Active vs Passive Investing

When you buy a stock in the public markets, that is passive investing.

When you buy 10% of that public company in the open market and then seek to obtain board seats, that is active investing.

When you buy a REIT, that is passive investing.

When you buy vacant land, build an apartment building, and lease it up, that is active investing.

When you buy a treasury bill and collect interest, that is passive investing.

When you make “hard money loans” to developers, that is active investing.

When you toss some money into an angel deal that others are leading, that is passive investing.

When you lead a seed round and take a board seat, that is active investing.

Both models work, but when you do passive investing, it is best to invest in liquid markets so you can get out when things aren’t going your way.

When you do active investing, you are most likely investing in illiquid markets and you have to invest your time, energy, and intellect to make sure things go your way.

It is hard to “beat the market” when doing passive investing. That doesn’t mean you can’t make good money doing passive investing, particularly over a long period of time.

But like everything else in life, if you really want to make big gains with your investments, you are going to have to invest your time, energy, and intellect as well as your capital.

And that means being an active investor.

That’s how I like to invest and it limits how many investments you can make. It is hard to scale “active investing.”

One of the things I see in the angel, seed, and VC markets is investors and firms trying to scale their investing while pretending to be active investors.

I don’t think that is possible.

You have to either choose to be active and concentrated or passive and diversified. Either model works, but I think you need to be one or the other. It’s not really possible to be both.

#VC & Technology

Comments (Archived):

  1. Elia Freedman

    I think what a lot of entrepreneurs forget is that starting a business is active investing too, whether seeking investment from a third party or working on an indie business.

    1. PhilipSugar

      That’s the most active of active investing.

      1. Nick Devane

        And the hardest to scale 🙂

        1. PhilipSugar

          Who cares about scale? Not me.

    2. fredwilson


    3. sigmaalgebra

      Darned right.

      1. ShanaC

        ignore the other post…I have a spoof

    4. ShanaC

      Why do you think they forget that

    5. Joe Cardillo

      Well said…one thing a couple of investors have said to me that stuck (in context of a pitch deck) – make sure you explain that active investment, because if you can explain it directly and simply, it signals what you’ll do when the chips are down and you need to be all in.

  2. PhilipSugar

    I’ve inferred you’ve done some active investing outside of venture capital, i.e. real estate. I need to start doing that. Do you have any advice there?

    1. Vendita Auto

      Real Estate, Don’t “Put all your eggs in one basket and WATCH THAT BASKET”

      1. ShanaC

        not the actual shana. I’m the actual Shana. *sigh* I have a spoof.

    2. fredwilson

      have a thesis on a market and a type of tenant you want to serve. then work with professionals you know and trust to develop the asset. and don’t use too much leverage. we avoid all leverage but that’s not a great way to make money in real estate. it seems like some leverage but not too much is the best approach.

      1. JLM

        .Leverage in real estate is like being a paratrooper. It is the fastest way to get to the objective but it entails a bit of risk on the journey. That is why paratroopers have a reserve chute.Money — equity or debt — has a price tag. Even your own money has an opportunity cost.Today, is a day to pack on as much long term, low cost, fixed rate debt as you can find. That is the key, or course. Rates are low but the hurdles to closing a real estate loan are higher than ever.Leverage has to be evaluated on the basis of DCR from the free cash flow. If you have a DCR of 1.75 and a 75% LTV, then that is, literally, a AAA rated security.The pros look to the credit of the underlying tenants and evaluate them from their perspective as individual credit risks. Make a matrix and see how many local, regional, national credits you have. Don’t forget the vacancy.You are ultimately investing in the credit quality of your tenants. Leases are derivative securities which then are the basis for a mortgage on the property.It is really very simple financial analysis which the amateurs never bother to do because they don’t know how to do it.It is way easier than venture capital.JLMwww.themusingsofthebigredca…

        1. PhilipSugar

          You are right but I have not found the right theme. For instance my brother a professor rents to foreign grad students. That is his advantage. I think real estate is a local game you need to know your market.

          1. JLM

            .Invest in storage at a commercial level.Few moving pieces in the physical plant.No utility costs.The site selection is easy and the competitive analysis is easy. You can call the competitors and see what they have available. Any occupancy above 85% is a call for more inventory.You can grow the physical plant incrementally. You can’t add onto a low rise office building but you can with a storage facility.Once you have a tenant, they have to work to leave you.No new tenant improvements when your tenant leaves.You can raise rents easily. Raise rents on 1 December and nobody realizes it.Normal storage ROIs are 3-400 basis points higher than other forms of commercial real estate.It is not sexy and nobody in the real estate business wants to do them.Storage.JLMwww.themusingsofthebigredca…

      2. PhilipSugar

        I too have avoided all leverage but it seems in today’s interest rate environment that is the way to take advantage of low interest rates.

  3. awaldstein

    Raised some capital over the last few years from passive investors by nature and experience demanding to be active.Being active requires pedigree and experience and doesn’t come with having a lot of capital per se.There is a new breed of people thinking that because they have capital then by definition have wisdom to share.Not by definition true of course.

  4. Dan Moore

    And, of course they aren’t mutually exclusive. You only have a certain amount of energy and time to expend, so if you are focused on one aspect of your life (health issues, family problems) active investing might be a bad idea. Whereas at other points you might have more energy and be able to pursue active endeavors.

  5. Joel Monegro

    “Put all your eggs in one basket and WATCH THAT BASKET”

  6. Shalabh

    Is that why USV stays sub-200 million?

    1. fredwilson


  7. LIAD

    You can somewhat scale active investing by training people to do it on your behalf, or creating a partnership structure.Perhaps going forward sophisticated AI could serve the same purpose.

  8. JLM

    .Another consideration is the nature and source of the money. The typical VC is not investing his own money. It is passive money given to him by pension funds, endowments, and other sources of capital.[In many instances, these passive sources of capital cannot invest directly or manage an enterprise because of UBIT and their charters.]When the money is your own, even when invested in seemingly passive endeavors, there is a different view of the world. Not always good as you may be willing to accept a diminished return through laziness with your own money which would otherwise be an embarrassment if it were OPM.VCs have a good deal. They get paid a babysitting fee (management fee) and a carried interest (when successful) for simply agreeing to manage somebody else’s money. No disrespect intended but it is a sweet arrangement and without it, the truly passive LPs would have a very difficult time finding somehow or someone to steward their money.One of the problems which occurs today, in spades, is people with money think they have the expertise to actually be active investors. The arrogance of investors who think they can assist a CEO in running a company — something they personally have NEVER done in their lives — is breathtaking.In the high rise office building business they all become design experts and want to go to Italy with you to pick out the stone and visit the quarries and fabricators.In the big time commercial real estate business, I used to say:”When the dentists (lawyers, VCs, accountants, your pick) get in, get out. When the pension funds get out, get in.”It takes as long to be able to develop the skill set to actually participate in corporate governance and to make a difference as it does to learn the investment business. They are not the same thing.Corporate governance is the lowest form of active participation. Picking winners and serving on their boards are two distinctly different skills.Entrepreneurs, founders, CEOs know this and keep silent about it. Frankly, they laugh behind the investors’ backs.[Pro tip: This is why having board members who have been CEOs is so powerful. They can actually assist you because they have bled from the same wounds. If you’re trying to decide which model of BMW is the best for you, the VCs will be way more helpful.]The entrepreneur, founder, CEO invests something completely different — their hearts and souls, their ego. The most active investment you will ever have is to invest in yourself, start a company, raise that baby in your own image and then teach it to crawl, walk, run.One day, if you are lucky, it will run itself to the paywindow and you get to watch the next guy walk off with your baby. All you get in return is a bunch of money which is a weak return on the investment of your soul.JLMwww.themusingsofthebigredca…

    1. Richard

      Both the 2 and the 20 and the federal taxing at capital gains rates are hard to justify. The origin of carried interest can be traced back to the 16th century, when European ships were crossing to Asia and the Americas. The captain of the ship would take a 20% share of the profit from the carried goods, to pay for the transport and the risk of sailing over oceans.

