If you haven't been following the series on investing lessons from venture capitalists, now is a good time to start. The latest in the series comes from some great insight that was provided at the World Financial Symposium here in Seattle. The question of course that everyone has next is what the hell is the world financial symposium and why is it in Seattle?
Amazingly of course the angel investors on hand at the symposium generally had the same thought in response to the always outstanding question of why isn't Seattle a bigger startup community? Regardless of the amount of angel and venture capitalist investment that happens in the region, there is an amazing amount of talent on the entrepreneur and investor sides of the table. Some of the lessons from the symposium apply to both tech startup investors as well as investors in real estate or investors in publicly traded companies. John Cook and the team at Geekwire provided a lot of great coverage of this event and continue to be a public amplifier for the things that are happening in the startup and tech community in the Seattle area.
One of the investing lessons that continues to be a theme. This theme I would argue is the biggest theme in my analysis of angel and venture capital investors. The team is THE thing to invest in. Andy Liu said that he would prefer to invest in an A team with a C minus idea over a C team with an A idea. This is pretty powerful as there are many C teams with A ideas. In fact, I often argue that A ideas are just as easy to come by as C ideas (usually people who have no startup experience don't believe me). Regardless of what you are investing in, an A team makes the difference though. The ability to change directions or make whatever idea the team is working with into a profitable growable business is a talent and a skill that takes time and perseverance.
This same rule applies to investing in public companies as well, in fact here is a tweet from a couple of weeks ago...
— Joshua Maher (@JoshMaher) February 4, 2013
The link in the tweet goes over to an interesting article about Overstock.com ($OSTK) Patrick Byrne and his rather extreme interactions that arise from his paranoia. I am not judging Mr. Byrne or suggesting that his stock is one to avoid; however, I am saying that you should trust the managers of the businesses you invest in and reading stories like this about your managers should not be a surprise.
It is pretty common knowledge that I invest based on deep value. Whether that be real estate or companies, if there is unrealized value in the asking price I am interested buying. Tom Huseby pointed out that investing in this way (a way that is also common for any early stage investment), means that the investor has to plan to be around for long enough to get the payoff. This may be five to ten years and can include a lot of ups and downs along the way. This is so much of a problem in the public markets that many public investors who invest in value take on an activist role trying to shape the turnout of a company. Huseby is quoted as saying:
The must-be-present-to-win requirement for exits is always overlooked. It is amazing. If you get a good company with a good idea and you hang around long enough, you will probably have a win. And the art is: How do you do that? So, all of you who think you are going to be in and out (of a company) in three or four years — it is going to be eight. It’s going to be eight, if it is fast. And you better have a team and backers that will know that.
Despite all of the hoopla at the symposium about investing and Seattle being a place to invest, there is the continual anti-Seattle investment thread that is a part of the story. There are a lot of entrepreneurs who look to head to the bay area to compete with many other brilliant entrepreneurs for cash. Some strike up a great investment and their companies do great, others never find an investor and move on to another location or to another startup/career. Others of course head to locations where the great entrepreneurs are harder to find and thus smart money has a harder time finding great investors. Las Vegas for example is not anywhere near the top of any angel or VC investment list mostly due to the lack of Vegas as a hub for startup success. I am not saying that Vegas has no great successes as they clearly have zapped the thought of there being no success out of anyone's mind. What is interesting though is that if you are looking at a region or industry that is simply not filled with great opportunities it becomes easy to fool yourself into thinking that anything that looks halfway decent is a great investment. One thing that we can learn from this trend is that if entrepreneurs or investors are focusing on areas where the opportunities are hard to turn into successes, it is better to reconsider why no one else is investing there and move on.
Following from the last lesson, Cam Myhrvold states:
The cycle that created Silicon Valley isn’t something that happened over 10 years. It happened over 70 or 80 years,
The lesson here is that it is hard to tell if a region or industry is forming or if it is stagnant where it is at. It is pretty common knowledge that Silicon Valley is the hub for startups, but will it be surpassed at some point? Is there really another region that is building the talent and capital base to overcome the valley? Similarly is Atlanta or Detroit the only place for investing in severely underappreciated real estate or will other parts of the country ever be as volatile as these to regions? Investors need to carefully evaluate what it takes to be an up and coming industry and what investing in those industries means. A great case in point is Warren Buffett. He is on record on countless occasions talking about the fact that he only invests in businesses that he understands and he does not understand technology. Granted most of those comments were during the dotcom bubble and now that we are well past it, Buffett happily invests in the tech giant IBM. Did something change? You bet! Was it that Buffett suddenly understands tech or was it that IBM finally took the shape of a company that Buffett could invest in? I say it is the latter. It takes time for these things to happen.