Venture capital can seem very esoteric and hard to understand if you’re on the outside.
But the more you study the VC asset class, you develop pattern recognition and certain things you might want to look for.
I’ve learned that absolutes are bad. The more absolute rules you have as an investor, the more likely you are to miss out on the next big investment.
The reason for this is that the vast majority of what are now unicorn and decacorn companies started out really small, almost like toys or features that would never turn into something big.
Companies that end up becoming some of the biggest investments of the century usually look like crazy bets in the early stages.
The future is not fixed. The future is designable, malleable, suggestible, impressionable, and adaptable.
In other words, understanding the future the way you see it is a very limited way of perceiving what the future might be.
An investment in a very early-stage future unicorn can seem crazy, but the art of venture capital is knowing when to spot a contrarian bet that is based on truth.
Peter Thiel invested $500K in Facebook at a $5M valuation. He already knew he was going to write the check even before a face-to-face meeting with Mark Zuckerberg.
The reason he was already prepared to write the check was because he and Reid Hoffman had been studying other social networks for a while and knew that Facebook fit their investment thesis.
At the time, Facebook was quite a contrarian bet.
They had traction with colleges, but other investors did not see that as a valuable market to go after.
Peter Thiel and Reid Hoffman saw things a little differently, and the rest is history.
It’s hard to imagine the future when we see it through one lens and only use the context that we have accumulated over the years.
It’s also tough to imagine new markets as the result of a product that does not fit the evolution of technology the way we see it in our imagination of the future.
Not all great investments end up creating new markets, but a significant portion of these investments worth making will innovate so rapidly that they dramatically increase the market size.
An investor cannot just invest in contrarian things because they could be huge if they succeed—or so it might seem at the time of evaluating the investment.
An investor should invest in things that seem contratrian to almost everyone, but only a few know and understand certain truths about that business.
The art and craft of investing in early stage companies is to understand when to pay close attention to a founder or product, and often times the way the product is described isn’t the best way to gauge whether it might be a bet worth making.
It takes more than just reading the description of an investment, because often times investments worth making are described with words that may seem to make it fit in with the “trend” that might be something you’ve seen and heard of a thousand times.
The art of venture capital is knowing when to have deep conviction and certainty about an investment and picking founders and ideas that are both contrarian and right.