    2. PhilipSugar

      I really love this: “The arrogance of investors who think they can assist a CEO in running a company — something they personally have NEVER done in their lives — is breathtakking.”

      1. LE

        something they personally have NEVER done in their lives — is breathtakkingBut yet many of the people that are running a company have never run a company before. I think it’s a paradox. If the investor had actually run a company they would much more worried about investing in someone who had never run a company before. The way it looks to me “they don’t know what they don’t know”. I deal with many of these people that have never run a company before. They are all smart and really top notch people. (“Marry my daughter grade”) But it’s clear that they lack certain basic business skills. Things that you acquire over time. Luckily they have enough money to learn as they go along trying to build a company. That money allows them to paper over many mistakes.

        1. Sally

          Yes, and many VC like “active” investing in inexperienced founders. Call it puppet mastery.

        2. JLM

          .The big difference is the new CEO is learning every hour of every day. She wants to learn because she has to learn. And, there is usually a “correct” way to do things.I can teach a monkey to run an infantry/combat engineer platoon, develop real estate, or found/run a small business. If they are willing to learn.I remember being a new company commander in a battalion in which one of the other companies was run by a guy who’d been a Captain for 8 years and was on his third company command.He became my best friend. What I knew was that he knew more about this stuff than I did.Two company commands later, I could dial it in from the O Club and used to be there by 3:00 PM. My unit made 100% on its ARTEP (annual test from Dept of the Army) that year.This is also why organizations like YPO, TAB, Vista are so valuable — peer to peer CEO info exchanges.Michael Dell was in the same YPO chapter as I was. There were three guys who became billionaires in the same chapter.JLMwww.themusingsofthebigredca…

          1. LE

            What I always like about your comments is that they typically draw upon something that you did many years ago. As opposed to something that you read about or that you learned in school. [1] I remember almost nothing that I learned in school but everything that Iearned in life or business life. It’s amazing that I can’t remember the ending of the movie I saw three days ago or last night but can remember in detail things that I have picked up over the years.[1] Maybe because I focus on those comments. Now that I think about it you also rattle off history (which you have obviously read) and current events (which I do as well).

          2. JLM

            .I went to church this morning and I couldn’t tell you what the sermon was about if my life depended on it. I thought it was a good one.I was an engineer in college, so all of my interest in history is reading and studying leaders. I think the study of leaders is the “monkey see – monkey do” way to learn about leadership on the cheap.There are always secrets nobody knows. And these things are very insightful.I have met a lot of people and I am not particularly impressed with anyone. We are all quite normal and ordinary. Ordinary men rise to the challenge in extraordinary times and, often, sit back down.JLMwww.themusingsofthebigredca…

        3. cavepainting

          A guy who has never done the job before but can learn at high speed, and has the humility to understand he has a lot to learn has an advantage over the guy who thinks he knows how to do it.The paradox is real if we assume experience drives better outcomes, but it is also illusionary as it is not the experience that counts the most. The thing that drives success is the ability to learn and constantly relearn. You can do it at 20 or at 60. Just that as we get older, it is harder to set aside memory and the biases that it engenders.

      2. Dan T

        agreed 100%. Great VC Investor (note it’s not plural) – challenged my assumptions, asked great questions, introduced me to people that had experienced similar challenges and succeeded – always made me think and helped me decide what to do. What he never did: Tell me what I should do.Most of the rest of them . . “.have you tried this, you should consider this, what about “. . . .endless “ideas” based on a very weak foundation.Granted, this is based on a small sample size – 5 active VC board members across two companies. 1 was amazing, 3 were “ok”, 1 was a knucklehead.

        1. PhilipSugar

          See my comment to LE below. A great VC is critical to the success of a venture backed business.

    3. sigmaalgebra

      > … without it, the truly passive LPs would have a very difficult time finding somehow or someone to steward their money.The description I most heard was that the LPs regard VC investing as alternative investing, for comparatively small change, maybe not to miss out on a part of “another Google” if and when such happens. Otherwise, the LPs are very conservative MBAs trying to follow modern portfolio theory.

    4. LE

      VCs have a good deal. They get paid a babysitting fee (management fee) and a carried interest (when successful) for simply agreeing to manage somebody else’s money.But saying that someone gets “a good deal” doesn’t take into account the work that is involved in getting to the point where you can “get a good deal” or the work that a VC has to do to keep deals flowing or to manage the investments. And calling it a “babysitting fee” and reducing it to that (typically someone that takes care of kids for $10 per hour) is not acknowledging the difficulty involved. “Babysitters” don’t wake up at 4am worrying about the kids they babysat the night before (well maybe they do but you get the point).No disrespect intended but it is a sweet arrangement and without it, the truly passive LPs would have a very difficult time finding somehow or someone to steward their money.That’s a bit like saying that being a rockstar “is a sweet deal”. Maybe to someone who isn’t a rock star that thinks it’s all fun and games. But not to the guy who has to play a gig even when he is feeling like shit and also (and this is important and relates to VC’s) to stay relevant and important (an important source of psychic income).In the high rise office building business they all become design experts and want to go to Italy with you to pick out the stone and visit the quarries and fabricators.Agree. There are things that are like this it’s what I call “I want to use the hose to wash the suds off the car after you scrub it and before you dry it”. I want the easy fun part.This is why having board members who have been CEOs is so powerful. They can actually assist youDoesn’t that also come with drawbacks? In other words they have their bias from their situation and are less likely to want to be reasonable and circumspective..

      1. JLM

        .I want everyone to have a good deal. That doesn’t mean it isn’t a good deal or that it isn’t earned through judgment and talent and skill. Still, it’s one of the best financial algorithms available without taking personal financial risk.Cry me a river for the guy who has to collect these fees. It beats hauling garbage for a living, no?Everyone brings their own experience and prejudices to whatever they do.”When you are a hammer, everything looks like a nail.”Nonetheless, people who have been CEOs and know what it feels like have more RELEVANT experience. I take offense at the notion that experience as a CEO makes one less reasonable or circumspective (not sure WTF that means).What it does is knock the theory out of you and forces you to do what works. If I could only have one tip on planning, I would say it is the “brief back” wherein the recipients of the plan are required to tell the CEO what they just heard.Never fails. It is an earthy and pragmatic thing I learned at Ranger School. It works and when it doesn’t (when you fail to do it), there is Hell to pay.There is a huge difference between being a pilot and flying a million miles in first class.When I help new CEOs under the guise of The Wisdom of the Campfire, I find myself assisting people to do things I have previously done hundreds of times.When I deal with CEOs this is what they tell me — “Damn that is just so practical.” Yeah, cause I screwed it up a few times before I figured it out. That’s what 33+ years of experience will do for you.Never invest in experience when you can rent it.JLMwww.themusingsofthebigredca…

