the downside of optimism

when i first started investing capital in startups someone told me - “be careful, successful entrepreneurs usually make terrible investors because they are too optimistic.”  naturally, i scoffed at this.  i know business, i know what’s going to work and what’s not - i’ll be a great investor.

turns out my friend was right…and wrong also.

i think entrepreneurs generally make terrible “professional” investors.  We do tend to be overly optimistic.  we tend to fall in love with ideas and don’t think deeply about who’s executing them, where the downside is etc., because our experience tells us “we will figure that out when the time comes.” some of my biggest failures as an investor have been the ideas that I loved the most - executed by people who really didn’t have much chance of succeeding - or in markets with really toxic dynamics.  I invested because I loved the idea, and I thought about how I would go about executing it…and I expected it to succeed.  this isn’t to say i would have snatched success from the jaws of failure…in most cases the ideas had their own fatal issues.  my point is simply that being a great investor is about more than falling in love with ideas.

great early stage investors handicap the changing market.  they handicap the ability of the team to evolve, pivot, and find a way.  they don’t think “how would I do that?” as much as entrepreneurs do…and my guess is they’re less surprised when the team doesn’t act in the way they would.  If you’re an entrepreneur who wants to become a professional investor, you probably have to train yourself to think and act differently. You need to be a little less optimistic.  after all, to invest at scale, you can’t get involved operationally with every investment.

I do think entrepreneurs can be great investors when they get directly involved in a small number of projects.  When I can approach an investment as a “lightweight” personal startup, I have more fun and the success rate is much higher for me and the company. i get to be more involved than i could be as an investor doing a lot of deals, and it is more personally satisfying.  it is “lightweight because i don’t have to be ceo and i won’t get involved unless there is a strong ceo and team. it is really important that i choose the projects i invest my time and capital in, because i can really only be involved in 3 - 4 of these at a time total.  i’ve taken on one of these per year on average for the last four years, and now i’m in a place where i can’t/won’t take another one until one of the ones i’m working on doesn’t need me anymore.

the reason this doesn’t work as a professional investor is that it’s just not enough deals to mitigate risk and create portfolio dynamics.  pro investors need to do a lot more than one deal a year and have more than four investments at a time.  I have tremendous respect for what these guys do.  I’ve tried it and it is very, very hard.   one way i mitigate risk is to invest passively alongside as many great “real” investors as I can.  but i’ve learned my lesson, and i am happy to leave the professional investing to the professionals.