"The best funds are the ones who did less bad"

The VC industry has taken quite a big beating over the last two years. The media and world has taken their shots on the industry. A lot of the criticism is undoubtedly warranted. A lot of investors acted on hype and overpaid mightily for a lot of companies. Fundamentals were non-existent for a lot of investors.

In defense of VC, it is an industry where you expect to fail more than you succeed. An early stage fund can have over half of the portfolio go to 0 and still be wildly successful. Some funds have caught a lot of flak for investing in certain companies like FTX, but the reality is that missing an opportunity like FTX, if successful, is much more costly than not making the investment.

One constant saying I heard during my trip to Sand Hill last week was that the worst you can do with an investment is lose 1x but the upside on some of these deals are gigantic…1000x even. For a lot of VCs, taking those shots far outweighs the potential downside. Of course, the idea here is to make sure you take the right calculated risk which is harder than it seems.

Perhaps the most interesting thing I heard all week during my trip to some top tier VCs is Samir from Khosla stating that “every fund overpaid for companies in 2021, but the good investors are the ones who did less bad”.

That statement really paints the picture of how the industry works. It’s an industry where you need to take shots and you fail more than you succeed. Yet, many in the media love to focus on the failures and attribute blame to the bad picks they make.

As we eventually come out of the tech reset, we’ll see which funds did less bad. My hunch is that it will be the ones who have been through these cycles before. If there’s one thing I’ve learned during this downturn, it’s that nothing can beat experience.