Before I became a VC in 2009, I was an active angel investor for about ten years. During that time, I got exposed to the age old debate about the relative importance of team, market and product when making an investment decision.
People always argued about these things (and probably always will). Some say the most important factor is market because team and product can always change, but if the market and the tailwinds are big enough, a company can make many mistakes and thrive. Others argue for team because a great team in a mediocre market will change markets. Still others argue for product, especially in today’s age where word-of-mouth is so easy to spread through social media. Product-market fit can be such a powerful force that it can compensate for a weak team.
During those ten years, I also developed some more unconventional investing rules that have served me well when I’ve obeyed them and punished me when I’ve gone against them. They are designed to guard me against my biases and adverse instincts (I think everyone needs explicit processes to protect themselves from known blind spots or vulnerabilities). I’d argue that it was the slow realization of these rules that changed me from a losing angel investor in my first five years to a successful one in the next five. These rules are important enough to me that I’ve printed them out on my wall to serve as a daily reminder.
Rule #1: Invest only in teams that don’t need you.
I’ll start with the most controversial and most easily misinterpreted rule.
I came to this rule by making what I see as a classic mistake of entrepreneurs who begin to invest. When I heard a pitch, as an entrepreneur, I would get excited about what *I* would do that with idea. The wheels in my head would begin turning about how I might approach sales, what features I would develop as head of product, or what distribution partners I might sign up.
The problem? What I thought didn’t matter. Sure, I could advise the company and give the teams my ideas (bad or good). But, in the end, it was *not my company* and my influence on it was very limited. Being an entrepreneur made me helpful as an advisor to the business but in many ways it made me a bad listener when it came to evaluating teams.
About five years into angel investing, I was beginning to suspect I had this problem (approaching investing solely from an entrepreneurial point of view). One day, I was talking about it with Marc Andreessen and he coined the fix for me, saying, “I only invest in teams that don’t need me.” Once I started following that advice, investment decisions became more clear and my results improved markedly.
I want to note a very important subtlety with this rule. When I say “invest in teams that don’t need you,” that doesn’t mean that you won’t mutually *benefit* from each other and be materially better as a result of your collaboration. Take one of my investments, the gaming company Kabam. Kabam has a tremendously strong team and they have more expertise than I ever will in gaming. And yet, I believe that our collaboration makes each one of us better in a meaningful way.
So, only invest in teams that don’t need you, but don’t conflate ‘need’ and ‘benefit’.
Rule #2: Impatience is the enemy
Despite being a private market investor, I love the public markets. When I was considering working in the public markets as a full time gig, a friend of mine and a successful public market investor, David Siminoff, suggested that I read the shareholder letters from Warren Buffet from 1977 to today as a narrative. It took me awhile, but I read them all back to back. When read as a history like that, it gave me an interesting perspective on how a great investor like Buffet handled a wide range of economic conditions, from high inflation to low inflation, from economic expansion to recession.
Perhaps the most poignant lesson, stated again and again and again, was the notion that the biggest enemy in investing is our own impatience. We have a strong desire to *make money now*, and when unchecked, that leads to bad decisions. It namely lets us talk ourselves into investments that we shouldn’t really make. It lets us create excuses for teams that aren’t as good as they should be, or for markets that really aren’t there or aren’t as big as we’d like.
Rule #3: Know why you want to own something: FOMO or insight?
In my opinion, FOMO (Fear Of Missing Out) drives a tremendous amount of human behavior and certainly a lot of investor behavior. There is always the hot deal of the month that’s being chased by many investors, who, if honest, are leaning in partially because other investors are pursuing it as well. They fear missing out on a deal that might turn out to be great. And this fear drives their desire to become an owner in the business.
Knowing that FOMO is a big behavior driver in investing is great for entrepreneurs to exploit. And many do if they can create a kind of feeding frenzy around their deal.
Resisting FOMO is not easy and the reason that I have the rule on my wall is (1) denial — most people don’t want to admit they’re ruled by or vulnerable to FOMO and (2) perception — it’s really hard to know you’re captured by FOMO.
This may sound obvious, but it’s often missed. You need a reason to invest – a critical insight – and not just fear that you might be missing out on a good deal. The tricky part is that it’s easy to convince/fool yourself that you have an insight when you’re really just fearful and rationalizing. That’s why, I think, you need a process to determine if you’re being driven by FOMO or insight.
For me, that process is a question I force myself to consider.
I ask myself, “If the company hit a rough patch (and most do), do I have insight into the business to be able to help?” When I ask myself that question, and I’m willing to be honest with myself, the answer about if I’m pursuing something because of FOMO can become more clear.
Two years ago, my friend and fellow investor Steve Vassallo (Foundation Capital), brought to my attention a deal in the finance arena. I spent two weeks working on it and I *loved* it. I was ready to bring it forward to my partners when I asked myself the “FOMO or insight” question, and I realized that if this company hit the skids, I did not have the insight to help. And, though it was tough because I *really* wanted to do the deal, I said ‘no’.
Only time will tell whether I was right on that particular deal, but I feel that the FOMO or insight question helps keep me honest.
Rule #4: In poker and investing, the goal is to make good decisions, not to make money.
This rule came from a three-day poker camp I went to seven years ago. One of the pros got up to the front of the room and asked the question, “What’s the goal of poker?” Of course, someone put their hand up and fell into the trap. “To make money” they said. Wrong. “The goal is to make good decisions, not to make money,” countered the instructor. If you make good decisions — better, more consistent decisions than the other guy — then you will end up making money.
In poker, if you approach the game to make money as opposed to making good decisions, you can fall prey to things like going on ’tilt’ after a bad beat, feeling ‘lucky’, continuing to fire bluffs at an opponent who’s clearly shown you he’s willing to call you all the way down, or playing in games that you can’t afford. When you hunger only to make money *now*, then you end up making bad, mostly emotional, decisions.
To apply this to investing may sound heretical. But, it is my belief that the goal of an investor is to make good investing decisions and good operational decisions with their companies. If they do that, then money will follow (sure, not always, but more often than not). Yes, all investors are measured on making money. But paradoxically, I think the best way to maximize that outcome is to focus on making the best set of decisions with your companies, rather than only focus, at every turn, on making money.
So there you have it. Four unconventional investing rules I’ve developed over ten years. As I said, they’re primarily designed to protect me against my built-in biases or vulnerabilities. My hope is that they’re helpful to you as well.
I’d be very curious to hear from you. What are some unconventional investing rules you’ve learned to live by, and that have served you well?