        1. LE

          I take offense at the notion that experience as a CEO makes one less reasonable or circumspective (not sure WTF that means).Well, look at it this way. The downside of not knowing about something is that you don’t have a seat of the pants feel. The upside is that you are forced to consider many viewpoints in order to arrive at what could be a better overall result in the end. Anyone who has done something has a bias. If you haven’t done something you don’t have an inherent bias. That is not a reason for having someone with no experience, it just realizes that there may be cases where being dumb could be an advantage.I know nothing about the military and you do. So common sense says that you would be in a better position to make decisions of that nature. [1] But perhaps I would [1] simply because I don’t have a bias and would consult a dozen people and try to come to a conclusion. Of course so could you. You would say you have an advantage because of what you know. But sometimes what you know can also hold you back as much as help you. I just think (along the lines of business being an art and not a science) it isn’t 100% one way or the other but “it depends”.[1] What I don’t know about the military has already been influenced by things that you have said here. My brain is completely open and I don’t have anything or anyone to counter what you say and little way to even put it into perspective.

          1. JLM

            .While I get what you are saying intellectually, I cannot think of a single aspect of meaningful human endeavor in which knowing nothing — total ignorance — is better than even a passing familiarity with the subject.Many times what one takes from their own experience is methodology. Eisenhower was a 5-star General, commander of the Normandy invasion, best American general to deal with the Brits, President of Columbia, head of NATO and President of the US.His common skill that drove excellence at all those assignments was his command of decisionmaking. He’d served under both MacArthur and Marshal and knew how a staff was to present problems to a commander to make decisions.The big thing he did was to serve under Fox Conner in Panama. Connor was brain of the army during the WWI before and after stage.He was famous for saying:Never fight unless you have to;Never fight alone; andNever fight for long.This doctrine continues to be useful given recent events.He was the most important influence on Eisenhower, Patton, and Marshal.Even when someone has decades of experience, they still have to temper their experience to the times and the geography. That is part of being a CEO.JLMwww.themusingsofthebigredca…

          2. LE

            Well let me ask you this. Do you think Fred (in particular Fred) would be a better investor if he had actually run a company or even a small business? I actually don’t think so. I think he has an advantage oddly enough in that he didn’t do that. Because the things he has invested in a typical person who has run a company would run very fast from. I don’t know if you were involved in the net when it came along in mid 90’s approx. I was. I simply couldn’t get my arms around getting involved in something that lost money. Or had no revenue. I had this built in bias that it didn’t make sense. I couldn’t even get into putting outbound links on a website (the younger people could). Why? I had ran a small business and the idea of giving visitors an easy way to “leave your store” just seemed bizarre to me. Just like having everyone’s name on the website so that people could pick off your employees. That is a form of bias created by what you know. And I missed out on opportunities because of it.Fred’s bias actually caused him (as he tells the story) to miss investing in airbnb. He couldn’t grok it but the younger people could (and as he says he missed I think listening to them IIRC). That is a form of bias. I would have (as I have said) never invested in that either (not that I’m investing).What’s odd about my comment is that I want to know as much as I can about something and couldn’t possibly fly blind without knowledge as much as I can have. And I couldn’t hire someone who didn’t know what they were doing. I don’t want to get into how well or not well I have done but there is no question that stuffing my brain with as much as I can has been a key to happiness and success. But I also think it has actually held me back in some areas.

          3. JLM

            .I regard Fred so highly, I would be reluctant to suggest what would make him better at what he does as he is at the top of the heap.Having said that, I think being a CEO — being beaten into the ground as a CEO — is one of the most important things that one can experience to be able to speak the language and to understand the journey.A guy who commands a rowboat he owns knows things that the third mate on the QEII will never know.I spend a lot of time telling CEOs — who tell me they feel nervous all the time and are anxious — that this is “normal.”Funny thing is they seem to be comforted by it.I remember going to the latrine six times in a single hour before I took out a patrol. One of my sergeants said, “Well, at least we don’t have to worry about the lieutenant shitting on himself.”There is nothing like experience. There is a reason why business school profs are often not rich.JLMwww.themusingsofthebigredca…

          4. LE

            I spend a lot of time telling CEOs — who tell me they feel nervous all the time and are anxious — that this is “normal.”I am curious if you have noted any performance difference in CEO’s that “feel nervous all the time” vs. those that either internalize or simply don’t feel that way?There is nothing like experience. There is a reason why business school profs are often not rich.I will take a stab at that one. Many reasons of course but include the fact that academia is well proscribed as a path (study hard, memorize and follow what others have done; oh yeah publish all of that crap) and business is not. It’s an art and it takes gambling and seat of the pants feel. Academia does not typically. At least not in the same way, if at all. Other reason might include lack of creativity, lack of running on the edge and so on. In academia it’s called plagerism in business it’s being smart and if you get caught it’s a cost of doing business and your buddies will still golf with you.My wife can digest large quantities of material and bring it up at will which is helpful in her job (medicine). However last week I asked her when she picked up takeout from the Italian restaurant to get a credit for my lousy meal the last time. [1] She wouldn’t do that, she didn’t feel comfortable even doing that. She would not make a good entrepreneur and in fact when I met her I wanted to “set her up” in her own practice and she didn’t want that she wanted to “work for the hospital”. To each his own.[1] I am guessing that your wife, an attorney, would have complained as well as Joanne (but then again Joanne was born to be in business and is very bold Fred has a unique situation there).

          5. JLM

            .One of my jobs is to get the CEO to externalize what he is feeling. That is a key to making a connection and to making progress. You have to know where the starting point is.I’ve had a few cryers and that is, actually, good. Once you get the emotions out and expose your fears, you can begin to plot and plan and perform.I am amazed at how well one can do, even when scared shitless. And, it is amazing how well one can camouflage how they really feel.My wife is from Southern, very Southern, society. She would never complain about anything. The only exception is if you mess with any of her children. I once saw her read the riot act to a DA, the GBI, the FBI, the gen’l counsel of one of the largest banks in the US. They had messed with her baby.In less than a week, they were all following her instructions and complying with her wishes. It is a family legend that is so incredible as to not be believable.Think of steel magnolias. They never complain, they just get even.JLMwww.themusingsofthebigredca…

          6. Nathan Jeffery

            I reckon being in a “scared shitless” state is pretty much the norm for a CEO especially if the CEO is the owner of the business.If it’s your business, you have everything to lose. Nothing quite compares to going through that yourself, being the last one to be paid or simply not being paid for months on end when times are tough.

          7. PhilipSugar

            I too have a very Southern wife. You summed it up well.

          8. PhilipSugar

            I think you and JLM are speaking across each other because I agree with both of you.If you are building a venture type business a great VC is critical. They are more important than your lawyers, accountants, and vendors.That’s not to say all of those aren’t critical they are.But a good VC is critical. If they’ve been a CEO or not been a CEO it’s fine either way. The key is that they are good.But JLM’s point is also right. When you get somebody telling you how to run a business that’s never run one? Not help with strategy, not look at the big picture, but get in the weeds? That is a problem.The biggest thing that stuck with me in the interview about Bill Campbell is when Shellye Archambeau (Wharton Undergrad) said he stopped a VC from getting into the weeds.

        2. Nathan Jeffery

          “Never invest in experience when you can rent it.” <– Love this

    5. Nathan Jeffery

      Love this.

