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.
I could not agree more. Whatever type of investments one makes MUST be approached this way. Discipline and conviction allow the investor to focus and to become focused on his/her specialty and thereby minimizes risk. Throughout history this has been the rule, rather than the exception, of the great investors.
Excellet post.What you are expressing in another form is Warren Buffet’s famous “circle of competence” theory – know what you know and know what you don’t know – and don’t stray far from what you know – no matter how good the opportunity looks.In the public markets, I’m able to go further afield from the very basic core of the knowledge base – because mistakes are quick to be rectified in a liquid market. But in the private world – mistakes and a lack of discipline will kill you.I have a friend on the West Coast who has a ridiculous batting average in terms of the VC deals he has done – it is completely antithetical to the typical VC outcome curve (you know a few winners pay for all the strike outs) and when asked how he has managed to do this the answer is pretty simple: he sticks to one particular sector (total discipline) where he has a massive amount of conviction. When things start going wrong – he thinks more like a hedge fund manager and punts rather than sticking with the investment till the bitter end (he has no investors or partners or next fund he needs to market) Why does he have so much conviction? Because he has been doing deals in the same space for over a decade – he knows everyone in the space – an has seen every business model in the space.Pretty good model.
Yes, its one we are trying to emulateFred
“When things start going wrong – he thinks more like a hedge fund manager and punts rather than sticking with the investment till the bitter end.”Is flexibility the opposite of conviction?
I’ve recently begun doing angel investments — $25 – $100K range. I find myself saying “no” a lot, not because the ideas aren’t good but I don’t feel like I can help them very much, so I pass. I guess I have my own investment thesis without actually knowing it.
Try to write it down some dayIt will be very helpful to youfred
Good idea, will do.
Good post, Fred! Every business needs a well-thought plan, whether running a lemonade stand or a multi-billion corporation.My question is the following: can you have too much conviction, to the point that it blinds you? Investments don’t always pan out for whatever reason even if you still believe in the product. Is that when discipline takes over?
You can have too much conviction if you are wrong.But I’d rather have conviction and be wrong than have no convictionfred
so is USV going to pull the trigger on hypem?looking forward to seeing the rest of the new porfolio…
Thanks Fred. Excellent post. But I think you short-changed yourself by glossing over what sounded like a very thorough bit of discipline ahead of ever arriving at conviction. What you beautifully described sounded like a bookend process. A very good one. With admirable results. Thanks again for sharing.
Great minds think alike I guess, Lindzon recommended a book; “A Zebra in Lion Country”, by the guy that ran Acorn (Ralph Wagner). I picked it up. Ralph preaches discipline in one of the chapters. I was very impressed by the book, it was a great read, for the young “go getter” investors.
Ralph Wanger…. you can be a timid zebra, stay at the center of the herd, and eat well-grazed, well-trampled grass, or you can live on the edge of the herd, eat fresh grass… but then you’d better be on the lookout for the lions!
Thesis is much less important for an individual investor than for a professional. For you, your thesis defines what you bring to the table to companies and investors, in terms of expertise, relationships, and portfolio characteristics.For individual investors, asset allocation (disciplined diversification, as opposed to disciplined specialization on a thesis) assumes critical importance over long time horizons.Investing, like poker, is a game of disciplined patience and calculated, well-timed aggression. A lot of the time, Mr. Market serves up a lot of mediocre opportunities. When you get the right opportunities, you need to be aggressive enough, quickly enough, and when your thesis is right, tenacious in holding on to your conviction.
Having conviction and discipline is a sign of maturity. Mature, stable businesses define themselves… they know what they can do and what they can’t do and they stick to it.We’re a software development firm that works with a lot of seed stage companies. Incidentally, we’re offered a lot of cash/equity deals. Although a lot of them are really interesting, and we’re tempted to do them… we have to turn them down for one reason or another.On top of that, we’ve seen a lot of offshore projects fail, so we’re very picky about who we do business with. Our stubborn adherence to our own rules has lost us a fair amount of business, but it was something we had to do. Poor businesses just chase cash… they over commit and jump into situations expecting the best-case scenario. The dot com bust really demonstrated that to me. Everyone thought their idea was a cash machine (including some very smart investors) Telecom companies had 10 years of inventory on hand expecting to make bank, but we all know how that went. I know people who were poli sci and psych majors who went into programming back then because they heard there was a lot of money in it. They ended up being crappy programmers and were hit the hardest when the bubble burst.This short sighted, get-rich-quick, unrealistic optimism comes from not defining exactly who you are and what problems you solve. There are a lot of temptations to divert you from your goals, but there’s nothing that can’t be accomplished with the right amount of conviction and discipline.After all, isn’t that how Kwai Chang Kane got admitted to the monastery?Raza Imamhttp://BoycottSoftwareSweat…
Great post. I am going to try to comment more often. I am a long time reader, probably have read 80% of VC’s posts since the very beginning, but I comment so rarely. Hmmm, conviction and discipline; investments. My main investment is paying off my mortgage, does that count? Maybe not, so ok, my even more important investment is my job. Trying every day to do a great job at my job, because it has monetary implications, and even more important, social implications. I have always understood that social connections were more valuable than anything else. So how do I deepen my convictions in my job? (I’m going to wait on the discipline part.) I can write an investment thesis. I can take the time to write: what is this job about? What am I going to do here? What am I NOT going to do here? What’s worth growing here, and how will I do this? I find if I write things out, and then stare at what I write, the discipline comes – not perfectly – but quite naturally. Look at the thesis daily – it grounds me. Look at it, do it. So that is the next step: writing down my investment thesis for my job. Thanks, Fred, Smarty-pants.
Also true for entrepreneurs.It’s easy to be distracted by business ideas that seem to be exciting at the time.But you’ve got to have goals and stay focused.
such a good post. conviction is so important, but make sure you start with that first while it’s pure. don’t back into it because of price or losses.