I was reading Worth Magazine the other day and stumbled into a one-page interview with Gordon Getty, son of oil tycoon Jean Paul Getty. Perhaps I’m the last guy on the planet to hear this quote, but I thought it was too good not to share.
Dad said, “Rise early, work hard, and strike oil.”
Increasingly, if you read books like Fooled by Randomness, you begin to believe that the luck part of the equation is indeed essential. That is, luck compounded by the increasing returns of leadership complemented by competence may indeed produce far superior results to good, old-fashioned hard work.
- Two otherwise-identical VC firms, A and B, are founded in year X
- Both produce identical IRRs on their first 29 investments
- On investment 30, firm A has a giant hit, producing an overall IRR of 39% as opposed to B’s 25%
So, in every respect but one, the firms are identical. And let’s say the difference resulted from blind luck: firm B missed the giant hit not because they passed on the investment opportunity, but because of a random, non-business-related event.
What happens next?
- Firm A is seen as more skilled than firm B in the market by investors, entrepreneurs, and other venture capitalists
- Firm A can raise money more easily than firm B
- Firm A can attract higher-quality new partners than firm B
- Firm A can often invest, ceteris paribus, at lower valuations than firm B
- Firm A therefore yields, ceteris paribus, a higher IRR than firm B
In essence, a self-fulfilling prophecy results, catalyzed by a random event.
Now, I’m not saying that the VC business is pure luck. To pass the ceteris paribus test with top VCs you must assemble a team of very smart people to pick investments and sit on boards. And VCs provide very different levels of marketing support to their companies (a strong point of Sequoia, by the way). And VCs provide very different network benefits in terms of introductions to suppliers, customers, partners, and potential acquirers. I believe those benefits are real and do explain some of the variance in outcomes amongst VC firms.
I am saying, however, that the VC business is most certainly not pure skill, either. I believe that both luck and increasing returns most certainly play a part, the extent of which neither I nor, unfortunately for most investors, anyone else actually knows.
To wrap up, let’s turn back to Jean Paul Getty. Half a century before Fooled by Randomness was written, I think he captured the idea nicely: rise early, work hard, and strike oil.
Which, on an optimistic note, brings to mind the famous Samuel Goldwyn quote: “the harder I work, the luckier I get.”