Value Investing Beats Hollywood-Style Venture Capital

image of a piggy bank flanked by a model of a movie camera and a director's chair

I read with interest The New York Times article, “Overreaching for the Stars of Silicon Valley,” about the venture capital firm Andreesen Horowitz.  It reported admirable Andreesen Horowitz positives, such as their recognition of the importance of ventures’ human talent and their commitment to help lean start-up staffing with their own people to increase success odds.  And can they raise funds . . . $4.2 billion in managed assets.

But they don’t sound so committed to one of my key investment principals – “buy low, sell high.”  The article suggests their mantra may be “buy high, hope to sell even higher.”  That can work sometimes.  Fortune recently reported over 80 “Unicorns” – ventures valued at $1 billion+ based on private fundraising alone.

Is Andreesen Horowitz' mantra 'buy high, hope to sell even higher'? Click To Tweet

Andreesen said his approach is fashioned on Michael Ovitz’s Creative Artist Agency model.  That model helped movie superstars earn breathtaking rewards, but unfortunately movie studios’ investments in those stars hasn’t reliably translated into their own comparably rich profits.  For Andreesen Horowitz, the model means bidding for venture talent at levels few can match.  While their investors have sometimes won big with this strategy, long-term returns are uncertain and may be less attractive if too many big bets prove wrong or if the feared tech bubble bursts before they cash out.

I don’t like the odds.  I’ll stick with a value orientation – “buy low, sell high” — even in venture capital. I didn’t say “buy lowest.”  I don’t want cheap; I want value.  If I wanted cheap, I’d buy penny stocks, shop at dollar stores, and place bets on the dozens of marginally qualified start-ups on crowdfunding sites.

Skip the start-up seeding lottery & look for strong potential after initial funding. Click To Tweet

At VCapital, our approach to value is to skip the start-up seeding lottery and look for ventures showing strong potential through the seed funding stage.  We focus on Series A investments, rigorously screening to find the best opportunities . . . at a fair price. We may go on to early follow-on investments too, while valuations are still reasonable.  But we don’t invest in the late stages, when exuberance can push valuations to risky peaks.  We’re prudent stewards of our investors’ money, just like with our own.

We too provide strategic counsel to enhance success odds, though we don’t have a staff of 100 like Andreesen Horowitz.  We do have proven veterans with enviable track records and lots of wisdom to share.  Our leader, Len Batterson, has invested in several ventures whose values ultimately reached the billions.  Our team’s annual IRR over 30 years is 29%.

Andreesen Horowitz may have the last laugh.  We wish them well.  But I’ll happily stick with a value philosophy.   An annual IRR of 29% over 30 years seems hard to beat.

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