Conviction and Discipline

I ran into an old friend last night and we got to talking about the traits of a great investor. He said he thought the number one trait of great investors is discipline. I agreed that was key. But I added that conviction was also critical.

Conviction and discipline are two sides of the same coin. I think you need to start with conviction. When Brad and I started Union Square Ventures back in 2003, we spent six months outlining an investment thesis. We asked ourselves and others a bunch of fundamental questions. Did VC make sense in the new world of IT where commodity infrastructure and open source software made starting web apps and services very cheap? Did intellectual property still play a role in defensibility of technology? What would the architecture of business on the web look like in a world of interconnected web services? We must have written down twenty or thirty questions like this. And we spent months going through them, working out in our minds what was going to work and what was not. And at the end of that process, we wrote an offering memorandum and went out and raised our first fund.

The benefit of that process of building an investment thesis is that when we closed the fund and started investing we had conviction. We knew exactly what we were going to invest in and what we were not going to invest in. We’ve evolved our investment thesis over the past five years, mostly tightening it up and narrowing it even further to be honest. But the basis tenets of it have not changed much. We’ve blogged quite a bit about our thesis on the Union Square Ventures weblog and here are a series of posts by Brad on this topic.

But conviction isn’t worth anything if you don’t pair it with discipline. Once you have a thesis, you need to stick to it. There are all kinds of temptations that come along to invest outside of the core investment thesis. You have to resist them. Discipline is about sticking to what you know and what you believe in totally and completely.

It helps to have partners, not many, but a few, to impose the discipline. I know that at my heart I am a deal doer. I like to make investments. I like to find and work with new companies. Left to my own devices, I could pull the trigger on a new investment every month, maybe even more frequently than that. But my partners remind me all the time that we have to pick our shots carefully. They make sure we run each and every investment opportunity through the lens of our investment thesis and evaluate them in that way.

The result of our conviction about what we want to do and our discipline in doing exactly that and not anything else has resulted in the creation of a portfolio that I am very proud of. We will be announcing several new investments shortly which I am equally proud of. Is this the best portfolio out there? No, of course not. But it is certainly the best portfolio we could construct given our view of the world we are operating in and that’s exactly what we want to be doing.