Track Record
I’ve had a few conversations in the last few days about a VC’s track record, which is a schedule of investments over the years with the wins, losses, and everything else.
I was seeing an old friend who has been in the VC business as long as I have yesterday. We got to talking about the notion of a track record. I told him that what is most valuable in a track record to me is not the gross returns, IRRs, or even big winners. What is most interesting and valuable to me is the cumulative experience you can see by looking at the track record. You can see how long someone or some firm has been at it, their mistakes, their successes, how they have evolved as investors, style changes, risk appetite, and a lot more.
Then this morning, I was talking with one of my partners about USV’s track record and we both were cringing at some of our big mistakes. Neither of us were focused on the winners. We were just stung by the mistakes.
And I think that’s important. We should not stare too much at our big winners. We don’t learn that much from them. We should stare at our big mistakes, because we do learn a lot from them.
I am proud of USV’s track record. We have produced fund after fund of strong performance, something that is not easy to do. But I don’t think that is what differentiates us in the market. And we rarely talk about it with entrepreneurs. We do talk about the difficult lessons we have learned over the years and how those lessons may allow us to help them avoid a similar fate. And, ironically, maybe that is what allows to produce the track record we have.
Comments (Archived):
If you stop having winners you quickly stop making mistakes. Keep making mistakes.
Mr. Wilson in yesterday’s WSJ, quoting from your blog post:… https://uploads.disquscdn.c…
fish’n’chip paper.
Nah, you are underestimating the reach of a print paper (even in this day and age) like the WSJ (or NYT) has on the market. It has influence. All those big companies that are in on the blockchain or crypto are in as a result of coverage in papers like this (and the traditional media they influence) and what they have read there making it seem legitimate.
blue horseshoe loves Anacott Steel.
Look something is fishy. At 7:36am (12:36 UTC) this very morning it was at 3999.99 …… https://uploads.disquscdn.c…
now at $4240 on CMC, but price is codswallop. it’s all about fundamentals, so i read.
On paper can’t compete with Charmin, and on the Internet useless for wrapping dead fish heads.The WSJ writers believe that they have important business information to pass on to their readers. But the writers know nothing important about business so for such work are idiots and, thus, treat their readers as worse than idiots. There’s not a good future for a business rag published by idiots treating their readers in business as worse than idiots, giving those readers garbage for business information, helping them go out of business and finally even unable to pay for the WSJ. The WSJ is something like a football coach who knows nothing about football, believes that his players know even less, and fielding the worst players on his team. Football has an effective way to get rid of such coaches; getting rid of the WSJ is taking longer.When I was at FedEx, I assumed that the WSJ had some good information about business I could and should learn, subscribed to it, and read it every day. Soon I discovered that I was wrong — it made a poor substitute for Charmin. Occasionally I glance at the WSJ and for two reasons, first, to see if they are still as bad as they were and, second, try to guess when they will finally go out of business.Same for ABC, CBS, CNN, MSNBC, NBC, NYT, WaPo.
But I don’t think that is what differentiates us in the market. And we rarely talk about it with entrepreneurs.You don’t talk about it with entrepreneurs because (per my other comment where you were quoted in the WSJ about crypto) because others do. So you don’t have to brag because there is a much more effective way that is happening.Someone can achieve great success and fame by both bragging or not bragging. I would have to say that I’ve seen more examples of this with those who brag (and/or use PR) than those who do not.
Would you ever consider writing about some of your failed investments and the (perhaps perceived) reason for failure/wind-down? Or even doing something like what Bessemer does with their anti-portfolio I think would be quite fascinating.
https://www.bvp.com/portfol… It always make me chuckle, especially this one on Google; “Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine.” Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?””
The anti porfolio is a marketing ploy. And trying to appear humble and real. The truth is the same brain that didn’t take one investment (and is sorry) also avoided 1000 other ones that didn’t work out. This ‘fail’ pattern is a meme of writers and the media. They love to talk about the fact that HP turned Woz down on the computer or that Parc didn’t see value in what Jobs saw. What you don’t ever hear about is the times they were right the other 999 times when people had goofy ideas that they passed on.Fred’s biggest miss (that he has discussed here) is Airbnb where he rebuffed Paul Graham’s twisting his arm literally to invest. In that case Fred was stubborn and said that ‘younger people at USV liked it but I didn’t’ (something like that not exact). Well guess what? I don’t like the idea and would never share a room with someone else. No way. So I can understand that. My much younger brother in law though well he rented out his place while he was away many times performing and his new (really good looking) wife was home alone. Like who does that? Really? No fear? Stupid? Millennial? Makes no sense to me.Of course Fred could have dug into it more and listened more to the opinon of others or maybe Paul Graham didn’t do a great job of selling it. Same brain (Fred’s) also turned down 1000 other ideas that never worked. How much effort do you put in?
