When you make a living by finding and investing in the world's most promising start-ups, you probably know a thing or two about business. Leading venture capital firms have minted fortunes for themselves and their limited partners by investing in current tech titans like Apple, Alphabet, Oracle, Facebook, and many more when they were just nascent start-ups.
However, after considering the business wisdom of visionary business leaders, it recently occurred to me that examining some quotes from leading VCs could also prove tremendously useful for tech investors. So, banking off of this same logic, let's examine a series of quotes from some of the world's leading venture capitalists on subjects including the business of venture capital, business in general, and technology.
About the business of venture capital
Many readers may not be particularly familiar with the venture capital world: how it works, how it's financed, and how VC firms make money. As such, this quote from Union Squares Ventures partner Fred Wilson serves as a nice way to frame what exactly venture capitalists do.
Venture capital is about capturing the value between the start-up phase and the public company phase. -- Fred Wilson
In general, venture capital firms can invest in private companies at any stage in their development. Though not always as strictly codified, these stages range from the initial seed round of financing used to get a nascent company off the ground to the later stages, series C or later, that often take place in the years preceding an IPO. What's more, the results can be astounding. According to the National Bureau of Economic Research (NBER), the average annual return of VC investments is an astounding 57%.
Especially in moments when tech investing is particularly en vogue, the number of VC firms and the amount of money chasing start-ups can create some unintended consequences, as a number of established venture capitalists have also noted.
There are lots of ways to make money in venture capital, and there are even more ways to be mediocre. The industry has too much money and too many smart people chasing too few great entrepreneurs. -- Dan Levitan
All markets have boom and bust cycles, and I think venture capital market has even more exaggerated boom and bust cycles. -- Fred Wilson
Both issues might sound eerily similar to the issues many investors encounter when investing in the stock market. However, much like our ethos here at The Motley Fool, investors can overcome, or even benefit from the cyclical nature of the market by maintaining a focus on the long term.
The big advantage that we have as a venture capital firm over a hedge fund or a mutual fund is we have a 13-year lockup on our money. And so enterprise can go in and out of fashion four different times, and we can go and invest in one of these companies, and it's OK, because we can stay the course. -- Marc Andreessen
Business in general
Investing in high-growth private companies involves many of the same skill sets public market investors need to cultivate in order to succeed. The best venture capitalists think about business models, market economics, and competitive dynamics at a high level. Especially in the tech sector, where newly minted public companies often remain unprofitable, it's important for investors to remember that a path toward eventual profitability is an essential piece of any investing thesis, as Bill Gurley succinctly states in the two following quote:
If one asserts that buying customers below what they charge them is a corporate strategy, this is in essence an arbitrage game, and arbitrage games rarely last. -- Bill Gurley
You can create infinite revenue if you sell dollars for 85 cents. And if you give consumers more value than you charge them for, they will love you. And I remind entrepreneurs all the time that Webvan had the highest NPS scores of any company I've ever known. It wasn't that the consumer proposition didn't work, it was that the economics didn't work. They weren't charging enough for the service level. -- Bill Gurley
A litany of examples come to mind, here. Companies like Zynga, Gluu Mobile, Skull Candy, and even Twitter have generated tremendous losses for their investors as the overly optimistic stories around which they came public predictably failed to materialize. If the company's economics don't make sense or don't seem achievable, that should be a major red flag, but it's one investors have consistently overlooked -- to their detriment.
Also similar to investing in public companies, the leaders of the best start-ups resemble the entrepreneurs running the world's most successful public companies. Individuals like Tesla's Elon Musk or Facebook's Mark Zuckerberg have taken huge personal risks to bring their visions into the world. Further affirming this idea, leading venture capitalists also seek this visionary quality in the companies in which they invest.
The very best entrepreneurs are relatively advantaged in times of scarce capital. They can raise money in any environment. Loose capital allows the less qualified to participate in each market. -- Bill Gurley
Innovation and technology
Rounding out these quotes, venture capitalists live and die by identifying the companies that will define coming waves of disruption. As such, they spend a disproportionate amount of time thinking about the current and future state of technology. One of the key themes is that software will continue to automate and upend sections of the economy as Marc Andreessen candidly observes:
Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not. -- Marc Andreessen
However, software isn't necessarily the only way we should understand technology either, as early Facebook investor Peter Thiel notes:
The single word for vertical, 0 to 1 progress is technology. The rapid progress of information technology in recent decades has made Silicon Valley the capital of "technology" in general. But there is no reason why technology should be limited to computers. Properly understood, any new and better way of doing things is technology. -- Peter Thiel from Zero to One
Furthering this idea, famed VC John Doerr sees a truly game-changing investing opportunity in one largely undisrupted area of the economy:
Green-tech could be the largest economic opportunity of the 21st Century. -- John Doerr
Spotting the next big thing is indeed hard work. However, as the world's most successful venture capitalists have demonstrated time and again, doing so is indeed possible. Similarly, investors in public market companies that follow this same line of reasoning can also do extremely well over the long term. Integrating these above ideas to your research process should certainly help increase your odds of successful investing.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, Facebook, Tesla Motors, and Twitter. The Motley Fool owns shares of Oracle and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days.