Betting your Beliefs

Here is the second-best thing any entrepreneur has ever said of me, to another entrepreneur: “you should talk to Jerry. He’s one of us.”

I was an entrepreneur once, I have a different job now. But the implication that I was like them, that I understood them, that I would have empathy for what they are trying to do, was comforting. I’ve been in their position.

My friend Steve Schlafman put up a post yesterday, “Venture Investments are Not Bets.” In it he says

Countless times over the last decade, I’ve heard other venture investors refer to their investments as “bets.” Earlier in my venture career, I was absolutely guilty of this because I wasn’t being mindful and probably lacked some necessary empathy. At the time, I don’t think I truly appreciated what it meant and took to be an active investor and support a company over the long haul…We, myself included, should never view our work as gambling given how much time, effort and energy goes into building companies and long-lasting relationships with founders.

If you read my blog, you know I talk about betting a lot. I’ve likened angel investing to betting on horse racing, I’ve tried to figure out what lessons about portfolio management I can learn from assuming outcomes are randomly distributed, I’ve tried to get a better handle on follow-on investing from the Kelly Criterion–best known as the formula Edward Thorp used to Beat the Dealer in blackjack. Managing a venture portfolio has much to learn from managing a stack of chips at a gaming table. And, definitionally, the unit of gambling is the bet.

I understand Steve to have two points: saying that your investments are “bets” is an objectification of the team that is building the company, a way of distancing yourself from them as people; and that gambling is a passive endeavor.

The latter point I simply dispute. Gambling has two parts: working to maximize your edge, and luck. My interest in gambling is in the ways people have figured out to maximize their edge over the course of human history; this knowledge is more like folklore than science and so seems like a fruitful vein to mine. It is portfolio-level thinking.

But the former worry is real. I saw it when I raised money for the company I helped start and I see it in talking to investors now. Thinking about founders as pawns on a board rather than people working their hardest to make their visions real is insulting and wrong. But I don’t necessarily think this is the only way you can think of betting.

When I invest in a company I always wholeheartedly believe it will live up to the vision of the founder. I wouldn’t make the investment otherwise. But I know I am going to be wrong most of the time. I know that from experience, from 20 years of watching other VCs invest, and from reading pretty much everything on the history of venture capital that I have been able to lay my hands on. This is true no matter how much time, effort and energy I put into it. My involvement helps: there are things I can do, introductions I can make, viewpoints I can articulate. I can improve their chances of success, but not to certainty…anyone who has been around startups knows that hard work alone is no guaranty of success, there is always luck.

With every company I simultaneously believe this company is going to succeed and know this company will unfortunately most likely fail. Sometimes when I’m trying to make a decision these two different points of view lead to two different results. The only way to address this is through abstraction, by thinking about portfolio mechanics and probabilities of success across many investments, not the probability that any single one of the founders I back will succeed.

When I think about gambling, about making bets, it is at this level of abstraction. The portfolio-level thinking is a necessary distancing, allowing me to both believe 100% in a founder and not get wiped out when I’m wrong.

But I don’t distance myself from the entrepreneur as a person. Every startup founder knows their idea is thin at the very beginning: no data, no resources, no proof. There is no rational basis for any investor to make an investment in any given startup. Most startups fail and most investors won’t invest. When an investor invests in a startup it’s because they believe something that the other investors don’t believe. And in the absence of any business proof, what they believe in is the founder.

I invest because I believe in the founder, despite the lack of evidence, despite the objective chances of their success. Believing in a founder is the opposite of distancing myself from them or putting an abstraction layer between us, it is embracing who they are and what they’re trying to do.

But I’m still taking a chance, making a bet. There is that element of luck, always. It’s just that I have decided, generally against all rationality, that the founder has managed to shift the odds in their favor. When I believe this it is because they have convinced me of it. And I think this is the greatest possible expression of empathy: choosing to believe what they believe, when all my analysis and everyone I respect insists that there is simply no reason to believe it. I put myself in their head and see what they see. When I bet, I bet on founders.

Here is the best thing any entrepreneur has ever said of me. Over coffee, a propos of nothing.

“Thank you for believing in me. For taking a chance on me.”

I took a chance, I made a bet that she could change the world, I believed in her. I won’t apologize for that.