VC is a lottery disguised as an ultra-high end luxury product
Venture capital may appear like an exclusive club of smart people making lots of money, but in reality, it’s a very competitive game with thin and delicate edge.
1. VC is a lottery disguised as an ultra-high end luxury product.
Lotteries are negative expected-value games. Majority of startups fail, and thus via math, the median startup investment is money losing.
But unlike lotto tickets which you can walk into any corner store to buy, it’s complicated to buy startup stock.
Startup stock is bought and sold like an ultra-high end luxury product. Consider luxury cars and watches. You can’t walk into a Ferrari dealership or Patek Philippe store and buy your favorite model. They’ll make you wait in line and limit you to basic and/or old pieces before they let you buy your favorite reference. They dress it like it’s an honor to hand over your hard-earned money.
The very best startup stock share this exact dynamic: you can’t just go buy it. To get in the door, you need high reputation and an ability to demonstrate value. So this is the dilemma of the venture capital game: you have to beg to invest, but the median startup is a zero.
2. VC is a game of saying no.
Now you might reasonably think that venture capital is an idiotic business. So how are good VCs some of the richest and most powerful people in the world? The answer is that the good ones are really good at saying no.
Polite society indoctrinates all of us to be people pleasers and say yes. Venture capital is the game of saying no a lot without pissing people off and burning bridges.
The way to reason about this is simple: venture capital is a betting expression of what the future looks like. Most startups are unnecessary and not important to exist in the future. So saying no is just another way of saying you don’t believe that the future requires someone’s startup to exist.
But it’s hard to predict the future, so the founder might actually have the goods (e.g. Airbnb’s first round in 2008 was $150K at $1.5M valuation cap, and many good VCs passed on it). So the default VC response is a trained response of ghosting or “not now, maybe later.” It’s not personal, it’s just the gameplay dynamics of VC.
3. VC is monetizing the ability to predict the future.
VC is anchored on the idea that the future will be more bountiful than the past. If you believe this, then you have to own equity in the future. If you don’t believe the future will be more bountiful than the past, buy ownership in legacy companies. If you believe the future will be worse, then you can consider buying gold, guns, and stocking up your bunker.
I believe that the future will be better than today, so I’m expressing that through buying ownership in the startup companies that will build and operate the important pillars of future civilization.
You have to be very smart and have a lot of data to predict where the future goes. Calculating the entire world is unlikely a compressible problem, so the only way to do it is focus on narrow sectors where you can better network, collect data, and calculate.
Therefore, to be a good VC, you have to focus on 1-3 adjacent sectors where you have a chance to the world’s foremost prognosticator. For Anti Fund, the sectors we are focused on are AI, robotics, and consumer platforms. AI and robotics will definitely be important in the future, so we need to own pieces of it. The platforms in which humans interact with each other will also evolve, so we also need to own that. My partners at Anti Fund are some of the most important tastemakers in the world, so we believe we have edge here.
4. VC is picking people.
After choosing the sectors, it’s a people selection game. I’ve met a lot of people and made a lot of bets. The three most important attributes in order:
- High energy — some people simply do more than others. They don’t get tired; they keep moving; they don’t just say they want it, they make progress every day to prove it.
- Focused — high energy people often get distracted, so you need to find focused, high-energy people. Distraction has destroyed many geniuses and billion dollar outcomes.
- Clock rate — the best people just turn faster. The best people are the most responsive even though they are the busiest. They process, decide, and execute faster. Instead of a week to turn, turn in a day. Instead of a day, turn in an hour. Instead of working on it in an hour, do it now.
5. Transact often to collect illiquid information and then load up big.
Smart people tend to sit back and analyze in a chaotic situation. But in the venture lottery game, you have to fire. You have to buy and sell and do transactions because it’s the only way to collect information in a highly illiquid and secretive market.
The best VCs have the most tentacles out to collect information, while staying incredibly concentrated. You have to load up in winners before they look obvious. This is fucking scary because as smart people, we want optionality and downside hedges. But the big financial outcomes are all made when betting big on winners especially when business looks uncertain and the odds are scary. The billionaire VC legends make it look easy because of survivorship bias. For every concentrated winner, there are nameless myriad who went bankrupt.
The data is clear that the median VC investor is a negative expected lottery player. The good players cultivate a positive EV system to consistently buy good tickets with correct sizing. Because winning the lottery is so lucrative, VCs try everything to increase their odds: starting podcasts to befriending high school math olympiad gold medalists to all sorts of sell dinners and trips. But ultimately, these are just implementations of the underlying principles. Master the core 5 principles and your own investment style will emerge.
To VCs: read my essays and read the essays and biographies of the greats, so you can better understand the game you’re playing.
To founders: choose your capital partners wisely; if they don’t know how to play their own game, how can they help you play yours.