Why Venture Capital is a Probabilistic Game

If you're talking about public equities or any public market, there's so much information out there. Yes, maybe you can have some advantage, but it's very hard. If you're instead operating in a private market that is at least relatively to the public markets, much more illiquid, you can have more advantages. So you've shifted your career to doing mostly early-stage private market investing. Is that a big reason for that?

Well, so what I'd say is, first of all, I think you'd be hard-pressed to say that venture is super inefficient. It's not a market where everyone can transact, and it's actually hard to get in the place where you can, um, in- invest in, in, you know, seemingly great companies, but the competition to invest in those things is very fierce. So I wouldn't say that I came to the realization that venture was this super inefficient market. I wanted to capitalize on that insight or whatever. And by the way, and leaving aside the fact that I love hunting for founders, I love working with founders. I love so much that goes into the whole business of venture investing. But if you'd wanna just talk about the proposition, the reason why I went into it is, um, nu- number one, you know, it sort of suits my skill set more to, um, make kinda long-term qualitative judgments about the future. And I think venture, you know, so much of, um, what you're doing is you're finding huge gaps between what you're paying today and what this could be worth if it's right. So you have to really imagine in ten years, if this is successful, well, what could that business look like? And much more so than the sort of analysis that goes into being a public markets investor, you know, that really suits my skill set much more. And then the other thing is, it's a much more probabilistic endeavor. I mean, what you're doing is you're trying to find extremely high expected value investments, where the average occurrence is that you're gonna lose your money, but make enough of those bets, and so it works out to be a great return. And then, by the way, you know, try to help the companies in whatever way you can and, and, you know, follow them closely so you can, you know, add more capital to the ones that are doing well and whatever. And so that whole endeavor really suited my makeup much more.

Oh, man. We, we were chatting before we started recording. I, I, I went back through my notes from business school, from Howard, your book, uh, The Most Important Thing Illuminated, and every other page on there is like, risk equals permanent capital loss. Do everything you can to avoid permanent capital loss. And venture is not that.

It's not that, and I also don't think that I would be particularly great at that. I mean, if you told me I had to have an, you know, a portfolio of, of ten companies where, uh, not only would they... the portfolio return be twenty percent, but they'd all be roughly twenty percent, or they'd go somewhere between ten and thirty or something like that. I mean, I just don't know if that would be as suited with my skill set.