Tag: Fred Wilson

Anti-Social Proof

In the words of the great Fred Wilson – “If you can’t figure out why you like an investment and why it will be successful, don’t make it”.

Recently, I came across this awesome (like always!) 2012 post from Fred Wilson (Union Square Ventures) – Social Proof Is Dangerous. Quoting a line that captures its essence:

If you can’t figure out why you like an investment and why it will be successful, don’t make it.

One of the big investing ideas I have distilled from studying the best investors across asset classes – from Charlie Munger and Howard Marks to Bruce Flatt and Vinod Khosla, is that to outperform the average (the index), one has to be “non-consensus-and-right”.

In fact, in my July’23 post ‘An Investing Framework To Find Startup Diamonds‘, I outlined a Consensus vs Signal 2×2 and argued that the outlier venture returns opportunities tend to be found in the High-Signal-Non-Consensus quadrant.

Source: An Investing Framework To Find Startup Diamonds

It was only in 2022, almost a decade after I first started my career as an institutional VC, that I truly embarked on this journey of trying to become a non-consensus-and-right venture investor. As I have outlined in the above 2×2, molding my mindset toward this approach has required consciously working on the following 2 elements:

1/ Having a unique world-view and trusting my instincts to be able to spot ‘Signal’.

2/ Totally ignoring any social proof noise while doing this.

I have observed that while it was really hard to ignore social proof early on in my career (eg. which VC is leading the deal), having seen so many Tier 1 VCs across geos do such foolish things over a decade, I must say with much humility that as of today, I find it much easier to ignore their POVs on something.

A few months back, I also came across comprehensive LP data that validates this organic learning. David Clark of VenCap shared with Jason Calacanis how loss ratios are surprisingly similar across various percentiles of funds, and even the best strike out a lot.

That’s why in my view, it’s foolish to do one-off deals purely on the basis of the social proofing of a lead investor in that deal unless one is actually replicating their entire portfolio construction (which is a benefit only LPs in their Funds get).

This idea also explains why I remain skeptical of loose angel networks, angel communities, and syndicates that really don’t have a unique, grounds-up world-view and right-to-win, and therefore in most cases, do spray-and-pray on allocations in deals being done by VCs.

These deals often suffer from major adverse selection (“if the founder/ startup is so good, why are they raising from you?” OR “what specific value are you bringing to the table because of which a star founder is giving you allocation?”) and are therefore, likely to be on the wrong side of the loss ratios of major funds.

Coming back to the point of social proof, let me neatly summarize my POV on it:

  • If the best Tier 1 VCs are striking out as much as an average Joe VC, there is no value in blindly following them.
  • There could be value in investing in the “best” companies of a Tier 1 VC portfolio but especially at the seed stage, it’s impossible to know beforehand which company will turn out to be this “best” company. Also, companies keep going in and out (and back in) of this “best” bucket multiple times anyway during a Fund’s 10-year lifecycle.
  • Even if there was a way to know which company is indeed the best company in a Tier 1 VC portfolio, why would they give me allocation in it? The best VCs want to keep every bps of ownership in their best companies only for themselves.

Hence, what’s the point of doing a deal purely because of social proof? I would rather spend that effort looking for the best contrarian deals in places where no one is looking, doing the work (and trusting my instincts) to spot Signal in them, and investing in them as early as possible, driven only by my strongest conviction and nothing else.

This approach is already starting to reflect in the early Operators Studio Fund 1 portfolio. In a majority of recent investments (eg. Soulside, Confido, Loop, Astrophel Aerospace, and a recent one in Stealth), I was literally the first investor to build conviction and say “yes” even before the round started coming together with other VCs. In several of these deals, I ended up catalyzing the round itself, making intros to eventual lead investors and even sharing my customer diligence notes with VCs evaluating the company.

In a way, this approach is Anti-Social proof and Pro-Signal. What is Signal, you ask? It can be of two types, as I explained in my July’23 Investing Framework post (quoting from it here):

  • Internal – extraordinary founder-market fit eg. the founder has spent a decade just going deep in the field. Or a backstory that provides an authentic “why” behind pursuing this idea. Or an execution track record in the startup’s arc that is outstanding on important elements like capital efficiency, iteration velocity, or organic customer acquisition.
  • External – eg. a visionary customer is taking a bet, partnering with them in building the early product. Or a domain expert, skilled operator, perhaps even a specific GP in a venture firm, has taken the time to evaluate & build high conviction in the company.

As you can see, there is a little bit of social proofing baked into evaluating Signal too, but it’s much more oriented around operating and execution-oriented conviction vs deal FOMO and an investing herd mindset.

