5 Investing Lessons From Fred Wilson

Following up from my last post in the series 5 Investing Lessons From Chris Sacca, I came across this article that Jeff Bussgang wrote on lessons for startup entrepreneurs. Reading the article, there were a few key points that Jeff points out as important for startup entrepreneurs. These are great for the MBAs Fred was speaking to and entrepreneurs, but it is interesting the insight that Fred is providing into his thoughts on investing and how relevant they are to investors in public companies.

Let’s look at each of the key points and how they are relevant to retail investment decisions.

 

Lesson #1 – Embrace Failure

Fred observed that failure is typically a valuable and powerful experience—forcing introspection, humility, and an extra drive to prove something to others. He observed that the entrepreneurs he has been most successful with typically had a major and personally defining failure in their career.

This is less of a lesson in what to invest in and more of a lesson on being a good investor. Every good investor that I know has suffered from a loss or failure. I have my stories of failure and loss in the markets as I’m sure any other great investor you talk to does. This holds true for traders and investors alike, the world can not be perfectly calculated easily, despite what economists attempt to tell you. Making investments with failure and loss in mind does make you more hungry, it does make you define success more clearly, and it does teach you to manage risk in a more manageable way. Entrepreneur, investor, whatever – the process of trying really hard at something and getting it wrong teaches more lessons than most universities will be able to.

 

Lesson #2 – Investigate Your Hunches

He repeated a comment that we drew out from last year’s conversation, which I particularly like: “Start-ups should be hunch-driven early on and data-driven as they scale.” What was interesting was discussing the profile of the entrepreneur that has good hunches—often they come from outside the domain, yet are obsessed with the opportunity to disrupt the new field with a fresh perspective.

As I read this advice, I thought back on the many investment opportunities I missed because I didn’t execute on my hunches. I wrote a bit about one of them in The Difficulty of Pursuing Your Ideas. In that article I didn’t talk much about the hunches I had on investing in RIMM when the stock was trading at $4… in 2002. At the time the benefit of the product was so amazingly obvious to me (I was rolling out Blackberry Server at Washington Mutual Bank). One weekend the service was up, two weeks later everyone had a blackberry – there was no way this was not going to be a hit. At the time, I thought I would capitalize on being really smart at knowing how to configure the server… the real money would have been made investing in the stock (even selling today I would be up 230%). Your watchlist or the list of 10-K’s on your desk should be your list of hunches, not some list of stocks on MSN.

 

Lesson #3 – Look Out For Gate Keepers

We discussed the role of gate-keepers in start-ups. Fred is skeptical of businesses that involve gate-keepers. In fact, he encouraged the students to look for industries that have gate-keepers, and compete directly with them (e.g., education).

This is a good piece of advice, where gate-keepers exist, there is money to be made. Most importantly for investors are the gate-keepers around the investment vehicles. If you invest in a stock that is under $5 that is going to soon go over $5 as a result of growth you are going to take advantage of the gate-keeper that institutional investors have. Remember, they aren’t looking at those stocks that are priced under $5. When they do look at those companies when they become valued in a range that is acceptable – and if the like what they see – the results for you can be amazing. Similarly, most retail investors are not investing in options (even covered calls in an ESPP) or warrants. Understanding how these work and how to invest in them is a great skill to take advantage of the fact that most retail investors aren’t in these markets.

 

Lesson #4 – The Team Matters

When evaluating whether you want to join a company, think like an investor. Conduct extensive due diligence on the team, the product and the market opportunity. Ask yourself whether you would invest your money in the company before deciding to invest your career.

As we learned from Chris Sacca, the team matters! I don’t care who you are, an investor, an entrepreneur, an employee – the team that is making the magic happen needs to be a great team. I talked about Ron Johnson in my last post, he is brilliant! The same is true for all of my investments. Just listen to Benmoshe over at AIG talk about the insurance industry – the guys is an insurance industry oracle. He is turning around that company, paying back the investors, and going back home to deal with his cancer – I’m in!

 

Lesson #5 – Experience What You Are Investing In

Entrepreneur and start-ups have many varied models for success. Don’t try to follow someone else’s model. Stick with your personal passion and your authentic leadership model. If you don’t have your own start-up idea, go join a 50 person company and leave when there are 500 employees. And if you have an idea and no one can talk you out of it, go be an entrepreneur. (Interstingly, Fred confessed that if he could have done it over again, he wishes he had joined a start-up for the first 10 years of his career.)

If you haven’t been at a startup – you should try it. This advice was to a bunch of MBA students, but as investors there is no better way to learn how businesses are run than to join a startup and see how businesses grow. When you are in a 50 person startup you hear and see everything. You get to learn the difficulties of office space, leasing vs. buying, debt vs. equity, etc. You gain an insight into running a business that extends into any industry and market that you want to invest in. I have been at a couple in my time – as well as large companies. Fred doesn’t talk about this much, but it is equally important for investors to understand just how screwed up the internals of large companies are and what drives management. I can tell you from experience, what drives management at startups is not the same as what drives management at large companies. This matters when you are making an investment decision as the insight into what is driving decisions in that business are critical to understanding what the management is going to do with your money.

Keep your eye on the Investing Lessons From Venture Capitalists tag for more lessons!