When it comes to making investment decisions, the science is clear. We make emotional decisions, and then we cherry pick data to back our decisions up. And I’ll be the first to admit, I’ve invested in plenty of deals based on emotion.
When a professional invests in a deal, they are testing a hypothesis – that the investment will go up in value, and that the rewards outweigh the risks. They develop a thesis, and after they test it enough times and have enough data, they create rules.
But let me tell you about a rule of investing that blew my mind. I was raising for a new venture fund – and I had already secured an anchor investor. I went to one of my friends who ran a large family office, and who had invested in many of my oil & gas deals. I gave him the pitch, and to my surprise, he smiled and politely said that they wouldn’t be investing.
I was shocked.
I had developed a deep relationship with this investor over many years and had provided stellar returns to their family office. When I asked why, he simply said, “We don’t invest in first time fund managers. You have a track record in oil & gas, but this is your first venture fund. The data shows that first time fund managers fail more often than they win.”
I’ll never forget what he said next.
“The number one rule in this office is to never lose money.”
He explained that even though we were friends, and even though I had made them millions in returns over the years, and even though he personally thought I would knock it out of the park, they would rather sit on the sidelines and miss out rather than lose money on a risky bet.
Now let me be clear. This multi-family office had billions under management. I was asking for a measly million or two to shore up my own fund.
But the fact is, they had a very specific set of rules and a deeply developed and tested investment thesis that they never strayed from. Ever. Even for friends. Even for people with whom they had done deals before.
Not ever. They were one of the wealthiest families I knew, and they aimed to keep it that way.
That simple statement – “never lose money” – haunted me in the days and weeks afterward. Sure, I had a great track record. But I didn’t have any rules. In fact, I rarely had a thesis other than trying to pick good deals from a sea of bad ones. I became pretty good at it, but it was clear I had a lot to learn.
From 2014 to 2017, I personally invested over a million dollars in angel and VC deals. I thought this made me good enough to create my own VC fund alongside my oil & gas firm. To earn the trust of professional investors, I needed more reps. I had done hundreds of oil & gas deals, and only a handful of VC deals.
It turns out, if I had kept that same $1MM and invested it into oil & gas projects, it would have been worth 5 million dollars at the time of my exit. I know this because I kept meticulous track of our internal returns over that time period.
Instead, I was plowing my hard earned money into risky angel investments – in a variety of industries where I had no specific knowledge. Some turned into winners, a few were losers, and the jury is still out on the rest of them. But that money is still tied up in companies that other people control with no clear path to exit.
The point is, if I had known about and followed the number one rule of this wealthy family, I would be a hell of a lot richer today.
I wouldn’t have invested in a single one of those deals because there was no way that I could guarantee that I wouldn’t lose money. Even worse, part of the mentality of VC investing is that you know you will lose on a high percentage of deals that you invest in.
Since that day, I’ve been much more disciplined with my capital. I don’t invest unless I have a clear thesis and have answered an entire checklist of hard questions. Every time I make a mistake or identify a weakness in my decision matrix, I add another question to the list.
If you don’t have a list of hard questions to ask when making an investment decision (or any major business decision), now is the time to start building your own list.
I’ll give you my favorite to get you started:
“What is the likelihood that this will lose money?”
If the answer isn’t zero, maybe you should take a page out of the family office playbook.
Swiping left on losing,
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