A few days ago while rushing into a meeting, I heard someone call out my name. I was in a hurry, but I knew the person, so I politely spoke to him for a few minutes. During the conversation, he reminded me of a venture he had recommended that I almost invested in i.e. I committed capital, but backed down due to serious concerns with the founding team. I am aware (and as he went on to remind me) that that company went onto become quite big and it frequentlty comes up in conversation with people and our prospective LP’s as a part of our “anti-portfolio”, but I do not think that I “missed out” on making the investment, because even if it were offered to me today (under the same conditions), I would stand by my decision and refuse to invest in it.
I have been thinking about why I continue to abide by certain principles because eventually monetary returns are every investor’s ultimate goal, right? I know my reasons for abiding by by certain principles, but it is only today as I was getting ready for my day, that it struck me how to explain it.
I am not a gambler, but an investor in extremely risky early stage companies. Each investment has a thesis behind it. That thesis is validated by my team, my close circle of investor friends, my inner circle, venture partners, the external and internal due diligence teams. They ensure that these theses are in fact not a figment of my own imagination. I also have an independent investment committee (IC) who have to agree with my investment decision (Thesis) for the fund to be able to invest in it. Out of the 8 deals that we have taken to the IC 3 have been rejected. Although it may be disheartening at the time, we have later thanked them later for making those decisions. All these steps and hurdles are taken to mitigate the risks of early stage investing – these are done by design and that design is respected for the risks it mitigates.
That is not to say that I don’t test out new theses or edit my theses from time to time. Last year, I invested in Lyft (through my family office) to test whether the precursor to pre-ipo rounds in tech companies makes investable sense. For the record, even though we’re up 2x, I would’nt do it again. That being said, these are educated guesses and even though it may look like a gamble to an outsider – it isn’t. Whether that thesis is right or wrong is a different matter.
Therefore, I believe that when I allow a sense of adventure and gambling in our investment style it can quickly spiral out of control for both me and my team i.e. if the gambling starts to make us money. Our risk mitigations, the paranoia that we could be missing out on something, and the fear of the risk that comes with each investment would quickly dissipate because with gambling success comes a sense of invincibility that encourages taking larger risks. This process ultimately ends (and has) disastrously when the market drops which is inevitable at some point.
“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffet