintuitive, but it is a straightforward and natural trade-off for potential.
You may have heard this concept referred to as the “VC Power Law,” as recently articulated by the head of investments at Future Africa, Luke Mostert, on Twitter.
In essence, the category-leading ambition of a startup justifies a large number of small losses in exchange for a few enormous gains for investors. Rather than founders seeking a modest exit, venture capitalists prefer to invest in those who will attempt to skyrocket their company.
If every company in a VC’s portfolio generates a profit, this is a negative indicator. It is an indication that the VC is playing a low-stakes game: not thinking big enough, not taking enough risk, and likely not producing the level of return expected from that asset class.
If the failure-to-success ratio is intrinsic and priced into the VC model, is it possible to attribute success or failure to chance?
Professional poker players talk about “variance,” which is when things don’t go as planned because of luck, but they all agree that luck doesn’t affect long-term performance. It is assumed and accounted for how the cards are dealt, how you handle those situations, and the times when you just have to take a loss on the chin. Only mediocre players use luck as an excuse.
If you want to see luck at work in venture capital, you can certainly give it the chance: invest your entire portfolio in a single company, invest solely in industries you don’t understand, or throw a dart at a board of opportunities. Be cautious, as LPs will not accept luck as an excuse for failure, even if you cite it when you’re being modest about your success.
The prudent course of action is to always eliminate your exposure to chance using the standard combination of long-term strategy, observation, and calibration.
“Laughably early stage” The VC firm Hustle Fund is a good example of this way of thinking because, as its name suggests, it focuses on founders with the riskiest business models and untested assumptions.
Writing a large number of small initial checks allows it to convert this uncertainty into a strategic advantage: it gains early access to a startup, secures a seat at the table, and makes more informed decisions regarding participation in larger future raises. It is intelligent, methodical, and beneficial for everyone.
Consistency and repetition are the staples of investor success. Leave good fortune to the founders; they need it more.