Definitely agreed. I’d much rather hear about some of the investments that didn’t work out (and why), but if Fred isn’t open to writing about those even writing about missed opportunities would be interesting.
suspension of disbelief can make things more fun.
Going back millennia, many farmers understood a serious separation problem, separating the wheat from the chaff — want 100% of the wheat in this basket and 100% of the chaff in that basket.There are lots of important separation problems: (A) wheat from chaff, (B) aluminum from trash, (C) iron from slag, (D) water from pollution, (E) corn from husks, (F) sick from well, (G) male chicks from female, …Recently on Hacker News was a separation problem, given coordinates of the corners of two rectangles, say if they overlap or not. Well, a rectangle is the convex hull (smallest convex set that contains the points) of the four points of the rectangle. Much more general convex (for any two points in the figure, the line between those two points is also in the figure) figures are convex hulls of their points. Well, it is a simple exercise in linear programming, in any finite dimension, to determine if two such convex hulls overlap or not. Can also define a convex set by its tangent planes; given finitely many such planes again it is a simple exercise in linear programming to determine if the convex sets overlap.There is a very general separation result, the Hahn-Banach theorem — good treatment and lots of maybe valuable applications — is in David Luenberger, Optimization by Vector Space Methods.One of the most important problems in statistics is hypothesis testing. As for the wheat and chaff and the other cases, there are two ways to be wrong, saying that the hypothesis is false when it is true (Type I error) and saying that the hypothesis is true when it is false (Type II error). A pillar of pharmaceutical trials is hypothesis testing.Having the best possible (most powerful) test is challenging but important — that is, we want perfect separation just as we want with wheat and chaff — don’t want to throw away good wheat or eat bad chaff. Well, to get the best test, there is a classic result in statistics, IIRC from the late 1940s, from Neyman-Pearson (Karl Pearson goes back 100+ years, and Jerzy Neyman was long at Berkeley) that says how to do the best possible hypothesis test.I have a very general proof based on the Hahn decomposition.VCs are trying to solve a separation problem, i.e., wheat from chaff.As I have illustrated here, there is lots of progress on how to get powerful approaches to valuable results on separation problems. So, with these approaches, seat of the pants and gut feel don’t compete. Maybe VCs could get better separation techniques than pants and gut.
>Fred’s biggest miss (that he has discussed here) is Airbnb where he rebuffed Paul Graham’s twisting his arm literally to invest.Yes, I think PG also has an essay on his site, in which he mentions that. IIRC ,Mercado Libre (South American company) was another miss of Fred’s that he has discussed here and rued. Don’t know the numbers but it could have been big.
It will be interesting to see all four classes in a time window:1. the false positives (failed investments)2. the false negatives (what you passed on that turned out to be successful), 3. the true negatives (what you passed on that turned out to be duds), and 4. the true positives (the home runs, and the singles/doubles).What is game changing is likely a few key decisions in 2 and 4 among the thousands of deals evaluated.
Heard Dov Moran speak a couple weeks ago – everyone wanted to hear about the successes. He only spoke about the mistakes. That’s where the value is…Nothing about the SEC? Boy I wish we had Hunter Thompson around for occasions just like this…
We do talk about the difficult lessons we have learned over the years and how those lessons may allow us to help them avoid a similar fate.The irony of this is that by the same token one could argue that the lessons that traditional people have learned over the years should be taken as an important fact to be listened to by young entrepreneurs. But that can also be spun as a detrimental. The idea that ‘this idea won’t work and here is why…’.
Can you name the types of mistakes and lessons in broad categories?
Ain’t this the truth Fred.Recently had dinner with my team at Moai, the biggest one that got away in my career.15 years later, it still smarts. The team though have remained the best of friends, forged by fire.
Do you have enough data/investments to be able to tease out the increased alpha generated by experience of previous investments? In other words, can you quantify how much incremental return comes from each additional year of experience or fund?
We are the sum of our choices
For me a VCs track record is not necessarily about their winners/losers or mistakes or cumulative lessons learnt. It’s how they behaved when things were going right and how they behaved when things were going wrong.When hard decisions needed to be made. For the good or the bad. Did they show empathy to the founder who likely put their heart and soul into this success or failure. Did they treat them fairly. Did they show integrity and put the company first when their hand was strong and outlook was rosy. Did they stop returning calls when their hand was weak and outlook dim.
Always find out from entrepreneurs how a VC behaved when things were going south.
