David Rosenthal: evaluation

Transcript context

…That's such a good point. I'm really glad you brought it up because what we're really playing for optionality, half the portfolio is asymmetry and really it's not a batting average. It's okay if we're only right 30% of the time, which is not intuitive at all for public markets investors. I think everyone wants to be right 55% of time, 60% or whatever. It doesn't have to be that high to have good long-term returns. We're playing for a slugging percentage where even if only one of the three works, but those are multi-baggers and can really create a lot of value over a long period of time. That's the beauty in that half the portfolio, and we've seen it. We've been doing this for years now and it is amazing how you see these companies emerge as value creators and generate a lot of value for the portfolio out of relatively small starting position sizes. It gets back to this whole idea of you don't know what's going to happen. If you set everything up with the idea that you don't know, I think in a lot of ways, most venture capitalists grok this idea and set up their portfolios in this way. But I think lots of people, myself included in the past, didn't fully understand this. You say the paper, I think you use nicer language than this, but I'll use my own language. This is my quote, that this idea of conviction that so many people in venture talk about. Entrepreneurs have conviction. I'm convicted, which convicted means you're convicted of crime, but anyway, I have conviction that in this company, I'm going to lead this investment. Conviction is stupid. Conviction is saying, I think my view of the future is going to be right. Really, what you want is optionality, and you need people to have conviction because otherwise there would be no entrepreneurs. That example of the coin flipping contest, that is exactly the dynamics of becoming an entrepreneur. The expected value is positive, yet the vast majority of people who start down that path go bankrupt. Then a few people win really, really, really big. When you're constructing a portfolio, what you actually want is a lot of those bets. You guys have 30–40 optionality names in your portfolio as a venture fund. You want 30–40 “names” in your portfolio. Venture portfolios with 5 or 10 are very non-resilient. Yeah, that's right. We use conviction as a synonym for overconfidence. I think that's what really is the right way to think about it. Conviction for us means, hey, I've done a ton of work. So I've got a lot of sunk cost, which means I've got bias. I think that my view of the future is better than yours.…

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