The Comfort of the Crowd.
I was listening to Howard Marks’ book on “The Most Important Thing,” and the one category that is talked about, but not in name, is the “peer pressure” of investing. I wanted to shed some light here, it’s a topic I think about quite often.
Now, my thoughts are exclusively for early stage startup investing. It probably translates to other areas of asset management, but I try to stay hyper focused on early stage.
Something I have been talking a lot about in presentations is about how my family has a deal, “Don’t drink, smoke or do drugs until you are 21.” Looking in hindsight this deal is more about peer pressure than it is about drinking or drugs. I believe that in building a startup, or investing, it is important to feel the presence of peer pressure. This tends to be a good indicator of where to investor or where not to invest. Additionally, when you feel alone in making a decision, no peer pressure because there’s no reference point… that’s when the best deals are made at the earliest stages.
In 2012, I invested in Coinbase, then valued at $10m, now valued at $15B. It was an unpopular deal. I will also mention that not all unpopular deals do well, but Coinbase happen to have a few interesting pieces to it:
The category of Bitcoin was misunderstood, and under-valued
The founder was extremely talented (Any one of the 100 other investors Brian Armstrong pitched will attest)
I was young (26) and loved taking risks, and wasn’t part of any crowd that would have told me it was a bad deal
Throughout the last 12 years of investing, there are strong moments to have a desire to invest with the crowd. The problem with that is:
You are borrowing conviction from others rather than building it yourself
I believe the best valued investments are when it feels you are alone at the top of a cliff jumping off and hoping for the best
If everyone is interested in a category or a company, the market is valuing it at a market rate
If you aren’t going with the crowd, There’s no peer pressure, there’s nothing misunderstood about the deal
The goal at the earliest stages is to invest in the best people, and to be in every deal that the rest of the early stage market misunderstands.
Totally aligned! Not always, however :)