Chris Devore graces us with his wisdom in the fourth post in our ongoing Investing Lessons From Venture Capitalist series. Chris is a local Seattle investor (our first local investor) and is heavily involved in a lot of areas building the Seattle startup scene. His investing lessons are shared from the perspective of his move from being an entrepreneur to turning into an investor and prove to offer some interesting insights into early and not so early stage investors.
Lesson #1 - Understand Who Else Is Investing
It may not be obvious why it is important to understand who the other investors are, but it is very important. The reasons are different for an early stage company than they are for a publicly traded company; however, the need is equally important. Looking at VC investing there is a need to understand exit criteria of the other investors, appetite to invest in future raises, etc. In publicly traded firms, the need to understand is a little different. Are the major shareholders insiders to the firm and will focus on returning value to the firm or deteriorating the firm? Are the major shareholders institutions who will look for slow growth and dividends? Are the major shareholders activist investors who see value in a breakup or major change in direction? All of these will affect the stock price in drastically different ways on different timelines and understanding who is going to affect the price of the stock is just as important as understanding the value of the company.
Lesson #2 - Find Clear Opportunities
Opportunities are when an idea finds a market to be used. There are ideas all the time, some good, some bad, some early, some late. Occasionally those ideas find the right timing in the world and an opportunity exists. Finding these clear opportunities can be difficult, in fact a lot of companies move around a bit until they find the opportunity. It is important in both early stage investing and in publicly traded company investing to find clear opportunities.
In my portfolio $JMBA is a perfect example – they have been in business for some time now and are only now jumping into the health arena with both feet. It is hard to comment if this opportunity was in front of them before (although it seems as though when Subway made the shift $JMBA’s opportunity began to open), but the timing is good as Mayor Bloomberg and First Lady Obama work to bring this to the forefront of public discussion. Similarly, when you are investing in companies – you need to find a company that has an upcoming opportunity that they will be able to see clearly.
Lesson #3 - Find Teams To Execute On Those Opportunities
Finding a clear opportunity is one thing, finding a team that can actually execute on the opportunity is a completely different thing. Just like ideas present themselves all the time, so do opportunities. Being aware that they are available and having a team that can adeptly execute is critical to the success of any investment. Take $JCP (also in my portfolio), there has been a lot of speculation after their last quarterly earnings call that there may not be an opportunity in changing the face of traditional department stores. The speculation ignores the fact that teams alone don’t make an opportunity exist, teams only execute successfully (or unsuccessfully) on opportunities that exist in markets. With the team that I have talked about countless times before on this blog – if there is an opportunity, $JCP has a team that can execute on it.
Chris isn't alone in conveying the importance of the team. Every post in this series has had the team come up. Investing Lessons from Chirs Sacca, Fred Wilson, & Howard Lindzon all had the team as an important component of investing. When you are looking at any company to invest in, you too should look for a team that is composed of members who would be able to execute on the opportunities in their space.
Lesson #4 - Follow Others
Chris talks endlessly about the investing habits of Charlie Munger. His ability to convey the lessons of Munger into valuable lessons for investing in general and venture capital and angel investors is helpful.
I know a lot of value investors already look at people like Munger for advice or guidance on how to be a great value investor. Others look at Warren Buffett, Bill Ackman, etc. I think that as investors, we should look beyond the realm of investing or our preferred method of investing for clues about how to be a better investor. For example - if you invest only in publicly traded companies you should learn a thing or two about what private investors do to determine value in an environment where price is not as influenced by the crowd.
Lesson #5 - Buy At A Fair Price
Determining a fair price can be difficult regardless of whether you are investing in an early stage company or a publicly traded company. Interestingly enough, Chris is the first of the VCs to mention this his investing thoughts. Most VCs seem to ignore the value of buying at a fair price. Perhaps that is related to who Chris follows (see number 4 above) and how that influences his investing behavior as an early stage investor.
For publicly traded firms, this fits with my personal views on investing. With both early stage and publicly traded firms, valuation is a difficult excercise and determining a fair price can be tricky. Is $AAPL valued fairly? How about Instagram? Does discounted cash flow analysis really work for every company - no. Regardless of how you are performing your valuations, understanding the value and how you determined the value is the most important thing.
More to come in the Investing Lessons From Venture Capitalist series - stay tuned!