Fred Wilson is a top venture capitalist in Silicon Valley and co-founder of venture capital firm Union Square Ventures.
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Editor’s note: Fred Wilson is a top venture capitalist in Silicon Valley and co-founder of venture capital firm Union Square Ventures. Since the late 1980s, Fred Wilson has been investing in technology start-ups. This article is divided into two parts, combing and summarizing his experience and opinions on products, management and investment. This article was compiled from CBInsights, the original title “11 Lessons From Venture Capitalist Fred Wilson”, this article was partially cut.
Investment advice
1, put the most energy into your portfolio middles
Fred Wilson said that most venture capital portfolios are in line with the “power law” rule, which means that the benefits of a few high-return companies will far outweigh the rest of the rest. In the portfolio of 20-25 investment companies, the top 4 or the top 5 investment companies will bring you 80% of the income, the last 10 investment companies will generate 5% of the income, the remaining second quartile Part will produce the remaining 15%.
At first glance, it seems that the top-level companies are the most worthy of attention, and companies that bring you 80% of the benefits seem to deserve to be worth 80% of the time and effort of VC. But Wilson does not agree with this statement, he believes that the middle part is crucial for VC. Although it is often more consuming to work with this part of the business, venture capitalists like Wilson can make the most impact on this part of the business.
Investment companies in the middle layer may not be the unicorn companies that cover the headlines, but they still have the potential to create exits of $100 million to $500 million. An investment company like Wilson can often account for about 20% of the investment in the exit, which means that it can get a return of about 50 million US dollars.
Surely, some of the first quartiles can create the most value for investors, and Wilson can still provide guidance and advice, but in most cases, these companies do not have much external interference. The situation can continue to develop. In other words, these companies will grow bigger and stronger with or without the help of investors. Twitter is an example. However, for the second quartile, VCThe amount of investment often determines whether you can get a good return when you quit, or you end up with a disastrous defeat.
The most important point is that guiding the success of this part of the investment company is crucial for venture capitalists to maintain a good reputation. In order to have the opportunity to invest and cooperate with the first quartile, venture capitalists need to let themselves build such a reputation, and the founders of the company must believe that they will make the best efforts under difficult circumstances. For those founders who want to find a good investor, Wilson’s advice is “Look at how they treat the second and third quartiles in their portfolio, which is enough to explain everything.” p>
2, invest in “bits” instead of “atoms”
“When you are investing, you need to find the shortest path and the easiest path. For my entire investment career, this means finding a “bit” enterprise.”
In an interview in July 2009, Wilson made a bold prediction about the future of technological development in the new economic situation: “Every one is based on knowledge, information, or other forms of non-material elements. The industry will undergo fundamental changes.”
The so-called “atoms” are also part of the material world (such as clothes, food, etc.), and “bits” (digital information) are part of the non-material world. Wilson’s investment is mainly around large-scale industrial transformation, and the best way to ensure investment success is to choose to invest in digital products, that is, innovative “bit” companies. Of course, Wilson doesn’t mean that “atomic” companies can’t achieve innovation, but these innovations need to be implemented one step at a time, so it takes longer, and there are some serious challenges in the process. An example of such a self-driving car is that although the future of the industry is good, the time to achieve those good goals is much longer than expected. Wilson questioned: “Who wants to sit in the back seat of the first self-driving car and hand it over to a car that is completely controlled by himself? Anyway, I don’t want it.”
Wilson believes that a successful autonomous vehicle can be a steadily upgraded new feature, such as automatic parking or lane change. Every time consumers are willing to buy a car that is relatively smarter, and then upgrade and change little by little, almost no one will notice this change until the car can fully autopilot. This process will eventually lead to a valuable technology, but it is unlikely to bring a lot of benefits to early VCs.
The most important point is that products based on “bits” are suitable for open source business models. Companies like Red Hat, MySQL and MongoDB are examples, any enterprise based on “bits”.They can all imitate their patterns.
3, investors need to embrace failure
In November 2013, Wilson released a report saying that their company’s 2004 fund investment loss rate was about 40%. In other words, 9 of the 21 companies invested in this fund can be said to have no revenue. But Wilson didn’t mind this. He even called the fund “the best venture fund I’ve ever done” because such an investment loss rate means that investors are willing to take the appropriate risks. It is no easy task to successfully run a start-up business, and those investment funds that are unwilling to take risks are likely to give up those companies that could be winners because they are too cautious.
For Wilson, the successful operation of a fund is not a cautious step from the beginning, to avoid losses. Instead, stop losses in a timely manner, increase investment in companies with good development prospects, and withdraw from those companies that do not see hope, avoiding wasting too much time and money.
Management aspects
4. Crisis helps companies grow and thrive
“Changes are often difficult, but a crisis is often the best time for you to make a change.”
Wilson’s blog has a lot of strategies and advice on how to deal with failures, both for the founder and for investors. Given the variety of turbulence that may be experienced in the development of start-ups, it is important to focus on how to “fire”. But Wilson also said that in the long run, after the crisis, if the crisis can be well handled and managed, it is also beneficial for start-ups. “Because the crisis can make you see something that can make you nervous, you may be hit hard, but you will also gain something, you will know how to operate the company better.”
Crisis may be that you have lost a big customer, there have been a lot of negative news or a loss of key team members. To survive this crisis, companies must make changes. If the management team is able to respond well, the pressure from the crisis will slowly disappear, but the changes caused by the crisis will continue.
5, growth also comes at a price
Fast expansion can be a good thing, but it’s likely to cost you a lot. In a blog post in 2015, Wilson gave his own advice on the speed of early start-ups: the company’s average annual growth rate plus its operating margin should be at least 40 percentage points. If a company has an average annual growth rate of 60%, then every dollar sold must ensure that the investment and loss does not exceed 20 cents. In other words, growth at all costs is not always a good thing, especially when every sale is reached and you lose a lot.In the case of more money. Rapid growth without sufficient profits will create a huge follow-up burden for start-ups. For start-ups, it is necessary to correctly distinguish between “organic, sustained growth” and “transient, stimulating growth”.
Wilson points out that start-ups can grow in different ways. For example, Etsy promotes explosive expansion through a negative profit approach, and then returns to “fruitful results” in a few years. Indeed.com realized profitability in the early days. If you spend your own money, you don’t have to rely on financing to achieve expansion at the expense of losses.
Wilson concludes: “Profit is critical to the healthy development of a company, but it does not mean that the company must be profitable now.”
Translator: aiko