I am a story teller.The best stories are those of where you got your ass kicked.Everybody loves talking about their winners. Real people talk about their losers.I had an old neighbor that was an ex Pagan Motorcycle Leader. Controlled all coin operated machines in the Tri-State. Orange County Choppers. See how much those cost.This is a rough gang. He was great, my wife told him Rob: Do you know what your best quality is? He puffed his chest, and she poked it and said “your wife Deb”For Christmas, they would take literally hundreds of empty Bud Light cans an adorn a tree.I would tell my Baby Sitter, any issues here is his number and go to that house if anything is wrong. They would look and I would say he is a Pit Bull but he is ours.So one day during the holiday season he was talking about kicking ass at a party of mine for software people, and I said: “Rob, that is great, tell me about getting your ass kicked” We were rolling for an hour.The best story was at this place below., we had been getting fencing materials and he loved it for their Roast Beef. I had promised I would pay for diesel for the box truck by buying lunch. A fight started at about 11am from two guys drinking Jack and playing cards, I said we’ve got to go. He said let me buy a round I want to watch this. He said he had been there and hit the biggest dude there with his best shot and he just looked at him, that was when he turtled up and took his beating.Augustine Inn Delaware
Growing up I had a friend whose older brother was a tough guy. He drove a motor cycle. You know how when you are growing up and you are 12 years old someone who is 17 or 18 is like god to you and so tough. Anyway this guy (the tough guy) gets beat up one day. My friend says ‘oh yeah he was riding back from the shore and got attacked by warlocks’. Then he tells me the Warlocks were driving cars not motorcycles. You know when you are a kid you believe everything. I have no clue to this day what happened or even if it was Warlocks. Most likely just a fight. But saying ‘Warlocks’ made him seem less like a ________ and tough.Skip years later out of the blue I decided to google the tough guy. Same week turns out he died and I saw the Obit. What was he doing? Living in Socal selling Mercedes Benz. In his 60’s. Not that tough I guess (cheap shot on my part).Guys like that (the Pagan guy) do a great deal of bad and inflict a great deal of pain. Nothing admirable about that at all. Nothing to be celebrated. I think it’s a bit like looking at El Chapo now. Seems not a big deal if you are only looking at it as a bystander and nothing bad has happened to you personally as a result of the bad activities.Separately and as I’ve said before I have a big issue with man on man violence not being taken seriously vs. how assault of women is viewed. I think it’s all bad and has to be clamped down on and not celebrated as ‘men being men’.
Notice I said ex. I have a belief that people can make bad decisions when they are young, and you have to let them up if they actually change.A huge developer in Newark, DE was a mob enforcer starting at age 15 in South Philly. He talks about what went wrong, why he changed, and where/what his friends are that didn’t .
Just so you know I think that is more of a Christian thing ‘forgive’ than a Jewish thing. At least the way I was raised. That was that you avoided doing things because it would stick with you. This was back in the day where bankruptcy was a black mark and failure was not celebrated like today.That doesn’t mean I don’t somewhat agree with what you are saying ‘in the past’. I think though it depends on a few circumstances other than ‘person was young’. Both of us were young and we didn’t do those things. And it’s not soley because of who raised us. People need to think ‘hey this may follow me’.Giving people a ‘get out of jail free card’ is perhaps a way to make them not take responsibility or think ahead for what they are doing. But once again it depends. Definitely believe in giving ex cons a 2nd chance.Note also that part of what you wrote says he still is a tough guy by what you said about how he celebrates how he beat people up.Let’s say you are ‘like a Madoff’ (but not Madoff) and you ripped people off. Is is right if you say you are reformed and not a cheat anymore but then you tell war stories about how you ripped people off and you laugh about it and celebrate it as well? How does that show that you recognize what you did was wrong. Sure everyone thinks it’s a great story and they laugh with you. They were not ripped off. Would a concentration camp guard or a pedo do the same thing and get away with it? Of course not no way, right?I was watching the new CNN documentary about Patti Hearst (good and worth watching btw). One of the kidnappers is being interviewed. He is all into the fact that he is a celebrity with this now and he is laughing about the whole thing and loving the attention. What does that say about him? He still is the same person the way I see it.(Note Mob enforcer story sounds on target and more of the way I would expect someone who has changed to discuss this..)
I did some things when I was young that I am not proud of. Actually today I think because of cell phones, social media, and virtually unlimited storage, those never go away, which in some sense is really bad.
I did some things when I was young that I am not proud of.I am guessing that those things didn’t come close to what the Pagan guy did though, right?those never go away, which in some sense is really bad.I think I mentioned that a tenant (a doctor) had his step son drop off a check one time recently. So the guy shows up looks great clean cut etc is very nice and I think ‘wow type of guy I’d like to date my daughter’. I really thought that. Total nice guy (and I never say that about people). So I decide to do a bit of investigative work (for sport) and turn up that he was involved in something which involved stealing sports memorabilia a few years ago with three associates.In cases like that it definitely makes sense to change your name.
Trading is the same way. The losses really sting. I was talking to an entrepreneur yesterday. We were chatting about diligence. I mentioned that when things happened in companies I was invested in that were non-optimal, instead of looking at the company and the employees I looked at myself and my diligence. How did I miss? What do I need to change so I don’t miss? Learned the hard way with a lot of my own money…..
