From: acquiredfm
Investing in private markets, particularly early-stage venture capital, offers distinct advantages over public markets due to its relatively illiquid nature [00:00:09]. While the venture capital market is not necessarily inefficient, the competition to invest in seemingly great companies is fierce [00:00:32]. A key reason for pursuing venture investing is its alignment with a skill set focused on making long-term, qualitative judgments about the future [00:01:11].
Envisioning Future Value
A significant aspect of venture capital involves identifying substantial disparities between a company’s current valuation and its potential future worth if successful [00:01:30]. This requires an ability to envision what a business could look like in 10 years if it achieves success [00:01:38]. This type of forward-looking, qualitative analysis is different from the more quantitative analysis typical of public markets and aligns well with certain investor profiles [00:01:47].
Probabilistic Nature and Skill Alignment
Venture capital is a probabilistic endeavor focused on finding investments with extremely high expected value [00:01:55]. Although the average outcome might be a loss, enough successful bets can lead to great returns [00:02:06]. This contrasts sharply with traditional investing principles that emphasize avoiding permanent capital loss [00:02:37]. Some investors may not be suited for a portfolio demanding consistent, moderate returns across all holdings, finding the probabilistic nature of venture capital more fitting for their skill set [00:02:46].
Applying Traditional Lenses to the Future
Applying traditional investing principles to venture capital means considering a business’s potential worth if it succeeds, along with the probability of that success [00:04:18]. This necessitates visualizing:
- What the business’s financials could look like down the road [00:04:51].
- The potential “moats” or competitive advantages it might develop [00:04:56].
- The capital required to reach that point [00:04:58].
- The likelihood of competition and how the company might evolve [00:05:00].
This forward-looking approach is crucial because readily available quantitative information about the present does not provide a definitive advantage [00:05:17]. A knowledge advantage in venture capital stems from being better at making qualitative judgments about the future [00:05:27]. This requires evolving from a mindset of “buying dollars for 50 cents” to one that embraces the challenging aspects of qualitative and future-oriented assessment [00:05:58].
Ultimately, successful investment strategies involve gravitating towards endeavors that suit an individual’s personal make-up and skill set [00:04:04]. For some, this means being an optimist who enjoys imagining a company’s potential success, while for others, it might involve identifying undervalued or distressed assets [00:06:14].