    6. cavepainting

      The founders being willing to learn, knowing the nature of the problem they are solving, and having the grit, perseverance and optimism to push through obstacles are probably the most important criteria for whether a venture will fail or succeed.An active investor adds value only if he / she takes the effort to learn the market, the founders’ perspectives, and engages with little ego or bias. Not all experience translates across markets, and every situation has unique elements. Advice given without understanding context or specifics can be very dangerous.The investor being a CEO has its advantages, but only if the individual takes the effort to engage and learn. Hidden, non-validated assumptions of investors are just as dangerous as that of founders.

      1. JLM

        .The number of things that can go wrong is the square of the number of unique features of the product/service plus the number of voids in the founders’ skill set.There are a million ways to get something into a ditch and only a few ways to make it successful. To cross that same ditch. Some of the ways to make it successful may be held hostage to timing. Great idea? Maybe, it was just bad timing.Still, it’s a jockey, horse, course game.There is a difference between principles and experience.Principles — how you plan, treat people, run the business — last forever. What I did as a green shavetail 44 years ago still works. Take care of your people. Make sure everyone knows the plan. Answer every question until the last dog dies. Reward the doers. Inspire the others until they become doers. It’s simple leadership stuff.Technical experience has a relevancy shelf life and a sell by date. Nobody has thirty years of relevant experience. We all have six months of experience three times. The rest of it may have expired worthless.Still, there is something to be said for having been shot at (fiiguratively speaking not literally) and not hit or having been hit, survived. It informs you there is always a way to get home.There is something to be said for having a sounding board and testing ideas and plans with others who have either complementary, supplementary, or more experience.The most important utterance any advisor can make is, “Do you WANT some advice?”You would be amazed at the number of people who say, “No.”You want to check, double check, re-check ………………… everything, even if it is just to see if you have a heads and a tails on your coin.JLMwww.themusingsofthebigredca…

        1. PhilipSugar

          “Reward the doers. Inspire the others until they become doers”After getting bought by a big company……..we are so on the same plane.

    7. Jordan Thaeler

      You’re also forgetting to mention that investors have a guaranteed 10-year income, regardless of fund performance. It’s even more awesome when you acknowledge that VC underperforms public equities. The results are not surprising when you understand the financial motivations of the investor.

      1. Adam Sher

        The income because of management fees is not guaranteed. Small funds need to have successful investments in order to fund those fees during the second half of the fund’s life. There is a significant capital requirement to run a fund between salaries, reporting requirements, dead deal costs, etc… If a VC shop is not investing in some companies that return money, they will either need to call LP capital, investment GP capital, liquidate investments, fold.This is a significant reason why firms seek to raise large ($1bn+) funds. I recently left a real estate fund that managed under $500m equity. The 2% management fee did a lot less than it sounded.Lastly, management fee tends to be reduced when assets are liquidated. Hopefully liquidations occur and result in large returns. This is often not the case, so the GPs are not any closer to their carried interest and receive less management fees with which to run the company.

  9. Peng Jin

    Active investing is almost as if you were part of the start-up team fighting through the challenges with the co-founders. It is the “hard way” to make money, but it is the only way I know that at least guarantees intellectual growth, a shit load of fun and relatively the best chance of making returns.

    1. JLM

      .Active investing, as described herein, is like being the waterboy on a football team.You are providing an essential element of the success — water or money. You get to hang around with the team. You travel with the team. You get to talk to the players. But you are not a player yourself. You are the waterboy.But, you are not in the game and taking the hits. You don’t get to be on the real field with the real players.You are what is known as a “jock sniffer.”Bit harsh. Sorry.JLMwww.themusingsofthebigredca…

      1. fredwilson

        yessigned – the waterboy:)

        1. JLM

          .Way too personal and sensitive. Not talking about you.You are the player-coach. At the very least. You have a few scars to prove it.You do not require the applause from the cheap seats, because you own the stadium.Do not feel the necessity to defend the entire genus. You are special. And, people really like you.JLMwww.themusingsofthebigredca…

          1. fredwilson

            hey, i accept that i’m the waterboy. i’d down with that. its one of the secrets to my success. they say that success has 1000 fathers. i am happy to be the 1000th

      2. Peng Jin

        waterboy is perfectly fine by me. =)

  10. William Mougayar

    But I don’t see why you can’t be both, as part of the diversification, as an individual. I understand as a firm, it’s difficult to do both, but as a professional individual, you could have some passive investments that follow other successful active investors, and focus your energy on being more active with other investment opportunities.

    1. fredwilson

      yes, you can do that. but understand that when you make illiquid investments in private companies passively, you are along for the ride and are subject to the decisions that others are making

      1. William Mougayar

        yes, agreed on that.

  11. pointsnfigures

    I agree with you. I have thought a lot about this. As a floor trader, I was able to beat the market all the time. I disbelieved Fama’s Theory on Efficient Markets. I preferred the Behaviorial Theories. Behaviorial theories tend to feel more empowering and make you feel smart about yourself.I worked with a friend who has a PhD in Economics to really understand it. Fama is right. You cannot beat the market if you are the average investor. Reading Cliff Asness essays on efficient market theory really really helps too. I find Cliff to be one of the most enjoyable and informative reads out of any hedge fund manager.I have heard the theories on scaling your angel portfolio. If you invest in enough companies, you are bound to have a winner. It was really Albert Wenger a number of years ago that said, “If you invest in another company, you are just assuming more risk.”Statistically, each company you invest in is independent and identically (iid) distributed with regard to probability of success. Brad Feld has said that it is impossible at seed to determine who is going to be a billion dollar company and who isn’t. That means there is a lot of variance.Ironically, the meme is successful second time entrepreneurs do a lot better than first time ones. But the difference is only 16%. Is it enough to give them a huge edge? It’s an edge for sure.This has radically changed how I view investing. I invest when I think I have an unfair advantage. I invest when I think there is an edge.

    1. PhilipSugar

      I think you can beat the market if you are small enough and have enough knowledge to have an unfair advantage.For instance I can tell whether I think an F5 load balancer is going to be a hit or not.Same for robotic things and same for SaaS companies.

      1. pointsnfigures

        yes, but those investments are not liquid, and not open to most of the public. I agree with Albert and Brad. Each investment adds risk to your portfolio, and you don’t know which one will work.

        1. PhilipSugar

          I’m talking about publicly traded companies.

          1. pointsnfigures


        2. Girish Mehta

          What do you think of the 500 Startups thesis (in terms of number of investments in portfolio) ?

          1. pointsnfigures

            I can’t speak for them.

          2. Girish Mehta

            I meant the math behind it. Which if I understand correctly is different from what you are saying – viz. each investment adds risk to the portfolio.

          3. pointsnfigures

            http://www.spiderfinancial…. Beta is a measure of risk for a portfolio. I don’t think 500 investments in illiquid seed startups diversifies the beta in the same way a portfolio of 500 liquid stocks does. The liquidity premium is vastly different, as are the binary outcomes. In startup land, it’s usually all or nothing. In liquid stocks, there is residual value even with an adverse outcome.

          4. PhilipSugar

            I loved your other comment about that you don’t have to play….somehow it was removed???

