Errors of Omission, or Errors of Commission: Some Lessons from Hundreds of Startup Investments

I always learn new things when I listen to Patrick OShaughnessy’s podcast. Carl Kawaja is an incredible investor at Capital Group which does a lot of public stock investing. Made me reflect on my own investing career now with 8 years of data. So I spent some time this last year or so, dissecting my investments and thought process behind them.

I always ask myself when doing a deal: How am I so lucky to get this deal? What did I miss?

Having Anxiety, Ambiguity and Uncertainty is a very good thing to have as an investor. It forces you to do your homework & approach every investment with more rigor in due diligence. It also forces you to re-look at your investments with fresh eyes and question your assumptions where possible.

Managing Ego: is probably the biggest challenge for an investor. Paraphrasing Chris Sacca: “When you do well, you think you are smart and awesome. When you don’t do well, you are unlucky. You need to invert that. When you are doing well, you should be thinking you are lucky. When you don’t do well, you should realize you are an idiot and make sure you hustle to learn quickly and get better at it. FAST.”

Investing in Slopes and Curves: Understand that markets are much bigger than you think. I make the mistake of misreading the market size all too often. I’m either really wrong on just how big the market is or discover over time that there is a more limited market than expected. This second point is usually tied to my next big omission.

This mistake is in not understanding the timing of a startup, which is usually tied into one trend but multiple trends coming together. That acts like a massive wave that drives a startup forward. I was right on the 3D printing market long term and the teams as well, but I was totally off on the timing. The aphorism of “Being too early is the same as being wrong.”

The biggest and hardest part is really understanding and reading the people piece. In the early stage, founders are everything. And you really don’t know how a founder will react in times of crisis or when the chips are down. You can ask lots of questions, ask them to do special personality tests & do all the reference checks you want. You will miss something and get this wrong. Thankfully I do have a very large sample set of founders. I always compare the founders I talk with against my top 10% of founders in my portfolio. If they compare well (obviously assuming I like the business and market), I usually do the investment. Every time I break this rule I usually end up with deep regret in doing the investment.

The key point is that investing is a constant battle to get better by learning about your own psychology and blind spots or else you will fall by the wayside of irrelevance. I never understand investors who are arrogant and think they know everything. (They usually don’t and the arrogance is to hide their massive insecurities). Any new investor who says or thinks investing is easy usually does not last long in this business. As they say, there are two types of investors in Silicon Valley: “Those who are humble and those who will be humbled.”