It follows that the average investor will make average returns. In the world of startups and venture capital all the money is concentrated in a small number of winners and average returns are probably below zero. Certainly they aren’t sufficient to compensate for the high risk and long lock up inherent in startup investing. The venture industry is highly secretive and I don’t have good stats, but I do know that only a very small percentage of VC funds make carry and that investors in VC funds know that only the 25% of funds are worth investing in.
Being an average investor in startups is therefore a waste of time. It’s actually a surefire recipe for losing money.
Doing better than average requires what Howard Marks of Oaktree Capital called ‘different and better’ thinking in a recent memo to his investors. He put it like this:
Remember your goal in investing isn’t to earn average returns; you want to do better than average. Thus your thinking has to be better than that of others – both more powerful and at a higher level. Since others may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see they miss, or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right that others … which by definition means your thinking has to be different.
Peter Thiel is getting at this same point with his now famous interview question: what do you believe to be true that nearly nobody else agrees with you on?
Of course, being contrarian and wrong is no use. That’s just the same as being wrong. Being contrarian and right is the only place to be, as Howard says later in his memo.
This logic applies to startup founders as well as their investors. If around 10% of startups go on to be successful then to be an average founder is to fail. So like investors, founders need to be contrarian and have an edge which allows them to see things that others don’t. That usually comes from deep experience within an industry or real passion for a problem area.
We work hard to have an edge at Forward Partners. The most visible manifestation of that is our startup and growth team which helps founders execute better and faster by temporarily plugging skill gaps in their team, but we also like to think our understanding of markets, our experience with recognising great entrepreneurs and the reach of our networks give us insights that others might not have.