What makes a great investor?

By boris, January 06, 2014

As someone who is still relatively early in his investing career, I often think about what qualities set successful investors apart from the rest. Good investing doesn’t just happen. And while luck may help at times, it’s not the answer. Here are few key ingredients that I consider important for being a great investor:

Live in the future

Paul Graham advised start-ups to “Live in the future, then build what’s missing.” Once you’re living at the leading edge of a rapidly changing field, you’ll see things that are missing…challenges or frustrations that need to be solved. And, once these problems are solved, they’ll seem very obvious in retrospect. This same advice applies to investors as well. You can only create above-average returns if you invest in companies that are ahead of the mainstream.

Have a well-defined investment thesis

Fred Wilson once wrote, “So many folks in the venture capital business are sheep that just want to follow the herd. They are momentum investors purchasing highly illiquid investments. That is a recipe for disaster.”

In order to not follow the herd, you need a strong set of convictions to serve as the foundation for making bets, and then following through on them. For Version One, I’ve created a map of what particular areas we should focus on and where they’re going over the next few years. Then, I can evaluate each potential investment within the context of this map/thesis.

Stick with it

Not every investment is going to be wildly successful right away and one of the hardest things to do in the venture capital is hence to stick with a struggling investment. However, if you’re going to be successful as an investor, you need to realize that once you are in, you’re in. There’s no turning back, or ignoring a flailing start-up until it just goes away. Of course, it’s much easier to stick with your guns, if you’ve made the initial investment based on your own core principles/investment thesis, rather than simply reacting to market trends and current momentum (point three).

Be both a cheerleader and a critic

There will be times when your portfolio teams need an enthusiastic backer and a quick pep talk. Then, there are other times when honest, sometimes even harsh, feedback is necessary. I think an investor needs to be a start-up’s biggest cheerleader and their most honest critic. You can’t just be one or the other: praise without honesty are just empty words. Yet, a constant focus on the negative won’t generate the results you want either.

Remember who runs the company

Successful investors are usually active investors; they show up at board meetings, respond to emails and phone calls from the founders, and constantly think about the company and the ways they can help. However, the exact level of participation is a delicate balance; an investor should never cross the boundary of getting too involved. At the end of the day, the entrepreneurs run the company; the investor is an active bystander. Founders make the ultimate decisions; investors can only advise.

Those are the five essential ingredients that I’ve been thinking about lately. If you have other thoughts, share them in the comments below…

 

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  • rh

    Great post and relevant in today’s investor world. Pointers are great and a timely reminder for newbies on the investment front.

  • Steven Forth

    The real challenges here are ‘to live in the future’ (even if it is here, just not evenly distributed) and to ‘have a well-defined investment thesis’ – both of these are difficult to execute on.

  • bwertz

    Fully agreed – living in the future is probably more of a character trait / interest that you have or have not, developing an investment thesis is very often simply a result of discipline

  • Steven Forth

    Discipline and vision. I was impressed that you have publicly shared some of your own investment theses. Wish more people would do that but understand the reluctance to do so. I wonder if there is an opportunity to create a members only website (possibly as part of an angel group) where invest theses can be discussed and tested.

  • bwertz

    Interesting idea – I know that some people use tools like Hackpad for that but could be broader and more open.

  • Steven Forth

    I wonder if a formal Scenario Thinking approach would be useful in structuring investment theses. I am thinking here of the approach developed at Shell and exemplified by Peter Swartz and GBN. There is a city in the Netherlands that requires major new buildings to be ‘viable’ under several different future scenarios. Could one construct a portfolio that promised good returns across several scenarios I wonder. Example: Apple will continue to lead in mobile UX or Google’s ore open ecosystem will eventually out innovate Apple. One can construct arguments for either scenario. Or native apps will always outperform HTML5 vs. HTML5 eventually catches up with native apps. OK, boring examples, but the idea is to call out various possible scenarios and test the investment thesis (and portfolio) against them. This will need to be combined with the ‘moneyball’ approach that many are advocating.

  • bwertz

    Probably interesting approach for public companies, harder to do for private co’s.

  • Troy Hollenbeck

    What’s the most exciting idea in business startups? The entrepreneur or the business itself?

  • bwertz

    Always the entrepreneur.

  • Aging Angel

    A good post but, I think your last point goes a little too far. After 20 years as an early-stage investor there is no doubt in my mind that allowing for “Founders make the ultimate decisions” is a surefire way to lose your money. If one is an active early-stage investor then contributing to those decisions is critical. Having the power to stop bad decisions should be an integral part of the investment terms for any proactive early-stage investor. Using that power is essential. Nothing hurts me more than when I am in an investment syndicate with less experienced investors who are reluctant to use their veto powers because “Founders make the ultimate decisions”. Investors can and should act, not just advise. Yes, it is a challenge to determine when because just as the Founder is not always right it is very certain that the investor is not always right. Yet, sometimes we are and just like the entrepreneurs we back, we must have the courage of our convictions.

  • bwertz

    mmmm, you might be investing into the wrong entrepreneurs / with the wrong co-investors – don’t think that this strategy will work.