I was directed to a blog of guy named Georges van Hoegaerden from a tweet by my friend Nanea Reeves. He writes on a lot of subjects, but what I found particularly interesting was his musing on what he calls “sub-prime venture capitalism.” In a nutshell, he believes that there are a large number of early-stage venture capitalists, perhaps even the majority, who are as bad at assessing risk as the sub-prime lenders were; and, he believes, this fact is screwing up the venture industry and producing poor returns for venture as an asset class.
It made me think of an encounter I had recently with a venture capital firm that was evaluating one of my portfolio companies for a follow-on investment. The venture firm that evaluated the company for investment asked a lot of good questions, had multiple partners meet the management team and board members, and even interviewed customers, both existing and potential. They came back asking to delay their decision for 6-8 weeks, “while they collected more information.” When I talked to one of the partners by phone, he said that he felt the company was “just on the verge of generating really interesting information” that would allow them to make their investment decision. That just seemed absurd to me. Go ask Malcolm Gladwell about the decisional efficacy of having more information. It’s not about information; it’s about risk assessment. And there is rarely if ever some “fact” out there that makes you better at evaluating risk.
The game of Texas Hold’em is illustrative in this regard. For those who don’t know the game, the players are initially dealt two cards (the hole cards) which only they can see. Then five communal cards are revealed, one by one (the river cards), with a round of betting after each reveal. The goal is to put together the best five card hand out of the seven hole and river cards.
The most broadly adopted strategies are the “tight-aggressive” strategies: play few hands (tight), but bet strongly when you play (aggressive). Further, position at the table is important — the players who bet late in the round have more information than the ones who bet early.