DFJ’s John Fisher on Venture Investing

In response to an interviewer’s question about his firn’s reputation for being “adventurous” in its investments, DFJ venture guy John Fisher makes some very good points about the role of risk inf venture investing:

In general, there’s a critical notion that many people don’t understand about early stage or high-risk investing. That is, the most that you can possibly lose on any given investment is one times your money. The most you can make is unlimited. The truth is that risk and reward are often directly correlated.

It doesn’t make any sense to be afraid of risk as a venture capitalist. What you need to be concerned about is: “How big is the upside?” The truth is that in the early stage of the venture capital business it is common to lose all of your money on the first third of your deals. It’s common to make no meaningful return on the second-third of your deals and it’s common to make all of your return on the last third.

The baseball metaphor really applies: if you’re a .333 hitter, you’re at the top of the league. In the venture capital business, if you make money on a third of your deals; you should be doing fine so long as you’re making more than three times your money on average on all your deals, you’re making money for your limited partners across the board. A home run analogy really applies too. The magnitude of your winners determines the ultimate degree of success. So the home run deals make the difference between mediocre returns and superb returns. What really matters is the magnitude of the winners.

You’ve got to swing for the fences every time you place a bet because, given the fact that the risk is high in all of these situations, you better make sure that the winners really pay off. So you will have to be very ambitious for them and only invest in companies that can, if they become successful and truly achieve their vision, become extraordinarily valuable.

Related posts:

  1. Does Price Matter in Venture Investing?
  2. Venture syndicates
  3. Why Venture Funds Don’t Want Your Cash
  4. The Consumer-Centric Venture Investing Bubble
  5. Venture Investing: Riding the Ups and Downs

Comments

  1. Nivi says:

    I’m sure John Fisher is a great VC. But this is the usual stuff you get from most VCs that is
    * Probably not backed by rigorous historical data.
    * May only make sense for the very best funds.
    * Ignores the fact that the future is not the same as the past.
    * Ignores the fact the S&P 500 gets you good returns too.

  2. Paul K. says:

    Nivi –
    While I don’t disagree with what you’re saying, I’m not sure that is orthogonal with what Fisher is saying in the snippet above. After all, in venture investing you can only lose how much you put in, and too many venture investors act like that is not the case.
    More broadly, while the future will not necessarily be like the past, I’m not sure what you mean in this context. Are you suggesting that above-hurdle venture returns will be earned by making larger investments, with smaller and more consistent returns?
    P.

  3. Jeff Clavier says:

    Paul> I agree with your comments, and yes only Tier 1s will look at it this way. Having had the chance to sit on a board with JF for over three years, I can tell that he acts per his statement.
    At the end of the day, protecting the downside makes you focus on the wrong target.
    The problem is that only established (performing) funds can afford “gambling” this way, since LPs will look at their historical performance to remain quiet in the face of bad news.