          5. Girish Mehta

            I deleted it…I realized it was actually irrelevant to your reply which was to earlier comment of pointsandfigures…

          6. PhilipSugar

            I thought it was a great comment. It was totally relevant. You are right, I don’t have to participate. That is a huge advantage. I can wait things out. I can jump in when there is blood in the streets, I can wait it out when people are crazy.

          7. pointsnfigures

            That’s key, timing.

          8. PhilipSugar

            100%Fred had a great post about “luck” and that is when you find opportunity and seize it.If you force me to invest: index fund.If you think you get knowledge from the talking heads…..good luck.If when I spot an opportunity I can seize it……then it is not an efficient market.

          9. Girish Mehta

            Thanks. A under-rated flexibility that a small investor has.

      2. LE

        For instance I can tell whether I think an F5 load balancerSure but you can’t control the people who aren’t as smart as you who bet in other ways that impact the stock. (Dumb ways). I have found that you can also be “to smart for the market”. Plus all of the other events (economic, world events) that impact stocks that are unknown and you have no control over. Go and try to predict what happens if the Saudis dump oil and petroleum drops in price. It’s all a total crap shoot.

      3. nick l

        It’s funny you use F5 as an example. I would guess that 95+% of F5 shareholders do not understand what their product does. That’s not an exaggeration. I know for sure that the sell side analysts covering it have no idea.So if you know what their products do and whether the next one is going to be a hit or not, you are definitely ahead of the game.

        1. PhilipSugar

          I assure you I know very well.

    2. sigmaalgebra

      > Statistically, each company you invest in is independent and identically (iid) distributed with regard to probability of success.No, the standard Markowitz-Sharpe stuff doesn’t need to assume independent and identically distributed (i.i.d.). It’s enough to have expectation exist (trivial in practice) and finite with variance finite. Then work with just the variance-covariance matrix and get for a given level of expected return the lowest possible variance of return. Of course, have to get that matrix — don’t think there is one at the local 7-11 or Walmart. Actually, don’t know where there is one.So, the Markowitz-Sharpe stuff falls in the category of some nice applied math that actually could and would use if had a lot of data have nearly no chance of having. Otherwise that stuff is useful for some, call it, general, high level, overview, architectural guidance. At least should do some sensitivity analysis, and I’m not sure people do well at that.Sure, the efficient market hypothesis is just an HYPOTHESIS. Presumably with enough assumptions can prove that it has to hold, although I’m not sure anyone has actually written out a good proof. Just to setup the problem mathematically is a bit much for the economists. And to prove that the assumptions hold, well, that’s for next semester when the prof will be on sabbatical!To try to be positive, can discuss the hypothesis as a simple case, test case, etc., but I knew a family with a navy, it was a small navy, they liked boats and had some really nice yachts, that solidly proved that the efficient market hypothesis is quite significantly false.That B-schools teach that hypothesis as if it were true and proven is much of the total arrogant, incompetent, delusional, irrelevance of B-schools that so pissed me off when I was a B-school prof (never wanted to be — was for a while trying to take care of my wife).> “If you invest in another company, you are just assuming more risk.”Quite broadly, that’s not only not true, it is wildly false. Even if don’t know the variance-covariance matrix data at all accurately, for essentially any reasonable data at all that claim is trivially shown to be wildly false.

      1. pointsnfigures

        We disagree. There are neglible portfolio effects from extra companies in a VC portfolio

        1. sigmaalgebra

          > portfolio effectsWhat?The extra company in the portfolio under meager assumptions mathematically and nearly always in practice reduces the variance of the return of the portfolio, even if have no data on expected return and variance and covariance.Simple enough: If toss a coin, will get just heads or tails. If instead toss 10 coins will usually get 4, 5, 6 heads, that is, near the expected value with much less variance. So, spread the same investment among several investments and get lower variance of return. Want me to write out the algebra?That’s just the support for the simple concept of diversification. A better version is what Markowitz did and got his Nobel prize for. Even if don’t have any data and don’t make an optimal resource allocation across the portfolio, he was still correct that diversification reduces portfolio variance, that is, risk.So, then, sure, can accept more leverage and, then, get more return.Of course, unless have more data, say, for the full variance-covariance matrix, ballpark, have to assume that the expected return of each of the investments are about the same, that is, really good.But, for some positive integer n > 1, given n investments with the same expected return, all allocations across the n investments gives the same expected return and, with meager assumptions, any of those allocations gives lower variance of return than investing in just one of the investments.I thought that everyone in finance knew that?

          1. pointsnfigures

            That’s my point. Addition of another company doesn’t reduce variance at all. But, in liquid stocks it’s possible to build a portfolio to decrease variance. In a coin toss, the probability of heads or tails is 50/50. What’s the probability of success when investing in a seed round of a startup? At best, 10-20%? Certainly, every investment you make has a higher probability of failure than success. We are comparing investing in startups to investing in the S&P 500-which there is no comparison. There is no efficient market in startups even if investors are assumed to be rational and maximizing. You cannot say that there are portfolio effects in startup investing. Albert is correct, each new investment only increases the amount of risk you are taking.As far as B school teaching it as gospel, they don’t do that at Chicago. But, they do explain it well. It is true, for the average investor you can’t beat the market. If you do, either you have inside information, or willing to assume more risk.

