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Timeless Lessons from Great Investors

Ten habits of some of venture capital’s most successful firms.

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If you only have a couple of minutes to spare, here are ten lessons from great venture capitalists that investors, operators, and founders should know. 

  1. Come prepared
  2. Think from first principles
  3. Value exceptional ideas
  4. Treat investing as a product
  5. Offer genuine empathy
  6. Size relative to your conviction
  7. Adapt to the opportunity
  8. Develop a sense of timing
  9. Search globally
  10. Tell the hard truths

There is no single way to be a great venture investor. Some firms succeed by moving quickly; others rely on intense deliberation. One fund may routinely back the hottest startups in the market, while another capitalizes the under-loved. 

All of which is to say that one person’s “timeless wisdom” is unlikely to resonate universally. Indeed, part of the intrigue in studying venture’s great firms is discovering the different ways of competing. Funds like Union Square Ventures, Coatue Management, Multicoin Capital, DST Global, Y Combinator, and Tiger Global may chase the same company but often look like they are playing different sports. Studying them has been instrumental in framing my new fund, Generalist Capital

In today’s piece, we’ll revisit these disparate franchises, distilling lessons that I have found valuable. At the very least, I hope they incite new thinking as you invest in or build great businesses of your own.

1. Come prepared (Coatue)

As the stoic philosopher Seneca is supposed to have said, “Luck is where opportunity meets preparation.” Crossover fund Coatue Management exemplifies this trait. As an outsider in Silicon Valley circles in the early 2010s, the Laffont brothers had to find other ways to demonstrate their bonafides. 

One of their most effective weapons was running an outside-in diligence process, deeply researching a business before meeting with the founder. This approach helped Coatue access companies like Snap, Lyft, and countless others. While conducting a “reverse-pitch” may not always be suitable – especially in earlier rounds – arriving with as much context as possible demonstrates interest and an appreciation for the problem a startup is solving. It also helps push early conversations beyond the prosaic and toward more meaningful discussion. 

2. Think from first principles (Multicoin)

Venture capital is often criticized for being driven by FOMO. Rather than thinking for themselves, skeptics argue that investors simply follow social signals, fighting to get into “hot” rounds for the sake of it. For some managers, the fact that Sequoia or Benchmark is leading an investment is proof enough – no more thinking is required. 

Borrowing another firm’s conviction stops you from developing your own and perhaps finding a true outlier investment. Multicoin Capital is an excellent example of a fund that operates from first principles. Throughout its history, Multicoin has developed its own theses, including many that have run counter to accepted wisdom. When the crypto ecosystem was focused on Ethereum, Multicoin became convinced of the need for a high-speed alternative Layer 1. That thinking eventually led to its investment in Solana.  

The best investments often look insane to the rest of the market. The only way to find them is to do your own assessment and think from first principles. 

3. Value exceptional ideas (USV)

It is common for venture capitalists to say that they invest in people, not ideas. This group argues that startups' inherent uncertainty means that attaching oneself too closely to a particular idea is foolish. Instead, you should back a builder exceptional enough to reach strong product-market fit through experimentation and iteration.

If Stewart Butterfield tells you he’s going to build a new video game, for example, it may be beside the point to question its exact mechanics. Instead, you simply trust that someone of his caliber will build something valuable – even if it's an enterprise messaging service like Slack.

Union Square Ventures does not adhere to this approach. While the New York-based firm cares about founders, it is willing to back atypical entrepreneurs with exceptional ideas. Twitter, Etsy, and Tumblr were all created by founders that many other venture investors turned away. USV saw past this and recognized the uniqueness of the business being built. The idea, more than anything else, was what counted. 

It is almost a Silicon Valley trope to say that ideas are cheap; execution is what matters. But firms like USV show that it’s not so simple. While exceptional founders and operational excellence play essential roles in a startup’s success, unique ideas are absurdly valuable.

4. Treat investing as a product (Y Combinator)

Venture capital is a services business – but it needn’t be only that. Y Combinator is perhaps the best example of a firm that treats investing like a product challenge. In addition to its renowned early-stage program, YC has developed a suite of additional products, including an internal social network, cofounding matching service, and a hiring platform. These tools help entrepreneurs address their most pressing challenges, allowing them to build their network and recruit talent. 

Notably, this range is ancillary to YC’s pre- and post-accelerator programming. The result is an entity that invests like a venture firm but can support startups across their lifespan, at scale. 

While the best venture capitalists excel at building genuine relationships, finding places to productize support can be helpful for portfolio companies and the firm itself. 

5. Offer genuine empathy (Solocapitalists)

In some ways, the rise of the “solocapitalist” is surprising. How can a lone wolf investor compete against better-resourced funds? Even if they’re not vying to lead a round, solocapitalists are nevertheless jockeying for space against established and insurgent firms. 

Moving quickly is undoubtedly part of the solocapitalist appeal. The last couple of years in the venture market have been especially competitive, and being able to decide without a multi-partner investment committee has been advantageous when it comes to winning allocation. 

