Why Venture Capital is a Probabilistic Game | Acquired
Andrew Marks, managing partner of TQ Ventures, shares his fascinating journey and philosophy towards investing.
He reveals why he switched gears from public markets investing to early-stage private market investing, bringing to light the probabilistic nature of venture capital.
Switch to Private Market Investing
Despite the lower liquidity of private markets compared to public markets, they offer more advantages due to fierce competition to invest in promising companies.
This led Andrew Marks to transition from public market investing to early-stage private investing.
Attraction to Venture Capital
Far from viewing venture capital as an inefficient market to capitalize on, Marks sees it as a platform that suits his skillset of making long-term qualitative judgments about the future.
In venture capital, the aim is to identify enormous differences between present worth and potential future value.
The Probabilistic Endeavor
Venture capital is a probabilistic venture aiming at finding high expected value investments.
While on average, investors may lose money, making sufficient bets can lead to substantial returns.
An integral part of the process includes providing assistance to companies and closely monitoring them to add more capital to the high performers.
Readily available quantitative information about the present is not going to give you the key to the castle. You have to either do a better job of massaging the current data, be better at making qualitative judgments, or be better at figuring out what the future holds. – Andrew Marks
Unique Skillset for Venture Capital
Contrary to the principle of avoiding permanent capital loss learned from Howard’s book, Marks believes that his skillset is more adapted to the probabilistic nature of venture capital.
He doesn’t envision excelling in a portfolio where all companies yield roughly similar returns.
Applying Traditional Investing Lenses
Marks finds merit in applying traditional investing perspectives to venture capital.
This process entails envisioning the future of a business, including its financials, moats, capital needs, competition, and potential evolution.
Qualitative Judgments Over Quantitative Information
Marks states that readily available quantitative information won’t deliver an investor advantage.
The edge comes from qualitative judgments about the future and deciphering what it holds.
Venture capital is a much more probabilistic endeavor. What you’re doing is you’re trying to find extremely high expected value investments where the average occurrence is that you’re going to lose your money, but make enough of those bets and it works out to be a great return. – Andrew Marks
Different Investing Types Suit Different Investors
Marks underlines that different investing types match different people.
While some investors like Marks enjoy being optimists and pondering about a company’s potential, others may prefer a pessimistic approach, such as investing in underperforming companies that aren’t as bad as perceived.
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