Investment Pace & Premium Hands
MARCH 27TH, 2019
One of poker's most crucial decisions is, do I see the flop or don’t I see the flop? There are 169 different two card starting hand combinations in hold’em poker. If you play hold’em correctly, you’re going to be selective and toss away the vast majority of hands you’re dealt.
We've been investing in early stage companies over two funds since early 2013. Over that time, we have made a total of 19 investments, for an average of just over three investments per year. This is directly in-line with our strategy of making one to two new investments per partner per year. We estimate that we review 250 deals per partner per year, so this also means we passed on 4,481 potential investments. We're only playing premium hands.
We make early-stage investments, and we're not passive investors, which means each investment requires a lot of personal involvement. Over six year period, one partner can only take on so many projects. If you assume the average hold period for an early stage investment is five to seven years and a partner leads one to two investments per year, any given partner will have between six and twelve portfolio companies to manage at any one time.
We believe that early stage venture capital done right requires active management- in a sense, we see ourselves as a service business in which the portfolio company is our customer. We need to be able to service that portfolio company properly, and that requires bandwidth at the partner level plus a bench of advisors that we can utilize to provide additional support.
This all means we have to be very cognizant about managing our investment pace tightly and saying no to most opportunities that come in and being really committed and convinced about the projects that we say yes to. We stay disciplined, only play premium hands and play those hands in manner to maximize our returns (to use poker parlance).
Doing this well is hard. Because we only make four to five new investments per year and expect to produce top decile IRR performance relative to our vintage year peers, something we have been able to do, we need to have a pretty high hit rate on early stage investments.
Our approach to making this work is an evolving thesis that tells us what to invest in and what not to invest in, having discipline and being unemotional in our decision making, and adding real substantial value-add post-investment.
This is not spray and pray, this is not following the herd, this is not momentum investing.
This is thesis-driven, active early stage investing, which has always produced the best returns over time and we believe always will.