          2. sigmaalgebra

            INTRODUCTIONAt your…isIt was really Albert Wenger a number of years ago that said, “If you invest in another company, you are just assuming more risk.”and at your…isThere are neglible portfolio effects from extra companies in a VC portfolioAt your…isAddition of another company doesn’t reduce variance at all.My claim is that quite generally addition of another company to a portfolio reduces variance.So, apparently we disagree. So, let’s just go through some of the algebra and clean this up.BACKGROUNDWe need the concept of the set of real numbers, that is, the number line, R.We need the concept of a random variable X that takes values in the set of real numbers R. An intuitive view of random variables such as commonly taught early in introductory courses in statistics is sufficient.In simple terms, there is a number, and, if only in principle, we plan to make a measurement and get the numerical value. Then for us now, we have a random variable, say, X.There can be issues of independence, correlation, orthogonality, etc, but we never say truly random.All our random variables are real valued, and we don’t mention real valued again.Given real numbers a and b and random variables X and Y, |X|, X^2, XY,MAX(X,Y)and aX + bY are also random variables.We denote the expectation of random variable X by E[X].ASSUMPTIONSFor our random variables, e.g., X, we assume that E[X], E[|X|], E[X^2] exist and are finite.Then for such random variables, expectation E is a linear operator so thatE[aX + bY] = aE[X] + bE[Y]For real number a, if X = a, then E[X] = a.If X >= 0, then E[X] >= 0.If E[X^2] = 0, then X = 0 (with probability 1) and E[X] = 0.VarianceGiven random variable X, its variance isVar(X) = E[ (X – E[X])^2 ]= E[ X^2 – 2XE[X] + E[X]^2 ]= E[X^2] – E[2XE[X]] + E[E[X]^2]= E[X^2] – 2E[X]E[X] + E[X]^2= E[X^2] – 2E[X]^2 + E[X]^2= E[X^2] – E[X]^2For real number a, just by writing out the algebra,Var(aX) = (a^2) Var(X)andVar( a + X ) = Var( X )THE SCHWARZ INEQUALITYSuppose we are given random variables X and Y and real number t.If E[X^2] = 0, then X = 0 and0 = |E[XY]|^2 <= E[X^2]E[Y^2] = 0So, suppose E[X^2] > 0.Of course(tX + Y)^2 >= 0so that0 <= E[ (tX + Y)^2 ]= E[ (t^2)X^2 + 2tXY + Y^2 ]= (t^2)E[X^2] + 2tE[XY] + E[Y^2]Settingt = -E[XY] / E[X^2]we have0 <= ( E[XY]^2 / E[X^2] )- ( 2E[XY]^2 / E[X^2] ) + E[Y^2]0 <= E[XY]^2 – 2E[XY]^2 + E[X^2]E[Y^2]0 <= E[X^2]E[Y^2] – E[XY]^2E[XY]^2 <= E[X^2]E[Y^2]|E[XY]|^2 <= E[X^2]E[Y^2]which is the Schwarz inequality.PORTFOLIO VARIANCESuppose we have two candidate investments. For the first investment, if we invest $1 now, later, say, one year, the investment will be worth random variable $X. Similarly for the second investment, $Y.Suppose for real numbers a and b, we want to invest a + b dollars now.We can invest all of a + b in the first investment and in one year and get(a + b)Xwith expectation(a + b)E[X]and varianceVar( (a + b)X ) = (a + b)^2 E[X]Or we can invest amount a in the first investment and b in the second investment and in one year getaX + bYwith expected valueaE[X] + bE[Y]and varianceVar( aX + bY )To simplify this argument, suppose, when we make the two investments, they look comparable, i.e., competitive, that is, haveE[X] = E[Y]Var(X) = Var(Y)We note, then, that it follows thatE[X^2] = E[Y^2]FIRST VARIANCEVar( (a + b)X )= E[ (a + b) X^2 ] – E[ (a + b) X ]^2= … =a^2 Var(X) + b^2 Var(X)+ 2ab( E[X^2] – E[X]^2 )SECOND VARIANCEVar( aX + bY )…= a^2 Var(X) + b^2 Var(Y)+ 2ab (E[XY] – E[X]E[Y])DIFFERENCEVar( (a + b)X ) – Var( aX + bY )= 2ab( E[X^2] – E[X]^2 )- 2ab (E[XY] – E[X]E[Y])With our assumption about these two investments being competitiveVar( (a + b)X ) – Var( aX + bY )= 2ab( E[X^2] – E[X]^2 )- 2ab (E[XY] – E[X]E[Y])= 2ab (E[X^2] – E[XY] )But from the Schwarz inequality we haveE[XY]^2 <= E[X^2]E[Y^2]and with our assumptionsE[XY]^2 <= E[X^2]E[X^2]E[XY]^2 <= E[X^2]^2E[XY] <= E[X^2]E[X^2] – E[XY] >= 0So we haveVar( (a + b)X ) >= Var( aX + bY )That is both portfolios have the same expected return, but the portfolio with only the first investment has variance >= to that of the portfolio with both investments. Moreover, this holds for any pair a and b.INDEPENDENCEWe note that if X and Y are independent, then fromVar( aX + bY )= a^2 Var(X) + b^2 Var(Y)+ 2ab (E[XY] – E[X]E[Y])we haveVar( aX + bY ) = a^2 Var(X)+ b^2 Var(Y)That is, due to independence, the cross product term goes to zero.As aboveVar( (a + b) X ) – Var( aX + bY )= (a^2 + 2ab + b^2) Var(X)- a^2 Var(X) – b^2 Var(Y)= (a^2 + 2ab + b^2) Var(X)- a^2 Var(X) – b^2 Var(X)= 2ab Var(X) >= 0So again we haveVar( (a + b)X ) >= Var( aX + bY )ORTHOGONALRandom variables X, Y are orthogonal providedE[XY] = 0In that case we haveVar( (a + b) X ) – Var( aX + bY )= (a^2 + 2ab + b^2) Var(X)- ( a^2 Var(X) + b^2 Var(Y)+ 2ab (E[XY] – E[X]E[Y]) )= 2ab ( Var(X) + E[X]E[Y] )PERFECT HEDGE — Y = -XSuppose Y = -X and a = b. ThenE[ aX + bY ] = 0andVar( aX + bY )= a^2 Var(X) + b^2 Var(Y)+ 2ab (E[XY] – E[X]E[Y])= a^2 Var(X) + b^2 Var(Y)+ 2ab (- E[X^2] + E[X]^2)= a^2 Var(X) + a^2 Var(Y)+ 2a^2 ( Var(X) )= 0MOREWe have considered just a relatively simple case of a portfolio with either one investment or two.Then, quite broadly, e.g., we made nearly no assumptions about random variable Y, the second investment lowers portfolio variance, that is, risk.Well, sure, we can take the same argument, call the portfolio with X and Y one investment, and then include a third investment with return random variable Z.So, this one argument applies to portfolios with 2, 3, 4, …, investments.But, more can be done, and long has been done. Broadly the high points in history are the Nobel Prize work of H. Markowitz and W. Sharpe.There is more in, say,David G. Luenberger, Investment Science, ISBN 0-19-510809-4, Oxford University Press.

    3. LE

      Ironically, the meme is successful second time entrepreneurs do a lot better than first time ones. But the difference is only 16%. Is it enough to give them a huge edge? It’s an edge for sure.In the success of the first time entrepreneurs you have the lucky sperm that emerged with an idea that worked. (That is not to say that only luck is involved just that you have to have luck to make it to that point). When they try to do the next idea they typically won’t have that organic “aha” moment and typically they won’t be as hungry. Otoh, being successful means you get better employees the 2nd time and can avoid mistakes that would have sunk you the first time if you hadn’t been lucky. So the net impact is an edge of 16% (your number). Which still doesn’t make a great deal of sense actually.Steve Jobs first idea was Apple. Pixar was successful but Next was not. He fell into the idea of Apple (luck of meeting Woz and luck of being in the right place (SV) at the right time (70’s). Hard to follow that up.

    4. Eddie Wharton

      I dont think angel investments are iid. They are subject to the same macro economic trends and industry / sub-industry headwinds & tailwinds. And that assumes you randomly chose companies. If you didn’t randomly choose companies your selection process likely increases the covariance between investments. I imagine that thesis driven investing is one of the highest variance forms of investing because each company has a core similarity.

  12. William Mougayar

    When you are the author of a blog, it’s like an active investment (publishing).When you’re a commenter to a blog, it’s like passive investment. You’re reacting to the active publisher who decides the topic and sets the tone for the community. And you are at the mercy of the active publisher decisions to publish or not publish.

  13. Wayne Vaughan

    What’s your view on the optimal number of active investments per partner?

    1. fredwilson

      ten or less. of course, what is “active” is a subjective term

  14. Jake Chapman

    I couldn’t possibly agree more. As someone who manages a tiny seed stage fund I think about this a lot. The vogue strategy at my stage and size is spray and pray. Tiny checks to as many interesting companies as possible. This strategy dictates the investor have little to no involvement in their companies. From an emerging GP’s perspective I understand the driver for this strategy. Seed stage is incredibly risky and if you concentrate your bets in only a few companies per year the chance of striking out is high and your career may be over. Rather than take this risk, many choose to invest in 40+ companies out of a single fund. If I were an LP however, I would rather diversify my portfolio by investing in a handful of managers, each of whom makes relatively larger more focused bets and each of whom is actively engaged/committed to each company. Despite the personal career risk I can’t justify taking a spray and pray approach. If I do that, what value am I adding to the world? Besides, the fun part of VC is being the waterboy because at least it means you’re on the field and the players rely on you. If instead, you are a passive investor, you are just a ticket holder.

