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Placing Bets or Making Investments?
Sometimes, I hear people talk about early stage investing in terms of “placing bets”. It’s something that has rubbed me the wrong way for a while. In my first year as a VC, an old colleague of mine remarked that we shouldn’t talk about VC’s “doing deals” but instead, talk about “making investments”. Similarly, I think good early stage investors shouldn’t “place bets”. They should be making investments with conviction. A couple reasons.
First, I’m pretty sure that founders don’t want to be considered a “bet”. Although it is true that investors get the benefit of building a portfolio and founders typically have a portfolio of one, there are some investors that act like true partners to founders and others that don’t. I find that founders typically want to work with investors that have a similar authentic passion for the problem they are solving, and have the attention and energy to be integral partners in building a business. Someone who places bets does not do this.
Second, I think the mentality of “placing bets” leads to poor decisions. Most of the time, when I hear the phrase “placing a bet”, it’s in the process of justifying moderate conviction about an opportunity, or the desire to avoid FOMO. For example, “who knows if this is going to work, but the upside is so big, it’s worth a bet” or “It seems like VR is going to be hot, so it makes sense to place a few bets here”. I think this leads to bad decisions, especially since often, the best venture investments are ones that are completely contrarian, and no one would be willing to make a “bet” unless they were deeply informed and deeply believed.
Third, talking about “placing bets” makes venture investing feel mostly like an asset allocation exercise. As in, “Let’s just go place bets in a bunch of companies and some will work out!” Maybe that’s one approach, and maybe from the outside looking in, that’s what it looks like VC’s do. But that’s not what gets me out of bed in the morning, nor is it how really great investors in our industry approach their work. This is why we have a relatively small team and focused portfolio and have a strategy of doing exclusively high-conviction, hands-on seed investing. It’s what we think founders want and the best way to make good decisions. And it’s a lot more rewarding than placing a bunch of bets.