Venture Capital Investing: Taking the Road Less Traveled

“Two roads diverged in a wood, and I —
I took the one less traveled by,
and that has made all the difference.”
– Robert Frost, “The Road Not Taken”

To be successful in any high-risk investing like venture capital, the investor must always take the road “less traveled by.” It’s necessary to hear the sounds of a different drummer and to act in accord with those different sounds as soon as the notes are clear.
Taking the well-worn path leads to mediocre returns at best, because if everyone is doing it, no one holds the unique advantage needed for big wins. Exceptional returns require exceptional insight, and exceptional insight is the province of seeing what is still unseen by others.

Many venture capital investors invest in companies that fail because they look at what is close at hand and act on what others already know, rather than capitalizing on what they know that others don’t. In the words of Alfred, Lord Tennyson, they fail to “look as far as the eye can see, and know all the wonder that will be.”

Without a sense of wonder, there is no magic in venture capital investing. And without magic, there will be no high returns. Magic lies at the end of the road “less traveled by.”

The legendary entrepreneur and investor Peter Thiel puts it best in his visionary book, Zero to One: “…what important truth do very few people agree with you on…” or, in business terms, “…what valuable company is nobody building…?” These questions are critical because they set up a contrarian dynamic, and place the entrepreneur in opposition to the established order. Only in opposition to business-as-usual can there ever be high returns in venture capital investing.

When a crowd gathers around a business idea, the returns are shared among many. The solution becomes commoditized, and most players share equally – usually in meager returns, if there are any returns at all. Venture capital, as a home run business, is a winner-takes-all business; the lion’s share of the gains go to only one company and a few farsighted investors.

Successful venture capital investors look for opportunity where others are not looking. They are contrarian by nature, going against the grain and the herd. According to Thiel, if an entrepreneur can answer his Zero to One questions and execute on the answers, it will often lead to a monopoly position and real success. On the other hand, the failure to adequately answer his questions leads to me-too companies, many competitors, and disappointing results. A successful company must avoid gathering a competitive crowd.

In any type of risk-taking, from playing poker to venture capital investing, there are consistent winners and even more consistent losers, particularly when the stakes are high. Some investors win a much higher percentage of the time than most. They accomplish this by betting against the crowd.

To do this well, they see things differently, and then act immediately on what they see before others see it too, at the moment when further insight is unlikely to materialize quickly. They also have the ability to see what future cards are likely to fall, and ideally the order in which they will fall. If they don’t fall exactly as foreseen, though, they likely have a plan B, C, or D which will help carry them through the inevitable errors which are all part of playing their hand as it is dealt.

This visionary ability is part nature and part nurture, requiring experience and learning. Some have it and some don’t. Seeing the world and events differently is both a logical and an intuitive gift. In the real world of business, events sometimes unfold in a logical order, but since there are so many variables in play, particularly for a start-up or early-stage venture, the order is more often scrambled.

A successful venture capital investor sees the logical order, but also senses the almost inevitable coming scramble, and enriches his logic with invaluable intuition. Winning investment creativity is both born and made, subject to genetic make-up and then enhanced through considerable hands-on experience.

For a venture capital investor to see in a contrary way, it’s helpful to be a rebel . . . but not so rebellious that you lose touch with reality. You need to be able to explain that contrarian view in a way a few select others can understand, as a successful venture capital investor will almost always need co-investors who can see and appreciate “all the wonder that will be.”