Dissecting and pattern matching the venture business

Paul Kedrosky, blogger behind Infectious Greed,  has a couple of interesting posts again dissecting the venture business  and looking for best practices  to identify what makes a stellar venture capitalist. A lot of time, effort, words and echo in the blogosphere is dedicated to this task in general, though Paul is certainly qualified to address these issues.

I enjoy reading Paul’s articles and blog posts, and think he addresses some interesting points in this article  looking for best practices in venture capital. I think Paul’s conclusions here are mostly right, but would build on the gut conclusion in terms of how to make successful venture investments.

VC is a hits business and the biggest ones matter the most – i.e. a fund maker (or in today’s multi-billion dollar funds – fund makerS). You know these … Apple Computer, Cisco, eBay, Google, ….

What is common?
1. Big friggin markets. Obscenely big.
2. Persistence – have the balls (metaphorically of course) to bankroll the sucker through to win
3. Team – either you have it or you bring in on when you know you don’t (think Cisco)
4. Technology – either you have it or you know you can build it & the barriers to entry using step #2.
5. Hang out (actually actively troll) in a well stocked pond and kiss a lot of frogs

If the market is one that you know is huge, then be sure you back the best team & technology combo among all of the other choices, so that with persistence and bankroll you can win.

The art / gut is betting on the market and the team/technology combo, and having the balls to see it through (& know when to cut your losses).

It’s a well known fact that the asset class as a whole really stinks on a risk/reward basis. It’s the top funds that matter ….. and not many exist. Per Paul’s "VC is a Bubble Business" post, I don’t exactly agree unless you’re trying to invest outside of the top decile (mayby quartile if you’re being generous). The top funds always seem to find the next Apple, Cisco or Google (oh, were all of those Sequoia?), bubble or not.

Lots of money is salivating to get into the class (a psychology that would be interesting to understand), so an adverse selection process is in play (and has been for most of the existence of the asset class) ….. chances are good that unless you’re running a huge institutional fund, are close personal friends with one of the few top funds, or can really identify the next wunderkind of the industry, if you’re offered an opportunity to invest in a VC fund, you should politely decline and run away fast.

— brian