The more tangible, durable advantage of the solocapitalist, though, seems to be a sense of empathy. Many of the most prominent solo investors boast considerable operational experience and may still run a company of their own. Elad Gil, Lachy Groom, and Josh Buckley all fit this mold.

Even those that may come from less operational backgrounds are entrepreneurs in their own right – starting investment franchises from scratch. That also makes a difference and has a similar effect. In a sector that can feel impersonal, empathy has value. 

6. Size relative to your conviction (Multicoin)

You should size positions relative to your conviction. Often this may not be possible – the companies you might be most excited by could also be the most competitive, reducing your allocation. But when you believe you are onto a winner, you should do everything possible to maximize your stake. Assuming you believe in your picking abilities, doing so gives you the best shot at driving exceptional returns. 

Multicoin exemplifies this trait. The crypto-fund deployed its most significant checks into projects that became its biggest winners. Helium, Arweave, Solana, Serum, and Algorand were all positions Multicoin sized aggressively and were rewarded for doing so. Indeed, Helium represented fully 11% of Multicoin’s first fund – an extremely concentrated bet.

When possible, size your investments relative to your conviction.

7. Adapt to the opportunity (Tiger Global)

Tiger Global has shown considerable flexibility over its history. Since its debut in 2001, Chase Coleman’s fund has gone through multiple incarnations. What started as a hedge fund focused on U.S. telecom stocks embraced emerging markets (especially China and India) and, eventually, venture capital. Like few others, Tiger has demonstrated the value of adaptability, refining its approach to fit the opportunity. 

For nearly two decades, that approach worked well. This year, Tiger took a beating. Its venture fund was reported to be down $5 billion in Q1, while a June missive showed its hedge fund shed $25 billion. Such losses may prove too brutal to endure. 

Drawdowns of this magnitude can invite oversimplification. While Tiger misjudged market conditions in 2021, that does not erase its good management before that point (even if it does erase much of its gains). In the firm’s darkest moment, we can observe its history of success to find a useful lesson. 

8. Develop a sense of timing (USV)

Usually, great timing is associated with public market investors. Those that know when to move in or out of a position are lauded as exceptional managers. 

Timing matters in the private markets, too. While it is a much less fluid space, venture investors must develop a good gauge. Union Square Ventures is gifted and disciplined on this front. 

For one thing, the firm has shown an incredible knack for timing its investments. USV backed Twitter before social media was an established category and Coinbase when bitcoin was considered trivial by most. Companies like Tumblr and Zynga are further examples of this excellence. 

Just as crucially, USV recognizes when it is time to exit investments. It locked in gains on Tumblr, Zynga, and Coinbase before significant declines in value. This seems to stem from intuition, experience, and a structured approach. General Partner Fred Wilson wrote, “We typically seek to liquidate somewhere between 10% and 30% of our position in these pre-IPO liquidity transactions.”

Investors must study market history, develop conviction on trends, and create a structure for exiting positions to add a sense of timing to their arsenal.

9. Search globally (DST Global)

DST Global is typically associated with an investment made more than a decade ago. In 2009, Yuri Milner invested $200 million into Facebook at a $10 billion valuation. At the time, other investors felt the social network’s fair value was between $1 billion and $4 billion. 

DST was willing to invest on such terms because its team had unusual insight into the monetization potential of social media. Milner had been intimately involved in creating and growing several Russian social platforms, observing how they had turned consumer attention into advertising revenue. 

It was a classic example of DST leveraging insights from one geography to capitalize in another.  Indeed, Milner’s fund has thrived by first identifying high-potential new business models, then finding winners across national markets. It turned its appreciation for food delivery into investments in Gojek, Rappi, Deliveroo, and Doordash. DST’s interest in online car sales yielded bets in Kavak, Auto1, and Cars24. Such investments span countries and continents but share fundamental DNA. By maintaining such a wide aperture, DST ensures that it cannot only win once by identifying an intelligent approach, it can do so many times over. 

Increasingly, great companies are built outside the U.S. Funds like DST are constructed to find them. 

10. Tell the hard truths (Sequoia)

One epic fund The Generalist hasn’t covered (yet) is Sequoia Capital. While I will study what is arguably the world’s most renowned venture firm more closely at some point, following Sequoia’s work and meeting with some of their portfolio companies has provided some insight. One of the characteristics that stands out most is the firm’s willingness to voice unpopular truths. Sequoia is ostensibly frank with the entrepreneurs it backs. It also brings such candor to the broader market. 

The “R.I.P. Good Times” memo, shared during the 2008 downturn, is an excellent example. In that presentation, Sequoia walked through the economic turbulence and the damaging effect it would likely have on venture funding and customer adoption. Though founders could not have enjoyed Sequoia’s gloomy outlook, it helped many navigate uncertainty. Earlier this year, Sequoia shared a similar series of presentations with its portfolio, entitled “Adapting to Endure.” Again, it highlighted the difficulties of the current environment and counseled decisive action. 

Honesty may not always be well-received at the moment. But over a long enough time horizon, it is essential to earn the trust and respect of entrepreneurs. Sequoia does it well. 

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The Generalist’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Our work may feature entities in which Generalist Capital, LLC or the author has invested.

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