VC: a world of luck and methodology

27th October 2017  

by Vittorio Mauri, Partner at U-Start

I started my last editorial with a Latin sentence, and I’d like to renew this tradition with another “old-but-gold” quote from the ancient times: “Fortuna audaces iuvat”. It’s not a random pick though, it’s just a rather interesting concept that somehow applies to Venture Capital investments as well. Here’s why.

Last week I was told a story about an investor who made 100x on a deal in less than 3 years’ time. He was a small business angel, so his ticket didn’t buy him a life annuity but rather a couple of houses and a nice sport car. He was not a serial investor though, just a “so-called” FAF (Friends and Fools) who backed a business more as a favor than as an investment. The person who told me the story was regretting the opportunity missed, and of course I don’t wonder why.

However, I also feel that such a lucky shot is not different from winning a lottery, and lotteries are never good for business. If you think about it you will soon realize how dangerous these stories are for business, as they create excessive expectations on investors that do not belong to the real world of investments.

Still, rumors on cases like these are frequent and many people freak out either for envy or for fear. So how should we treat luck and bad luck in the VC world? Well, I think that luck is not a crazy variable, but rather a consequence of a precise strategy. After all, our ancestors used to say that “Fortuna audaces iuvat”.

First of all, with no risk there is no return. This is what makes VC a must-have asset class in whatever portfolio. Some assets bring on low risk and ensure low returns for a substantial conservation of capital, while some others are meant to be more binary and either fly away entirely or double up in few years’ time. For those trying to increase capital over time there is no third way. If you want to win big, you’ve got to risk big too.

And there comes my second point. Even though returns are coming from risky takes, rationality should always be the only and sole driver of investments. There are several ways to apply this rule. And depending on this, there are several typologies of VC investors too.

Some are data driven investors: they typically analyze, study and decide. They do it on market, on the company’s performance, on its financial plan, and so on. They do long and through due diligence and they apply their models to companies they can fully understand. This is a very common approach in Europe, where fund managers often come from Private Equity and thus bring their mindset to the VC world too.

Other investors, more common in the US, are vision driven: they do not invest in businesses they understand, they look for disruption and they generally expect a longer exit time. They want to invest in businesses that can really change the world and the way how people think, move, invest, drive and finally live. This is the typical approach of the Elon Musks, the Founders Funds, the Zuckerbergs, etc.

Even though these two categories seem very different, I think they are both driven by a conscious and thorough approach that limits significantly their risk exposure in favor of a higher chance of positive returns. Not surprisingly, they all apply the same rules to their (different) investment strategy: they work with the best, invest in the best and build a system to help them achieving their targets. All these things are the elements that make investors courageous and lucky. Nothing else applies.

So even if people often confuses competences with luck (by the way, such confusion is what actually make investors “lucky”) if you think about it, luck or bad luck are never part of the equation. The equation is made of courage to take high bets on emerging companies and skills to build a solid environment around your investment strategy. After all, if you shoot a home-run once you might be awarded as the MVP of the game, but it takes a season to become a champion. This is what we’re working on at U-Start.