In venture capital, the greatest danger isn't investing at high valuations during a boom; it's ceasing to invest during a bust. The psychological pressure to stop when markets are negative is immense, but the best VCs maintain a disciplined, mechanical pace of investment to ensure they are active at the bottom.
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The most successful venture investors share two key traits: they originate investments from a first-principles or contrarian standpoint, and they possess the conviction to concentrate significant capital into their winning portfolio companies as they emerge.
In a rising market, the investors taking the most risk generate the highest returns, making them appear brilliant. However, this same aggression ensures they will be hurt the most when the market turns. This dynamic creates a powerful incentive to increase risk-taking, often just before a downturn.
The worst feeling for an investor is not missing a successful deal they didn't understand, but investing against their own judgment in a company that ultimately fails. This emotional cost of violating one's own conviction outweighs the FOMO of passing on a hot deal.
Unlike Private Equity or public markets, venture is maximally forgiving of high entry valuations. The potential for exponential growth (high variance) means a breakout success can still generate massive returns, even if the initial price was wrong, explaining the industry's tolerance for seemingly irrational valuations.
A long bull market can produce a generation of venture capitalists who have never experienced a downturn. This lack of cyclical perspective leads to flawed investment heuristics, such as ignoring valuation discipline, which are then painfully corrected when the market inevitably turns.
True investment courage isn't just writing the first check; it's being willing to invest again in a category after a previous investment failed. Many investors become biased and write off entire sectors after a single bad experience, but enduring VCs understand that timing and team make all the difference.
Successful investing requires strong conviction. However, investors must avoid becoming so emotionally attached to their thesis or a company that they ignore or misinterpret clear negative signals. The key is to remain objective and data-driven, even when you believe strongly in an investment.
The venture capital business requires consistent investment, not sprinting and pausing based on market conditions. A common mistake is for VCs to stop investing during downturns. For companies with 50-100x growth potential, overpaying slightly on entry price is irrelevant, as the key is capturing the outlier returns, not timing the market.
The ideal period for venture investment—after a company is known but before its success becomes obvious—has compressed drastically. VCs are now forced to choose between investing in acute uncertainty or paying massive, near-public valuations.
In the current late-cycle, frothy environment, maintaining investment discipline is paramount. Oaktree, guided by Howard Marks' philosophy, is intentionally cautious and passing on the majority of deals presented. This discipline is crucial for avoiding the "worst deals done in the best of times" and preserving capital for future dislocations.
