VC: "Saying No Sucks…"
highway12ventures.com
highway12ventures.com
This is the very example of dishonesty he talks about. A company is either going to make them a ton of money, or it is not. If a VC thinks it is going to make them a ton of money, there is no such thing as "isn't right for us right now". If Larry and Sergei came to a VC firm that only invests in space exploration and offered to take their money in exchange for stock, they'd do it in a heartbeat. If a VC thinks it isn't going to make them a ton of money, it can be the most right company in the world, and they still won't invest. The hardest part of being honest is being honest with yourself.
If you are presented with 500 investment opportunities a year, and only have enough capital to fund 5 of them, you are going to pass on a lot of +PV opportunities.
Maybe they appear positive to you, but don't cross your hurdle rate. Maybe they're overly correlated with other existing investments, so despite being positive, they're not ideal for your portfolio. Maybe you want to avoid certain risks because you already have that risk in your portfolio. Maybe you're running a double or triple bottom line company, and it works financially, but is inferior to another investment in another way. Maybe it has more vol than you can fade. Maybe it's fantastic, but you have another investment that's really fantastic.
There are almost countless reasons that a company could be great and a worthy investment, without being right for a particular investor at that moment.
VC business is too binary and too cutthroat for these things to matter in any other than exceptionally odd cases. Since nine out of ten investments fail, they need to fund companies that have a chance of giving a 10x return just to break even. Considering that the limited partners could put their money into treasuries instead, they probably need to double the fund's worth to justify a high risk investment. That means that other than breaking even, they need a company that has absolutely massive returns. A google, basically.
There is no "ok", "good", "fantastic" and "really fantastic". It's either a google or they're out of businesses. So if a company like that comes along, unless it's a really edge case, all other reasons get swept under the rug. And if a company isn't a google, well then, it wasn't a good investment for a VC business model anyway.
As a very public counter example, Fred Wilson has stated that his lifetime failure rate is 20%. To get it that low, he most definitely had to pass a lot of profitable but high volatility opportunities.
Highway 12 Ventures has 20 companies listed in it's portfolio, and 5 of them are already successful exits. Their portfolio is not large enough to allow for very low success rates, and their past experience seems to re-confirm that they do not generally invest in super-high-risk activities.
Further, VCs are not interchangeable. They have different areas of expertise. This will lead to them investing in markets they understand, and often passing on opportunities in markets where they're less familiar, even if everything seems perfectly reasonable.
Accusing them of being dishonest for noting that they routinely pass on good investments is absurd. I'm certain that they do so on a very regular basis.
The other problem with saying "no" is that you get rapidly trained not to give advice or further details, as there is a class of entrepreneur who will make the suggested changes, come right back, and ask for the money.
I've thought a lot, lately, about becoming a professional investor. This is the part that stops me.