As you churn on this post, here are more POVs on this topic from some really distinguished venture investors over the years (Source: a 13-year-old Quora post titled Is social proof a rational approach to investment selection?)

1/ Roger Ehrenberg (Founding Partner – IA Ventures, one of the best-performing seed funds of all time)

2/ Naval Ravikant (Co-founder – AngelList, one of the best angels of all time)

3/ Dave McClure (Founder – 500Startups, now running PracticalVC)

Additional readings: The Death of Social Proof by Hunter Walk (Co-founder of a very successful seed VC Homebrew).

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Why The 60 Yr Olds, And Not Gen Z, Are Making the Real Money Off Bitcoin

Leveraging rare moments in time like Bitcoin requires having a prior mental model for how to behave when coming across an asymmetric option.

It’s crazy that in hindsight, Bitcoin was one of those super-rare, asymmetric-upside options that should have been a no-brainer to buy, esp. at the <$1k levels.

That’s why most tech HNIs, at least anecdotally from my network, ended up being early adopter buyers of Crypto. They had the right channels of early intel that informed them of why it was worth having at least some exposure to it.

Funnily enough, having these proprietary sources of info didn’t matter much given the long price runway that especially Bitcoin has shown. The dealer showed all the cards, multiple times over several years. Hell, you could have just read this 2011 post from Fred Wilson, trusted the OG who has gotten it right multiple times in tech, and bought maybe just a few thousand dollars of BTC. Do you know what price you would have entered at when this post was written? $2.75!!

And yet, few people bought any Bitcoin over these years, fewer ended up HODLing and even fewer ended up doubling down. Why do you think that is? I believe it’s because people don’t have a prior mental model for how to behave when coming across an asymmetric option.

Conviction comes from having a mesh of these mental models already in place, especially those that are drawn from experiential learning and therefore, become much more deep-rooted than those imbibed from mere academic study.

I don’t blame folks for not knowing what to do with Bitcoin. It is one of those once-in-a-generation movements and therefore, by definition, entire cohorts would have lived their lives without seeing anything similar to it before.

This is where experience becomes important. Ironically, even though Bitcoin is referred to as a Gen Z asset class, the people who have made real money off it are the grey-haired (or no-haired!) Michael Saylor, Mike Novogratz, and Bill Miller. Interestingly, both Saylor and Novogratz are 59 years old while Miller is almost 74!

This is because, over 4 decades of working and investing, these gentlemen have seen enough human behavior in the real world, as well as put skin in the game by taking multiple explosive-payoff bets one after the other, to recognize how the system works and how to leverage these waves to their benefit.

50% of my networth is in Bitcoin.

Bill Miller (born 1950)

In this fascinating interview, Bill Miller talks about how Roosevelt confiscated everyone’s physical gold in the US in 1933 and that’s the mental model that Bill uses to view Bitcoin as digital gold that can’t be confiscated due to the Internet (see my post ‘Bitcoin ETFs and The Challenges of Digital Gold‘). He then nullifies the argument used by the likes of Warren Buffett that Bitcoin has no intrinsic value, by saying that what intrinsic value does a rare baseball card or a Picasso painting have? They still sell for millions as their supply is scarce and people ascribe value to them.

I am actually a Bitcoin observer. I am observing its trajectory as a new technology and comparing it to things like the printing press, or the steam engine, or the railroads, or the automobile, or electricity. And it seems to be following a well-understood path to adoption of any new technology.

Bill Miller

The benefit of age and living through multiple cycles is that one can fit the arc of a new tech wave within a very long historical view of how things have evolved in the past and leading up to this point, as Bill does above. It’s how Millennials like myself will likely use the lived experiences of GFC’08, ZIRP, the pandemic, and the peak of 2021 as mental models for decisions going forward.

Therefore, let’s bookmark this post as a note to self: the next time we encounter an asymmetric option, strongly consider taking a swing at it (after due consideration, of course!).

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When To Sell?

Be it venture capital, public markets or real estate, “when to sell?” is an important question that both individual and institutional investors face.

Is it better to keep taking chips off the table? Or is hold-forever the right mindset? The journeys of Sequoia, USV, Berkshire and Brookfield give us some clues.

Yesterday at Primary’s NYC Summit, Fred Wilson (Managing Partner at Union Square Ventures) said something really interesting (and controversial) about venture firms that held on to their winners post-IPO in the recent cycle:

Their limited partners should fire them. They should never give them another dime. It is irresponsible what they did in my opinion.

