Not everyone is meant to be a start-up investor

Published in the San Diego Union-Tribune, April 24, 2017

Over the past few weeks, I have lunched with a few new “investors” — or more accurately, wealthy people who want to move out of what they know really well and have made a lot of money doing in order to start “investing in some startups.” Oy!

They have come to me ostensibly to explore how, if, why and when they should do it. They say that they are ready. But what I have found is that there is a mismatch. They have 10,000 chunks of knowledge in the businesses that have created their wealth, and since they are really good at what they know, they assume they can easily and quickly become really good at what they don’t know. Why is this?

Just because you can hit a golf ball doesn’t mean you can shoot a basketball. The conclusion I have come to is that people want “the perceived action of the startup — it is cool.” This reminds me of the billions (not just millions) that have been lost by wealthy people in the movie business. If you want to create a big fortune, take a really huge fortune, and put it into the movie business.

Hollywood holds an allure that cannot be replaced. Our society venerates “stars, famous people.” I am always fascinated by this idea of fame. How does Kim Kardashian become famous for simply being famous? Where does it start? What is the first time you are referred to as famous?

That brings me to the millennials. I am beginning to suspect that the startup racket and the social media cults are the current embodiments of the movie business. It is cool. Why study physics when I can take classes to become an entrepreneur? Currently there is no job listing in that category — unlike, for example, a welder.

Marc Andreessen, one of the most famous venture capitalists, talks about making bets in venture. He says, “It is wise to understand the difference between two types of errors. Mistakes of commission — losing everything you invest in a company — that can be tough, but you will get over that in time. Errors of omission, however — not investing in the first place — will scar you for life.” He goes on to say, “Take the bet, lose 1X. Don’t take the best and possibly miss out on 1000 X.”

This is the famous mantra about regrets — not what you did, but what you didn’t.

Andreessen goes on to suggest that we commit sins of omission because “we have some theory for why something’s not going to work. You look for all the evidence that supports (its likely failure) and ignore all the evidence that disproves it. In the end Andreessen says, “you have to take ego out of the ideas, which is a very hard thing to do. You need to be “ruthlessly open-minded.” This is very hard for first-time investors.

I listen to them and I tell them that if you invest $25,000, it will not move your needle (remember they are rich), because if you only go to the plate once, your odds are next to zero. You need to swing consistently and with patience, but you cannot leave the field. The next pitch may be the hanging curve ball. The startup investing game is brutal, and you need lots of Band Aids and ointments to get through a season. If you want to sleep with actresses and have lunch at the Ivy, then go to Hollywood or Vegas. If you want sleepless nights and tacos, welcome to startup-ville.

I think this current “entrepreneurial rage” is fed by this fantasy that you are going to get the fast ball down the middle and crush it. But you are not. You didn’t spend time in the minors, you have not really seen Kershaw at 96 miles per hour, and it’s the old rule that it is what you don’t know that you don’t know that will kill you.

In the end they sounded like many of us. They say they can tolerate risk, but they wanted a sure thing. I am suspect because there is no sure thing, and if there were you couldn’t identify it, until it becomes obvious (three pivots and a management change later). And by then, you can’t get in the deal.

Rule No. 514:  This is no way to make a living.


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