The World of the VC Investor: More on Fear and Greed

Of all investors, you would think VCs and angels would be people in whom, temperamentally or by design, Greed would massively overwhelm Fear.

It seems things are not that simple.

It’s not that Greed is so much stronger in us that it overwhelms our Fear.  It just happens that we have a particular bag of tricks for quieting our Fear.  To wit:

1. Control (or the illusion of control).  By having the power to overrule the founder and/or exec team of a startup, we believe we are hedging the risks of investing in them.  That, of course, presupposes that our ideas of what to do with the company are better for the company than his or hers (or at least that our ideas are better for our interests than his or hers).
2. Dribs and Drabs.  By doling out our capital in smaller tranches or rounds, we believe we are hedging the risks by tying infusions of capital to company accomplishments (aka milestones).
3. Due Diligence.  By studying the risks in detail before each investment, we believe we are hedging risk by understanding it.  Trading in “unknown unknowns” for “known unknowns”, in the words of that sometime investor Don Rumsfeld.

This may make more sense for investors – whether angels or VCs – who have some operating experience in the businesses and marketplaces they invest in.  Unfortunately, this is seldom so, and even if so, is seldom helpful.

Why?

Even if I made my bundle in enterprise software, the enterprise software of today doesn’t have that much to do with the enterprise software of yesteryear.  Things like SaaS, open source, BYOD, and “the SolarWinds sales model” have completely changed the playing field.  Oh, there are some verities, like “Buy Low, Sell High” or “Keep It Simple Stupid”, but any clown who’s read the digest of a couple of business books knows those things.

And even when an investor knows something about the area he/she invests in, it’s not clear how helpful their advice is.  Why?  Because people are seldom capable of accounting for their own success.  Ask a billionaire how he got there, and he will say, “never drink coffee” or “never make more than 2 decisions in an hour.”  Either these are pablum verities a la “operating experience” above, or they are quirky beliefs that probably don’t have much correlation with the success of the business.

So get an opinionated investor with a lot of pablum ideas with control of your company and you have a recipe, not for hedging risk, but for constantly diverting the company from its focus with boneheaded “try this” nostrums.

We VCs and angels get this, and so we are not less Fearful about our investments.  We may be even more so.