Three Characteristics to a Good Investor

By editor on February 20, 2018 — 5 mins read

Picking a good investor. There are, I think, four things that matter, and you should do your own diligence because these things are critical, especially when times are tough.

The first is, are they good pickers? And there’s now exceptional data from places like CB Insights and Mattermark. They will go and literally rank every single portfolio of every single venture capitalist to answer the question, “Is this a high-growth portfolio or not?” And I’ll tell you why it matters. But that’s number one.

It matters because, now, success begets more success. You are then surrounded by a portfolio of other great exceptional leaders. As they learn things, they can pass them off to you. It’s better to be within a group of winners. So it’s better to be, you know, the eleventh guy on the Warriors than it is to be the second guy on the 76ers. Always. So that’s the first thing.

What I would say on portfolio quality actually, 7 out of 10 companies are high-growth companies according to [CB Insights and Mattermark]. We’re number 1 in the entire industry. And I think what that means is we’re good pickers. So the diligence that we do and the thoughtfulness that we take to understand people and their businesses… sometimes it takes us a little bit longer than we would like, and maybe you would like, but I think we generally we get to good answers. And even when the answer is it’s not a good fit, we try to give as much feedback back to make it a fit. That’s the first thing.

The second thing then that I think you need to look at is, what is the percentage of that VC’s portfolio that gets follow on financing. And it’s so crucial. So as an example: Sequoia has the single best percentage of getting A’s financed to B’s. The single best. Spark is second, we’re third. And then everybody is a distant also-ran and we are like, two sigma above the industry average. Why is it important?

So, obviously, Sequoia has a fantastic brand. When they pick you, there’s a bunch of folks out there that will give you the benefit of the doubt. Hugely important when you need to raise more capital. But then you have to ask yourself, but what about from B to C? And there, what’s interesting, is Greylock is the best. We’re the second best, and everybody else is a distant also-ran, and Sequoia’s actually right below the industry average.

So what does that say? What it says is:

  1. a) you have to construct and be good pickers, and then,
  2. b) you have to help the portfolio companies in very specific ways so that you continue to get to that next tier of capital.

It’s not sufficient to just pick somebody because they can get you from the A to the B, if, from the B to the C you’re just as fucked as everybody else. That doesn’t work. And it’s not sufficient to pick the wrong person in the A, and then all of a sudden hope it’s going to work out in the B.

So it’s really important that you’re maximizing both those probabilities. So, again, CB Insights, Mattermark, look at the data, multiply those two things together and rank them. And it’s important for you, because you cannot afford to be in a situation where, in the absence of operational help, you could run out of oxygen accidentally.

And then, you want to have a situation where your venture investors have the benefit of the doubt with other investors. Because over a period of making enough good investments they will say to you, “Alright, I will give you the benefit of the doubt.” So I can call at the eleventh hour and say, “Listen, I know this is on the fence for you, but put in the five million. I’m telling you, we can help make it work.”

It fucking matters. Especially in times like this.

And then the other two things which I think are important to me, personally, is, number one is, are the people that you’re working with mapping to what you are as a person? Whether it’s your gender, race, ethnicity, or whether it’s your perspective and philosophy on how society and life should work? Because if you are going to be successful I think it’s really important that you pick people to bring along that are like you so then that your values are then further reflected.

Because success begets success.

And the last thing you want to do is create a successful person in someone you morally disagree with. And you do that by picking the wrong investor.

Anyway, you put these all together… I think we’re doing well. It wasn’t enough for us, and so we made the decision last year that we were going to migrate into not just being a venture firm but being more of a company. And in building a company, our model looks very similar to what Berkshire has built, or what Alphabet is building… which is basically, in our perspective there’s an opportunity to build a master brand in technology. Someone who has a really huge capital base, but a big vision around building things that create change in ways that we think are important.

And the way that we frame our mission is, what we are trying to do more than anybody else, is to basically advance humanity by solving the world’s hardest problems. And so we work backwards from, “What are those hard problems?”

Energy, healthcare, education, gender equality, whatever it is. And we try to find businesses that do that. We think that will create a lot of capital and wealth, and it’s important that then we control that versus somebody else who doesn’t have that sort of moral persuasion.

Because otherwise, bad things happen. And so we have to basically reallocate that in constructive ways. So over time, we’ll look like that. We’ll look like a company with a huge amount of capital that invests, that builds, that buys, private companies, public companies, minority investments, majority take outs. (29:10)

Posted in: Entrepreneurship

Editor's Note

These are Chamath Palihapitiya's words. They are probably some of the best thoughts on VC, business, and life, but were scattered around the Internet. They live now in this archive.