What I learned about VC Investing from… Paintball?
Almost 10 years ago I played paintball for the first time. It was something I knew of when I was younger and had plenty of friends who did…
Almost 10 years ago I played paintball for the first time. It was something I knew of when I was younger and had plenty of friends who did, but it was not until college that I had the chance to go myself and see what it was all about. I went with a big group to an indoor paintball course and we played 10 vs. 10. There was a 15 minute time limit and whoever had more men standing at the end won that game. We were set to play best of five games.
In the first game our team of smaller, younger guys got obliterated. We were all hit well before time was called. We were intimidated and naturally decided it would be safer to be more defensive, focus on not getting hit and try to survive. But something happened when I got hit in this first game and I felt the pain of a welt forming in my lower abdomen. The adrenaline started pumping and it became clear to me: this game is not won defensively, but offensively. The only tools I have here are my legs and my gun, and this game will be won based on my ability to hit the other guys and NOT my ability to avoid getting hit. Now that I understood the consequence — getting hit—and the relative inevitability of that consequence in addition to the setup of the match, the strategy was clear for game two: go hard and fast and prioritize hitting the other team over preventing myself from getting hit. This was not a kamikaze mission, but a calculated offensive where planned risks, like exposed traverses and lack of cover fire, would allow me to get to an advantageous position and achieve the goal, but I had to be willing to get hit for it to work. The result of game two was very different: we won handily and I personally hit 5 of the 10 players on the other team.
So what does this have to do with Venture Capital?
Like paintball, venture capital is not a game of playing it safe and outlasting the other team. It’s not a sport of certainty or defensive maneuvers, and it’s not all resting on one game. It plays much more like tennis than college football: you don’t have to win every game — or even every set — to win the match, just the ones that matter the most. And most importantly, if you are too afraid to lose, you will never win. You win by taking calculated risks based on the information in front of you and then executing the plan to the best of your ability. (Or you just get a sentry gun, i.e. an infinite amount of capital).
In my short career in venture I have made a few observations. The first is that defensive investments don’t work. Investing in the #3 or #4 player at a discount and thinking you got yourself a good deal is failing to understand the basic industry dynamics. In most technology subsectors the winner will take most and #2 might also have some success, but beyond that, additional players will get swallowed up or more likely die slowly. In the post-unicorn era, this is even more drastic where the hottest companies will raise enough capital to drown their competitors with brand marketing, discounts and aggressive R&D budgets. Like in paintball, where you have to attack with conviction and go for the other team’s best player, conservatively sitting in the wings and trying to not to lose will leave you with nothing (and it’s no fun).
My second observation is that the most controversial deals end up being the best. That being said, there are many great deals that get unanimous approval, but the very best ones always get some “NO” votes (the worst deals also naturally get NO votes). I think there are two reasons for this. The first is price: great companies tend to get priced up to a level that should make people uncomfortable. The second is disruption: if this company is really going to do what they say, it can have massive implications on the world view of people around the table, including their existing portfolio bets. Some great explanations of this are in Bessemer’s Anti Portfolio. You have to take risks and do things that are not obvious (at the time) to win big. In paintball this means running through a treacherous open area and taking fire to get yourself a perch that will give you the advantage. You may go down along the way, but once you’re on the other side, the choice seems obvious.
The third major observation is that good portfolios are carried by a small number of investments. I challenge someone to find a 3x VC fund that is filled with 3x exits. The entire playbook of venture is based on concentrated but outsized returns. A good early stage venture portfolio with 10 companies will have three zeros, three 1x returners, two good returners (3–5x) and one breakout success (10–20x+). Going in, you have no idea which deals will be which, but they should all have the potential to be that breakout success. You can’t think to yourself, “this is probably going to be a 1.5x — every fund has a couple of those,” at the investment stage because that is a losing mentality and you’ll probably end up doing worse. The key is to understand the risks and get comfortable with them. The difference between a good fund and a great fund is small: it’s two breakout successes instead of one, or one really massive success (~50x) instead of just a “normal” breakout success. You have to know going in that you might lose and be OK with that. In paintball that means being willing to get hit and it means being willing to lose single games, but never go into a game thinking that you’ll lose. You go aggressively with a sound strategy and solid execution plan and understand that you are playing a risky game. But the good news is that you can lose two games 10–0 and still win the match 3–2.
Venture capital is not an exact science and they key is being comfortable with uncertainty and assessing risk — using science wherever possible and in creative ways to better understand what they future may hold. Success comes with taking calculated risks with big upside and then working hard (alongside your portfolio companies) to ensure that you maintain the best chance of success each time you step into the arena (i.e. make an investment). You have to be trying to win instead of just trying not to lose. The small failures along the way can hurt, but the team with a winning mindset who works the hardest to understand the risks and then mitigate them will ultimately win.