A question that I often ponder upon is, do Venture Capitalists make bets or investments?
Let’s break it down:
- Bets: High-risk decisions based on intuition or limited data, with unpredictable outcomes.
- Investments: Calculated allocations of resources backed by research, analysis, and expectations of sustainable returns.
I’ve often asked this question to other capitalists, and the answers has been intellectually draining: These are ‘Calculated Bets’”.
Finally, I’ve decided to find the answer – it’s binary.
Many of the most famous venture capital investments today—valued at billions—were once tiny bets on companies worth less than a million. These early investments, typically in pre-seed or seed rounds, often went to ambitious founders, often IIT/IIM alumni, armed with little more than a pitch deck, strong communication skills, and a version of MS Office.
Investments were led majorly on intuition and analysis. Pitch decks had very less to say. Few examples: link.
There were rarely any actual products or business plans. No DCF models, historical growth data, or peer benchmarks—especially since many of these entities were creating entirely new categories. In hindsight, these early decisions seem to resemble bets more than investments.
Hmm… there’s more to it.
The first generation of venture capitalists were often former entrepreneurs themselves. Calling their decisions “bets” is like suggesting that a lion leaps at its prey based purely on intuition, without factoring in years of experience honed through countless hunts.
There is more than one attribution here:
- A lion doesn’t calculate the math behind every chase, yet it succeeds often enough because it knows its prey. Similarly, experienced venture capitalists don’t rely solely on intuition; their insights are shaped by years of experience and pattern recognition.
- And just like a lion isn’t successful every time it hunts, not every failed investment can be dismissed as a poorly calculated bet.
So, are these investments?
…Twist…
One clear distinction is scale. A lion catches what’s in sight—a buck, not an elephant. But venture capital operates differently. Imagine the rustling of leaves on the other side of the bush. What’s behind it could be a buck, a mouse, or even a snake.
My point here?
- Consistency in outcomes differentiates investments from bets.
- At a portfolio level, consistency means predictable returns.
Venture capital, however, thrives on outlier outcomes, producing returns anywhere from 0x to 7000x. It’s this potential for outliers that attracts many investors.
Two Types of Capitalist Strategies
Most venture capitalists fall into one of two camps:
- Those chasing outlier outcomes.
- Those prioritizing consistent, predictable returns.
Those in between, in their language are still figuring out their product market fit.
Interestingly, returns will be similar for both the kinds, the power of averaging.
Now, importantly, how do you distinguish between the two?
Explainability.
Explainability is the defining trait.
- Investments are clear in their rationale and can be understood by both insiders and outsiders.
- Bets often lack this clarity, especially for those not directly involved.
I hope this helps…
And yeah, Auxano’s style and preference? Focusing on next-gen, tech-enabled, consumer-focused businesses and partnering with promoters in their growth journey.
We are custodians and act in a fiduciary capacity. The ecosystem is evolving and having a playbook is the approach…….
Author
Kanuj Jadwani
