Tech Investing: Truths and Myths

The tech investment world is full of widely held, but wildly inaccurate beliefs. Avoid them and reap the benefits.

Startup Jordan- Robert Carroll

There’s no doubt that people are winning big by making tech investments. For example, several investors got mega rich with the Facebook IPO in 2012. Jim Bryer and Accel Partners increased their fortune by $7.7 billion in just one day. Early investor Peter Thiel walked away with almost $2 billion. Yuri Milner and his investment firm got $1.7 billion in cash. And the list goes on.

Facebook is just one of many tech startups that have cashed out in a big way for their founders, employees, and investors. With all the hype surrounding Facebook and other high-profile startups, two things were bound to happen. First, a lot more people were going to start investing in tech startups. This has happened. Second, many investment myths would spread. This also happened. Here are the top four myths about tech investing, and why you should rethink them.

Be conservative by investing in safe companies

It’s easy to see that not every startup is destined to experience Facebook-levels of success. With this in mind, many tech investors are tempted to treat their venture portfolio like a long-term stock portfolio. They look for conservative, easy investments that won’t lose them any money. This is a bad strategy. Famed investor and Y Combinator boss Sam Altman said: “Don’t try to get good deals on valuation and hope for these $20-30 million exits because too many things go wrong. If you look at people who have been really successful … investors, they’re the ones that take bets on founders and ideas that they believe can be huge, and cheerfully lose their money a lot of the time.”

Good venture capitalists invest according to the power law, which proposes that the best investment in your portfolio should return more money than all the rest of the investments combined. With this in mind, it’s easier to pass on the so-so deals and jump into the crazy deals. If one of them lifts off like Facebook, it doesn’t matter how many of your other investments failed.

Good tech companies are purely tech

Some investors get pitched on a simple e-commerce startup and think: “That’s not tech! You’re just selling stuff online!” That’s often a good excuse to not invest, but it’s important to look under the hood to see if the startup is doing something special. They may be doing more than just selling widgets that you can already get on Amazon—they could be solving a real logistics problem.

For example, Good Eggs brings local groceries right to your door and it’s one of Silicon Valley’s hottest startups right now. Founder Rob Spiro said at a recent TechCrunch conference: “We’re all building logistics companies that have the brain of a tech company.” Spiro makes the important distinction that a startup doesn’t have to be high-tech to be high-growth or high-return. Tech startups don’t have to be focused on technology; it’s often just the technology that enables something as simple as shipping fresh food to your door (something that’s arguably been available for centuries).

As sophomoric as e-commerce may seem in 2014, one of the top venture firms in Silicon Valley, Andreessen Horowitz, has put a plurality (over 25 percent) of its seed fund into e-commerce startups.

Half of your investments should exit big

If half of your portfolio is performing well, you’re probably the greatest investor that ever lived. The power law applies here again. Invest early and often. Some companies will perform and increase in valuation. Others will plateau and slowly die, and others will immediately flop. Stand by those in the first camp, re-invest, and if you’ve done well, at least one of your portfolio companies will exit big.

The alternate strategy is to wait and see which performs well and fork out $50 million or more to participate in their fundraising round. But don’t worry, you probably don’t have that kind of money, and Sequoia (famed VC) will always outbid you.

Silicon Valley is where all the good deals happen

The biggest IPO of the year happened in China and some of the biggest acquisitions were done out of Germany. There is a healthy flow of good startups coming out of the Middle East, Latin America, Canada, Russia, and Europe. Silicon Valley has a lot of talent, but certainly not all of it.

I’ve seen more and more venture firms like Index and Fenox launch global funds because they don’t want to miss out on opportunities around the world. More important than getting into the hottest deals is investing in a geography and industry that you know a lot about. MENA investors should invest in MENA deals because, in theory, they know the landscape better than anyone else.