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