Fred Wilson

Reading this argument brought me back to a question I think about often as an operator-angel – when is the right time to sell? In fact, I am faced with this dilemma right now wherein I might have an opportunity to exit a 2014 vintage investment. So, I guess it’s timely for me to attempt a deep-dive into this question, and analyze what the best investors across asset classes have to say on this topic.

A. Venture Capital

Clearly, Fred Wilson believes that venture firms should keep taking chips off the table as and when opportunities arise during late-stage financing rounds, and then cash out completely post IPO. Here’s an interesting excerpt from one of his posts on this topic:

Taking money off the table is smart portfolio management. It is very different from selling your entire position, which could be brilliant but is equally likely to be a mistake. Selling a portion of your position, returning a multiple or two (or eight) of the fund, and holding on to the balance works out for you no matter which way the position goes in the future. If the position blows up, you got a lot out and booked a huge gain. If the position goes up significantly, you make even more money on the part of the investment you retained. If it goes sideway, you got a little bit out early. It is a win/win/win pretty much every way you look at it.

Taking Money “Off The Table” by Fred Wilson

However, another OG VC – Doug Leone of Sequoia, has a different view. This is what he said on this pod with Jason Calacanis (paraphrasing):

It’s way tougher to go from 0 to $5Bn market cap than it is to go from $5Bn to $20Bn market cap.

There was significant upside created post IPO in companies like Yahoo, Google, ServiceNow and Facebook.

By holding for the long term, it’s a win-win-win for founders, LPs and Sequoia.

Doug Leone (Sequoia)

In fact, Sequoia started an evergreen fund in 2021 where the goal is to partner with entrepreneurs for 25 years, from idea to IPO and beyond. Here’s the firm’s stated thinking around evergreen hold periods for generational companies:

Source: The Sequoia Capital Fund: Patient Capital for Building Enduring Companies

So while one OG believes in taking chips off the table at every opportunity, another believes in staying all-in for decades.

Let’s see if we can break this deadlock by studying public market investors.

B. Public Markets

The first thing that comes to my mind when I think about the topic of when to sell public equities is the following legendary quote from Peter Lynch, later re-phrased and popularized by Warren Buffet:

Selling your winners and holding your losers is like cutting the flowers and watering the weeds.

Peter Lynch/ Warren Buffet

The gold standard in public markets investing is inarguably Berkshire Hathaway. Let’s look at the hold periods of some of its top holdings as per the 2022 Annual Letter:

1/ Coca-Cola – first started buying in 1988, and completed its purchase in 1994. Since then, annual cash dividends from Coke have increased from $75Mn in 1994 to $704Mn in 2022. The value of Berkshire’s investment has grown from $1.3Bn in 1994 to $25Bn in 2022, accounting for ~5% of Berkshire’s net worth.

2/ American Express – completed its purchase of Amex shares in 1995. Since then, annual cash dividends from Amex have increased from $41Mn in 1994 to $302Mn in 2022. The value of Berkshire’s investment has grown from $1.3Bn in 1995 to $22Bn in 2022, also accounting for ~5% of Berkshire’s net worth.

3/ GEICO – As a Columbia University business student, Warren Buffett made his first purchase of GEICO stock in 1951. Then in 1996, he purchased all outstanding GEICO stock, making it a subsidiary of Berkshire Hathaway, Inc. Warren paid ~$2.35Bn in total over these years to completely buy out GEICO. By 2022, the business was doing ~$39Bn in annual revenue itself.

Berkshire holds winners for extraordinarily long time periods, and benefits from their compounding, like no other investor on the planet. The 2022 Letter has an interesting para on this philosophy:

Source: Berkshire Hathaway 2022 Annual Letter

So till now, Sequoia, Peter Lynch, and Warren Buffet all seem to be in the hold-forever camp. Intrigued enough? Wait till you see what the world’s best investor in real assets (real estate and infrastructure) has to say on this.

C. Real Assets

IMHO, one of the best investing talks of all time is ‘Durable Principles of Real Asset Investing’ delivered at Google by Bruce Flatt, CEO of Brookfield. In fact, if you look at the video, it’s a travesty that only about 20 people actually attended this talk. Over 5 years since then, it has had a mere 175k views on YouTube, compared to the Millions that random TikTokers get.

Anyway, one of the core principles that Bruce talks about is investing with a mindset to hold assets forever. He cites an example of investing $432Mn in a marquee downtown NYC office building in 1996. Brookfield held it for 21 years, over 4 business cycles including 9/11 and the ’08 financial crisis, ultimately selling it for ~$2.2Bn in 2017. Note that this doesn’t account for additional returns created via using leverage for this asset and rental income.