  15. sigmaalgebra

    Gee, today the random, exogenous interruption of my startup is apparently cleaning gunk off the stem of the intake valve of my lawn mower. Symptom: Yesterday the mower stopped suddenly. Pulling the starter rope showed no compression. Removing the cylinder head showed that the intake valve was not closing. A Google search showed that this is a common problem caused by gunk on the valve stem. So, the gunk is on the part of stem that gets the intake flow of fuel-air mixture and gets so bad it blocks the valve stem from sliding back into the valve guide when the valve is to be closed. First recommended solution is a lot of carburetor cleaner on the valve stem. Just before the rain started, did that.But, why the gunk? On the intake valve? And on the part of the valve that gets the input fuel-air mixture?Okay? The Greenies again! Especially the CA Greenies! They want to take the gasses from the crankcase and feed those back into the intake!May have to remove the valve to clean it — will see. Ah, interruptions!But, then at Hacker News just read…on Microsoft’s Orleans and .NET framework for scalable server side software.Okay, if I had a BoD with “active” investors, I’d call an emergency BoD meeting, say, via Skype or some such, this weekend to evaluate the role of Orleans in the scalable, reliable software and server farm architecture for my startup?Looks like at several important points, the architecture I stirred up and coded to and the Orleans architecture agree:Sure, users come to the server farm by doing an HTTP GET to the Web server — that is, they come to Microsoft’s Internet Information Server (IIS) which then runs the code I wrote for my Web pages. My code, then, sends HTTP and CSS data, with a little Java script, back to the user. The user interaction continues with just simple HTTP GET and POST operations with no Ajax.But for all the real work for the users, the code for the Web pages uses other servers in my architecture.For scalability and reliability of the Web servers, supposedly Cisco and others have ways to do that — so the server farm just has several instances of IIS running on however many hardware servers, processors, and processor cores, and for load balancing, scalability, and reliability, Cisco passes out the work. All simple, standard stuff.Do I need the Cisco load balancing to implement server affinity for the user’s logical sessions? Nope! Designed the architecture that way! Instead, when the user does an HTTP GET, they get what I call a session ID, and when they do an HTTP POST that session ID comes back to my code which, then, goes to an instance (I could have 10,000+) of my session state store server code and gets the user’s session state (yes, I’ve got some security precautions in there).So, what is server affinity? That is where the user uses the same server for all their HTTP GET/POST interactions in their whole logical session. So, with my careful attention to session state per user and my session state store, I don’t need Cisco to try to implement server affinity.But for the real work, that is not in the code for the Web pages but in all the other soft/hardware servers. Each of these other servers runs its own software. I have four such — e.g., one of these is SQL Server, and I wrote the other three, and I’m about to write a fourth for some better handling of log files.So far, so good and in line with Orleans.In addition, communications among the servers is all via just classic TCP/IP sockets. In particular, for each of these other servers, there is a class for its input data and another class for its output data. So to send or receive, allocate an instance of the class and assign data to its properties (parts of, variables in) that class. Then each such class is serializable which means can use Microsoft’s standard software to convert between an instance of the class and an array of data type BYTE. Then can send/receive the byte arrays via TCP/IP, and the receiver does a de-serialize. In my software, all that is working fine. Yup, apparently in line with Orleans.Next, each such other server is single threaded so has no issues of locking or concurrency. Yup, still in line with Orleans.Next, if one such server does not have capacity enough for the demands of all the users, then in parallel run more instances of that software and have the server side clients, the software making the requests, pick a server, maybe just by hashing.Okay, still like Orleans except Orleans has some indirection here for the load leveling, and Orleans is willing to start/stop server instances in real time depending on demand. Fancy stuff — I didn’t program that. In a big Microsoft cloud site, maybe okay. For my startup, by the time I need that I’ll be wealthy.Sure, each such server has to be written in such a way that can have several, maybe many, instances running in parallel. I did that. Again, Orleans and I agree.Next, sure, no doubt want, likely often need, for the work going into such a server to be a first in, first out (FIFO) queue. Then notice that TCP/IP does this automatically, and the maximum number of input messages is adjustable with default 10. Orleans and I seem to agree here.I wonder how far that idea can be pushed. And if the TCP/IP FIFO queue drops incoming data, what can I do to detect and manage this situation in real time? And, even before loss of data, what can I do to monitor queue lengths? Looks like Orleans and I agree again — neither of us has a good solution!Really do I want to go to the expense and overhead of some version of guaranteed message delivery or guaranteed notification otherwise? Should be wealthy before really need something like that?A big difference with Orleans: My architecture is often static driven by just some constant data in some classes while in some of those cases the Orleans architecture is at least somewhat dynamic. So, for my approach, for some changes, have to shutdown the on-line software in parts or sometimes all of the server farm, recompile code, and start the software again while Orleans can just keep running.Orleans has a LOT of documentation with a lot of new and not well defined or explained terminology — actors, grains, chunks, silos, etc. That’s a lot of overhead. And the Orleans code may have bugs. And in the future some of the bug fixes may come with new releases of Orleans with changes that would force me on short notice to rewrite some of my code using Orleans.Does Orleans have security holes? Hmm ….Orleans has a lot of indirection that would use more computing resources and slow response time for the users — how much I don’t know, and Orleans seems not to say very clearly.What car is easier to modify? A Model T or a new Mercedes Maybach? Heck, I could put a 572 cubic inch Chevy big block crate motor in a Model T easier than I could change the spark plugs on a Maybach! If I need more, say, in system monitoring, management, maintenance, performance, reliability, would DIY on my architecture be better or DIY on Orleans?At some time, will something like Orleans — and there are some alternatives — be necessary? If so, then how soon? What about now? How will I know how soon?Is Orleans really for me? Or, is Orleans mostly just an artifact of the rather arms length distance between people writing server side software and the Microsoft cloud to run that software, that is, an example of extra overhead for a cloud?In the Orleans documentation, I saw nothing, not even zip, zilch, or zero, on how to analyze performance. So, of course, as even a blind person could see, the server farm, my server farm, no doubt as is common, with/without Orleans is a network of queues. This not nearly the first time people have considered networks of queues in computer architecture. For both performance and reliability, to get past just the intuitive, back of the envelope level, need to consider networks of queues with queuing statistics, etc. Yes, there is an easy, first cut for such things — just look at the bottlenecks and relieve those one at a time.There can also be some optimization problems — opportunities — e.g., what software goes on what server? So, for even static analysis, especially for anything very good and dynamic, need quite a lot of good real-time data on the server farm.From the BoD’s expertise and active role, let’s get the BoD’s advice on this by, say, Monday?

  16. dan_malven

    Fred,Isn’t it true that the companies that *really* work, the 50X+ return-type companies, don’t really need much help from the VC. They like having a friend / sounding board to talk about exec team stuff, and like the help in recruiting employees, but they’ve nailed the product-market and its caught fire. Don’t those companies almost go on auto-pilot for the VC, with the team not needing much help? Don’t they become more like passive investments? And the passive investors that go along for the ride on those enjoy the same returns as the active investors?Maybe you have to earn your stripes doing all the hard active investing with other companies to increase your probability of seeing and picking the rocket ship passive investments…? Is that what you mean when you say passive investing in illiquid markets doesn’t work?

