Luck as a Strategy

[Music]

my name is aran davidson

i’m a venture capitalist since 1996

i raised and managed seven venture

capital funds

today i run and manage my own fund

after investing in over 120 companies i

want to believe

that i am an expert that my success is

directly related

to careful selection of companies long

due diligence process

and careful wise analysis of every

opportunity

well i’m not so sure about it anymore

let me give you three examples

2001 i invested in the most exciting

technology at the time in the best team

i could find

it was video streaming to mobile devices

i raised

over 12 million dollars to that company

it was supposed to be my biggest success

ever

but sure enough blacks won 2001 was 9

it was a huge failure nobody wanted to

buy the company

and we had the right of the company and

lost millions and millions of dollars to

my

investors bad luck shortly after

i invested half a million in a very

early stage company

that wanted to develop mini robot for

surgeries of brains knees and spine

sound like science fiction i gave zero

chances for the company to be successful

but since i had some government grants i

like the guy

i liked the idea it was a nice story to

tell my friends so i said why not let’s

spend the money

17 years later this company was sold for

1.7

billion i had nothing to do with that

success just being there

in the right place in the right time and

make guts feeling kind of decision

eight years later i was in a bus

in san francisco with 20 most

experienced venture capitalists

these guys and me were looking and

watching

different pitches of startups a guy came

into the bus

and he gave us a five-minute speech

about his idea of connecting limousine

drivers

with some passengers occasional drivers

passengers

in the street using location-based

services on a mobile phone nobody really

got the idea how to make money out of it

and what to do with it

so nobody invested in that company this

company today

is valued at 55 billion dollars half a

million back then

would have been five and a half billion

today

the guy that pitched us in the bus was

travis kalani the founder

of uber none of us took this opportunity

opportunity to invest in that company

tough luck what is common to all these

stories and many more is it right to say

that

venture capital strategy is based on

luck and chances

i have to admit that the answer is yes

some of my best success stories in my

life as an investor

came out of nowhere were nearly

insolvent

very low chances to be successful yet

became the most successful companies in

my history

while those which i gave a lot of

attention

money and expectations went bust

and we lost all the money so what can we

learn from that

first yes venture capital strategy is

based on luck

but what are the chances of being lucky

what are the odds

of a venture capital to be successful

let’s start

with the choice we choose one out of 150

companies

we see in average so in a year when we

see about 600 companies

we only make three or four investment

decisions

and then after each very careful choice

we build a portfolio and only one out of

ten

of those companies do become successful

so the chances combined is 0.07 percent

of a good venture capital investor to be

successful

which means one out of 1500 companies of

his choice

will be successful so second question

comes to mind

why invest in venture capital funds of

course

we do want to be in this business

because it’s a very good impact we live

around us we leave behind

we support the most innovative created

people creative people worldwide

and we help young generations of

entrepreneur

to start companies and fulfill your

dreams hopefully also to improve

our lives if we look at the chances much

better chances

to invest in a horse racing for example

where the chances to be successful are

higher and you can collect the profits

of the same day

in the venture capital business it can

take more than 10 years

to have your single successful exit

event

in a portfolio of companies so

it’s a very low chances of success but

can we improve this lack

can we improve our odds well i think we

can

we do have a way to do it first keep in

mind that only one

out of ten of our own selected

selection of companies will be

successful so let’s create a portfolio

of 20 to 25 companies so we have at

least two or three winners

in our hand second

let’s try to add value can we really add

value to our portfolio

well i think we can and the best value

is

we can add to a portfolio of companies

or to a single company just don’t

disturb

a winner once we do have a winner in our

hand let him run

support him be ready to invest over and

over again

also in difficult times to avoid

delusion and to show the company that

you’re

with the winner at the same time you

have to

disregard the losers it’s a very tough

decision but many of our companies

remember 9 out of 10 will not be

successful

so we have to ignore and stop the

bleeding meaning

don’t put good money after bad money

but most important don’t disturb the

good ceo

don’t show you don’t show him you’re

better

don’t show him your ego is bigger just

let him run let him do it

at the same time if you don’t have a

good ceo let him go

it’s always too late never too early

to fire a good a bad ceo

and remember it’s a very long race it’s

a marathon

it’s not a sprint it takes 10 10 years

or more

and you have to be prepared for a lot of

ups and downs on the way

and you have to be prepared for making

some tough decisions along the way

and you need to build up a set of skills

the definition of luck is set of skills

meet and opportunity if i wouldn’t have

this set of skills

i wouldn’t be there in the bus with the

founder of uber and

opportunities will come over and over

again

you have to be prepared you have to go

to events you have to talk to people

like i do now speak in events and

meet and talk and do a lot of noise

around your business

so the opportunities will come to you

finally remember it is a marathon it’s

not an easy game to play

it is for professionals with strong

nerves

you have to be consistent you have to be

persistent

you have to define your goal put all the

energy in it

run along 10 years or more

with your portfolio and you have a good

chance that luck

will find you or you will find the luck