All professional investors, whether in fundamental security analysis, quantitative trading or private equity, should be forward-looking by default. We're not historians who dwell on building structured narratives of the concluded past, hoping that they're compelling enough to inspire people's thoughts. We might rely a lot on historical statistics, trends, evolutions and incidences, but our job is fundamentally forward-looking. We are trying to figure out what the future will bring us and all things past are but food for thoughts.
In this context, among all professional investors VCs probably have the trickiest job.
By definition VCs are looking for the next big thing that has yet happened. There should be no past data, no track record and no existing industry so to speak. There are some investment philosophies that can be (and should be) reused, such as virality growth. However, the past doesn't really tell us much. This is why VCs tend to have the fewest trained financiers among them, compared to the other sectors such as Hedge Funds, Mutual Funds or Buyout Funds. Instead, you find quirky people who are predominantly serial entrepreneurs or angel investors that happen to be very sensitive to the new trends.
While traditional finance trains financiers about market efficiency, random walk of stock prices and ultimately futility in doing anything but investing in a well-diversified market portfolio, VCs carry few of these thoughts. It's not that they don't understand them. In fact, keeping an unbiasing habit is just as important for VCs. However, they cannot be trapped into the passive mentality that everything has been priced properly and what's left is simply random.
VC investments are at the earliest end of hopefully a new industry sector or even an industry. One cannot expect the pricing, whether it's pre-money valuations or the amount of courageous engineers investing themselves in certain startups, to be efficient. Everything is in the move and consumers' reactions to such new services, such as Uber and Airbnb, evolve constantly. And the expected returns usually fall in a very distant future, such as the 10-year down the road argument made by Peter Thiel.
VCs have to be therefore much more forward-looking than the rest of their financial service peers.
But human beings are prone to stay the course. The more success one has, the more one tends to stay in the same operational mindset. While the quants have statistical tools to help them unbias and examine more properly whether their past success was a mere coincidence, the VCs do not have such luxury since most successful VC investments are one-of-a-kind in themselves.
For example, VCs who were able to profit substantially from their investments in Facebook, they weren't really able to do any ex-post statistic analysis to see if they merely got lucky or not because it's only a sample of one. How much of that investment decision experience might help them in future investments remains also unclear. Facebook ultimately is a narrative, a story, built on the demise of Friendster and Myspace. Looking back it's easy to say why Facebook was the last company standing, but one cannot really apply the full analysis to the future because for sure the next viral startup won't be in social networks.
The VCs should then be very careful about their success, much more so than other professional investors. It's so easy to brush away new ideas that don't fall within their cognitive space. For example, many successful angels in the Valley famously passed on Airbnb due to the obvious security concerns, which turned out to be irrelevant as human beings do trust each other enough for the Airbnb model to be working with acceptable negative incidents.
How can VCs stay forward-looking then?
One thing I learned from my mentor Mark Bivens of Truffle Capital is that one should really listen to the young generations. It sounds easy enough as the youngsters will grow to be the next-generation consumers and their opinions are very important to VCs, but in reality it's so difficult to practice. Other than the incumbent mentality, most VCs also have their own families and are used to more or less disciplining their children. It takes great openmindedness to really listen to teenagers. And that's exactly what Mark did in front of my eyes.
We had this tall, slim high-schooler coming in for 2 weeks of internship, which is a common practice here in France. Being French, he was apparently respectful to the beautiful office and adult professionals and appeared self-restraining initially. Without any warning, Mark started inviting his opinions on certain startups and applications. He was a bit unsure in the beginning but as he began to realize the geuine interest that Mark had in his opinions as a teenager, he became really engaged in providing feedbacks for the remaining days of his internship.
As part of the small circle of these on-and-off conversations – we all camped in Mark's little windowed office for those 2 weeks – I picked up at least one thing that has shaped my investment philosophy.
I asked the young man whether they're worried about their data being used by Facebook, Gmail or Snapchat. In other words, I was interested in their views on privacy, a hot topic today in the tech world.
He simply shrugged. He said he and his friends never worried about that. They believed these big companies would behave properly and if not, they would get punished – he didn't even bother worrying about who were gonna be the punishers. For them, they cared about the products and services. If they're good, they'd use them. Simple as that.
What's presented to me was a generation that grew up with ubiquitous connectivity and social networks over which they're already sharing their private lives to the public, much more so than any of the older generations. And as the society morphs into an overload of private information disclosures, the downside of exposing oneself seems to be diluted.
For example, when the first batch of cellphones armed with cameras became the perfect sources of improper distribution of private nude photos, victims abounded. But as the even more powerful smartphones swept through the entire world and zillions of private nude photos became potentially available, people lost interest – the flooding supply has diluted the demand and people move to the next erotic thought.
All of these views change constantly while the senior legislators in the European Commission spend years pounding on a 1000-page privacy law. But what's the use of such regulations if the next generation has a completely different view on privacy?
And it's already happening in China. Due to the quantum leap of the country's economy, billions of people skipped the PC-Laptop-ADSL-Internet era and dived directly into the mobile age. In such a mobile age, they do not distinguish among professional, private or family lives. Everything is mixed onto the same platform called WeChat. And this is less a distinct part of the Chinese culture but more of a mere result of the economic quantum leap. When opportunities abound, people use a single identity to pursue all possibilities. It's actually counterproductive to separate private and public lives.
And if we're just regular adults, we can have whatever opinions of our own on these trends. But if we're VCs, we cannot afford to ignore them or simply dismiss them, because there might lie the next supernova startup.