This is Part 2 of our Investing series.
There is often a lot of debate about choices investors make. “Why on earth did Investor X invest in Startup Y?” As an investor you have to make bold choices. Every investment should have the potential to become really big, otherwise you will never make up for the loss of startups that fail. Investing in only average ideas will never get you a good return.
Say 20% of your investments become successful. 20% is rather average, so let’s pick that number. That means that to make up for the 80% that fail, the 20% has to generate at least a 5x return. And then we do not take dilution or any profit into account, you just break even on your investment. Since it is safe to say that an average investment will make an average return, you have to make bold choices to get at least a 5x or even 10x to 20x return on your successful investments. If you can’t get at least 2x back what you put in as a whole, why would you invest? Such high risk investments, should give you a high yield. Otherwise it is safer to put the money in the bank or invest in real estate.
Mark Suster has a great Snapstorm where he talks at length about these fund economics. We can really recommend to watch it. He starts at 4:13:
Chris Douvos spoke in the Origins podcast a few weeks back about “investing with courage” and it really stuck. As an investor you have to invest with courage. You have to believe that certain crazy ideas will fly. Even, and maybe especially, if other do not see it like you see it. Only when you are different than average can you make a good return and be successful as an investor. That does not mean that you do crazy stuff, your investment thesis will still define when and how to decide which investments are worth investing, but be brave!