Do you think that individual investors need to have a approach – did to time approach – to gain alpha in the market? 65 + demo long / short based on spending patterns?
You can’t market time in venture. You have to look for deals all the time and have a reason that you are looking for them. Just looking for a good deal will not be good enough. You will miss a lot of good ones.(Not picking on Fred here) If you have a thesis, and fail to invest (like Fred did with AirBnB He has been transparent about that), then you question why you missed. How did you screw up? Conversely, if you invest and the company dies, you need to do some navel gazing on your process to figure out if there is a hole in it to help you not make the same errors again.Venture is a much tougher business than picking stocks. It’s illiquid. It’s more alpha. It’s also a prediction about the long term future. We know how often humans miss on predictions about the future even when they have access to the best data.
Sometimes your diligence is right and a catalyzing event that begets your expect return never occurs. Well researched investing means you put the odds in your favor but it’s still odds. This can be painfully true if your investment strategy includes short positions.
To paraphrase another venture capitalist Andy Rachleff from his Silicon Valley Career guide “you get more credit than you deserve from your successes, but you learn more from your mistakes.” In this way a track record is valuable in two different ways. The first is reputation–reputation comes mostly from your successes. The second is learning–learning comes mostly from your mistakes.
“Experience is the great teacher, and some will learn from no other.”But learning much from experience too often requires paying “full tuition” which can be very, VERY high.There is a remark that “theory is underrated”; that is, should think, look for causes, that is, theories, and use experience to test the theories, mostly not to think of candidate theories but to test them.VCs get accused of looking for empirical “patterns” from past “experience”: This practice is silly and no doubt harmful. E.g., for a while the hot fad was social, mobile, local, sharing apps — silly pattern.Such patterns are not enough; in addition need some candidate causes, i.e., at least a start on a useful theory.For both ambitious entrepreneurs and their VCs, a huge weakness of such patterns is that the desired wins are from things that according to the patterns are very new, not visible in the experience.A classic example was Ptolemy and his “epicycles”. If apply Kelly’s Variable Constant and Finkel’s Fudge Factor carefully, then the epicycles fit the old data and predicted the future.But the epicycles were only empirical fitting without any principles behind it, no credible theory.In principle the epicycles said nothing about the trajectory of a comet, grand slam baseball, or even a falling apple. But what we know now from Kepler’s work with ellipsoids and then Newton with his law of gravity, second law of motion, and calculus, there really is a terrific theory, for planets, moons, comets, baseballs, apples, and much more.A good theory can see the future much better than empirical patterns from the past.Did I mention, “theory is underrated”?
Nicely framed.I’d add – if you have been in any field of activity for over 10 years, in the end your reputation will be what people who have worked with you say about you.The numbers are super-important and support your reputation.But your reputation is not your numbers.And a halo is not a reputation.Sometimes, people who have a good track record on paper miss this. The numbers in their track record are doing the heavy lifting for them. The halo effect kicks in. That can work for a long time. But once the numbers change (and they will at some point), the track record is yesterday’s news and the halo is gone.A reputation that rests on what people who have worked with you say about you, supported by the numbers, is more resilient. Just how we are wired as humans.
Reputation is earned by the eye dropper and lost by the bucket.The one HUGE thing success allows is you to be magnanimous. Much harder without success.
People who know they are good at what they do, what are hungry but not starving, talk about what matters to the other party and they don’t worry about optics.As Phil Sugar says – just ‘real’.
Very interesting post. It raises the question of evaluating VCs and more importantly how we perceive numbers. In an industry with millions of opportunities, tens of thousands of investments and an incredible small number of investments per VC, the big question is about the validity of a track record. “Thinking fast, thinking slow” comes to mind with the example that even an investment banker beating 40 quarters in a row the average is totally normal and most likely not the result of his hard work or his talent. There just have to be a certain number of traders who will achieve this. Looking at VCs with often only a few years of existence, talking about their track record is in this regard interesting. Therefore I really like the very cautious approach expressed in your post. Thank you.
Sure, take 1000 really highly qualified VCs, brilliant, grand experts in business, fantastic track records, and some afternoon have each flip a coin 100 times hoping to get heads, e.g., each one carefully waiting till their gut or great business acumen told them it was time to do the next flip.Then of those 1000, the flipper with the most heads will look fantastic.Once a guy associated with the Lind Waldock firm wanted to know how in such a situation to tell the difference between luck and real ability? Hmm …!I know; I know; I might be accused of being flippant!
Pitch Book and Preqin make a solid effort at bringing transparency to the PE/VC world; however, their reporting still suffers from survivor ship bias. Short of an SEC action that mandates public-like disclosures for PE Funds, you may never solve that problem.
Hey Charlie, Where have you been?