Brookfield held this marquee office building on Park Avenue for 21 years, even through multiple global crises (Source: Durable Principles for Real Asset Investing)

Bruce says that when you invest with a hold-forever mindset, you automatically start looking at the asset’s long-term fundamentals, rather than what will happen to it next year or who will pay up for it later.

Cool – so we now have multiple OGs across asset classes in the hold-forever camp. From Sequoia in venture capital, Warren Buffet and Peter Lynch in public markets to Bruce Flatt of Brookfield in real assets.

D. Where I Stand On This

Based on personal experience as well as observations, I firmly lean towards hold-forever as a default mindset. Here are the reasons:

1/ Motivates fundamental analysis – as Bruce rightly said, a cross-decade hold mindset ensures that in the beginning itself, an investor will be prompted to think deeply and rigorously about the long-term future of the asset. Otherwise, there is a risk of investing with a ‘passing-the-buck’ mindset (expecting someone will be willing to pay a higher price for it in a few years) without building a strong investment thesis.

2/ Be on the right side of Power Laws – business outcomes across most contexts are driven by Power Laws, wherein only a few assets end up becoming winners in any portfolio. Therefore, adequately compensating for all the losers, such that the overall portfolio drives superior returns, requires milking the few winners as much as possible.

Those who regularly read this blog know that I worship at the altar of Power laws (refer to my posts on Conviction vs Randomness in Venture Investing and Only Need to Get a Few Right!).

In this regard, the following extract from Berkshire’s 2022 Annual Letter really caught my eye:

Source: Berkshire Hathaway 2022 Annual Letter

3/ Room for compounding – it’s important to hold assets long enough for this 8th wonder of the world to do the work for you. Studying the journeys of the best investors in history across asset classes, it becomes clear that compounding is really the true force that drives superior returns. As Bill Miller says – “the key to returns in the market is Time and not Timing”.

Am seeing the power of compounding in my own angel portfolio where the 2014-16 vintage companies have now hit strong product-market-fit and I expect a bulk of returns in these companies to be rear-ended. Check out what Susa Ventures has to say about its learnings from winners across vintages:

Source: Chad Byers, Co-founder/ GP at Susa Ventures

E. A Framework for “When To Sell?” Decisions

While I am philosophically in the hold-forever camp, I do believe a framework is needed to ensure rigorous thinking on a deal-by-deal basis, especially to catch edge cases where applying the default philosophy might, in fact, be sub-optimal. These could include either (1) luck-driven/ speculative upside cases (eg. a previously unknown crypto token hits unjustified all-time highs) or (2) scenarios with potential Risk of Ruin (eg. having an inordinate concentration in a single stock).

Inspired by Nick Sleep’s** decision-making framework on when to sell (via Mohnish Pabrai), here’s a set of proposed questions an investor can look to answer while making a sell decision:

1/ What is the ultimate destination? – Is there enough growth runway still left in front of the business? What does the business look like in another 10/20/30 years?

2/ Is the business getting better? – How are the operating and financial metrics trending? In particular, is its competitive advantage getting stronger?

3/ Have any of the fundamental assumptions underlying the original investment thesis changed in any way? – Is the market shaping up differently than expected? Have new competitors entered the space? Is a new technology disruption around the corner?

4/ Is a sale going to serve any other strategic purpose besides the quest for returns? – Are there any time-critical professional or personal requirements that need this capital? Is there an opportunity cost case to be made?

5/ Is the valuation egregious? – Is the asset at the peak of a hype cycle? Is the price at crazy levels that are unlikely to be seen again for several years?

Rather than giving a binary yes/no answer (real-life deal situations are rarely binary anyway), this framework should help in figuring out which side to lean on and in what proportion. Ultimately, one has to use judgment to arrive at the final decision.

A disclaimer…

My stance as outlined above applies more to the context of personal investments. In the case of managing other people’s money, various considerations related to fiduciary responsibilities kick in. My sense is Fred Wilson’s argument as outlined earlier is more focused on the latter.

F. Summarizing

Fred Wilson’s stance of de-risking via routinely taking chips off the table is a safe and conservative strategy that makes a lot of sense for most investors out there. But as many OG investors across asset classes have shown, generating outlier returns with generational impact requires going all-in and holding the winners for decades. Essentially, one has to become a smart gardener that only cuts the weeds and lets the flowers grow.

**If you enjoy reading investor letters, the Nomad Partnership Letters by Nick Sleep and Qais Zakaria are a must-read. FYI Nomad was one of the best-performing investment partnerships for 15 years starting in the early 2000s.

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