    1. Farhan Abbasi

      No such thing as auto-pilot even during times of success. Managing growth is one of the most challenging phases of a company, and it’s usually when the CEO needs the most support. During a failure, while support is needed then too, there is more to “lose” during growth in terms of opportunity, if the right steps are not taken.

  17. Salt Shaker

    Most investors, and presumably most readers of this blog, don’t have the means or access to become active investors. There’s no real choice involved here. Many fall prey to the notion that if you invest your “time, energy and intellect,” in exchange for a shit load of options, you’re on your way to the pay window, when in reality few ever get there. Like w/ any investment there are opportunity costs w/ one’s career choices. A VC has it’s downside risk covered w/ mgt fees and it’s upside covered w/ carried interest. The avg. start up employee doesn’t and can’t have all those bases covered. There’s a high element of risk, particularly during one’s formative income producing years, and I think far too many get caught up in the hype driven by a few successes and insane valuations and fail to recognize this dynamic.

  18. Ana Milicevic

    It’s very hard to be an active investor unless investing is your main area of professional focus. To Fred’s point, you can’t really dabble in active investing — at the very least you need a thesis, recruit some sherpas, learn, etc. It can’t really be a part-time thing unless it’s on the heels of a career worth of experience and wisdom.

    1. ShanaC

      Ignore him. I have a spoof. It’s really oy

  19. Erin

    Thanks- this is informative and helpful. I’m also reading that book you recommended a few weeks ago on your blog- the Aspirational Investor- by Ashvin Chabra. I have yet to get to the good stuff, which I’m sure is coming- he just takes quite a few pages (and chapters) outlining why it’s insanity to invest in the stock market (or is it? I’m waiting for the big reveal…)

  20. Teddie Wardi

    Being a Limited Partner investing in Venture Funds is very much about passive investing (“limited” being the operative word). On the other hand the VC firms and GP’s running them are the very example of active investors. Interesting how the returns from very “active” strategies become “passive” as the capital flows through the financial system.

  21. Elizabeth Dorsey

    With regards to the opening comment, and taking it literally, I would suggest that buying a stock in the market is not passive. Some investors seek to understand the companies, including management , products, strategies, competition, goals, values etc. and use a tactical approach to investing rather than a strategic one. Even buying treasuries requires careful thought and active analysis on many factors including the illusive path of inflation.

  22. Nathan Jeffery

    I dig this. I started off passively when I was about 18; I had no idea what I was doing. I eventually figured out it’s really important to invest in things I understand and I prefer to be involved with what happens to my money. Active FTW! 🙂

  23. cavepainting

    Let us say we divide the portfolio into two halves. One half is active and concentrated investments where the investor is highly involved, and the other half is passive investments which are somewhat contrary to some of our theses, or long range bets, but still plausible outcomes.Can we definitively say that the former will deliver a better return over a period of time than the latter ?

  24. ShanaC

    I didn’t write this.

    1. Matt Zagaja

      In 2016 I would have expected Disqus to have figured out how to algorithmically block imposter accounts by now.

      1. ShanaC

        so I just had a conversation with shawn in response to thisIt is doable, especially if it is labeled data, but it will run about $5 a user, so it may be too expensive overall for disqus.

        1. Matt Zagaja

          I would think that doing it the “dumb” way (see if a new avatar is equivalent or substantially similar to an old one if it is a photo of a person) could be an easy 80% solution. That being said if it truly is that expensive it could be a fun “kaggle” type competition if they were willing to make some of the data public and offer a prize. Though would it be fair to presume that the $5/user figure is mostly labor for a crowd worker(s) to make a final judgment on users the algorithm marks suspicious?

          1. ShanaC

            It was shawn’s guessimate at total cost. He was figuring computationally to find vectors that would identify unique characteristics away from fakes. You would need some tagging done early on by some group (maybe crowd worker(s)), but the goal would be unsupervised learning.

  25. ShanaC

    So my only thought on this, is that I just thought of this extension of eugene fama and emh1)passive investment – just consuming information2) active investment – creating information

  26. Jan Sessenhausen

    The phase that always puzzles me in VC is when an investment goes from active to passive. Being a seed / early stage investors, at some point comes the time (in successful investments) where you have to gradually phase out. My expertise is the early stage, not the late stage. For an early stage investor not “phasing” out on time (remaining a fully committed shareholder, but e.g. not being on board any longer or the first person the founder calls) can really cause a struggle to the company and especially to the founders / management since it can become quite messy whom to talk to etc etc. It is a personal challenge to time this somewhat right.

  27. ShanaC

    In case someone comes across this and sees the sheer amount of missing posts, which is unusual for the site.There was a spoofer of me, and for security reasons and for reasons involving confusing people, the individual was deleted.

  28. AngelSpan

    Well stated. Integrity of style (or the expectation of it) is standard procedure in the public markets. Money managers can’t say they are a value manager and load up on dot.coms. That happened in the ’90’s and blew up more than one firm.Most angel investors fool themselves, as they don’t get ‘active’ or ‘passive’ right. Proper passive investing generally involves sufficient diversification so you are making a decision on the asset class, not just a singular asset, or a small collection of individual investments.There will be more proper passive investing coming to the private asset class, where portfolios are actually constructed, not just accumulated (like most syndicates). Diversifying across the life cycle stage, geography, industry, etc. All standard practice in the public markets.There will also be more use of the tax code to lower the after-tax risk and raise the after-tax returns for individual (angel) investors, whether they are in a fund or on their own.Again, standard practice in the public markets, soon to come to startup investing.

  29. Michael Brady

    Minor point of correction! Buying any individual stock in the stock market is considered active investing…..Buying a index fund of the S&P is considered passive. Sorry to nit-pick!

  30. fredwilson

    you can do that. but investing passively in illiquid privately held companies where you have no say is not a great way to invest

  31. pointsnfigures

    Put the 17 in a no load mutual fund where you pay next to nothing in fees that replicates the S&P and never look at it until you need it.

  32. William Mougayar

    That describes the majority of angel investing.

  33. Nathan Jeffery

    For The Win 🙂

  34. JLM

    .You already are lucky. You have talent, skill, brains, beauty, youth, education, a winning personality, chutzpah — what the Hell else do you want?If you are feeling in need of a bit of business luck — come to work early, stay late, work hard, work through lunch two days per week, and spend an hour a day reading and studying your industry and its leaders.If you are not lucky within 5 years, call me and I’ll send you some money.JLMwww.themusingsofthebigredca…

  35. ShanaC

    I have a spoof right now. That isn’t me. I don’t know who it is…

  36. ShanaC

    you’re creepy

  37. ShanaC

    Jeff. This isn’t me

  38. ShanaC

    and many people who are in that role shouldn’t be doing it, or at least not to the extent that they are

  39. ShanaC


  40. sigmaalgebra

    The mower is an example of a random, exogenous interruption that delays the startup.

  41. ShanaC

    that wasn’t me

  42. sigmaalgebra

    Sorry I responded to the reply without your title “MOD”.Hope you get rid of the hacker soon. Please feel encouraged to delete my response to the hacker.

  43. ShanaC

    It’s OK. It’s more frustrating and odd than anything else.I’m also just wondering what is driving the other person to mimic me. I’m not that interesting, and it’s kinda a pointless hobby. Probably that person has better things to do with thier time anyway *shrug *

  44. Vendita Auto

    as ever, consistent and cool