The Pony’s Lucky Horseshoe

Jerry Neumann’s “Betting on the Ponies” is easily the single best thing I’ve read online in 2014. In it, Jerry thinks through how angel investing relates to unicorn hunting, plain old luck, high frequency investing, the importance of having a system and sticking to it, and much more. If you’re involved in early stage investing and you haven’t yet read it twice – please go and do that right now. It may be the best 15 minutes you’ve ever spent (in a professional capacity). Read the comments too.

I’ll wait right here. Then we’ll talk about whether my angel round investment in the (so far) super-unicorn Uber was in fact unicorn hunting or whether it was simply dumb luck. Or could it have been something in between?

Sim Simeonov (a long time Techstars mentor) has talked about luck in the past and also has a great follow-up to Jerry’s post. There is another key piece of advice here that I was given early and have certainly followed. Be consistent and don’t do just a few deals. Doing a few deals as an angel investor is a great way to increase the odds of losing. Luckily for me, Brad Feld gave me the same advice years earlier when I first started angel investing.

Guess what? Doing more deals increases your chances of getting lucky.

When I tossed $50k into the first angel round of Uber in 2009, it was only about the 20th investment I had ever made. To date, I’m an investor in more than 500 companies, mostly through Techstars and our related venture funds. I believe that I have invested in at least five companies which have a strong chance to turn out to be billion dollar “unicorns”.

But here’s the most interesting part. While I think I’m in five such companies, I can only identify two of them (three if I squint) sitting here right now as I write this. I can name several others that have a legitimate shot at it. And because of the large number of companies at play, I’m actually quite confident that there is at least one that will emerge “out of nowhere.”

Luck is a part of this game. And a long game it is.

In Jerry’s post, he says:

These are the two main VC strategies: (1) have a reputation of being the go-to investor in a certain type of company so you get first shot at investing in companies that are more likely to be unicorns; and (2) invest in enough companies that you have a decent probability of being an investor in the next unicorn.

later he says..

If you up that [the number of companies you can invest in] to 500 companies, your odds [of finding a unicorn] are 27%-28%. That would cost $17.5 million.


If either of these strategies is available to you, read no further, just keep doing what you’re doing.

Because of Techstars that second strategy is available to me and I will certainly keep doing what I am doing even though I have already invested in over 500 companies.

Back to Uber. I met Ryan Graves when he was relocating by driving across the country to become the first full time employee and original GM of Uber.

People ask me all the time if I knew Uber was special the moment I invested. Was it an obvious unicorn? Heck no. They didn’t have a single car on the road yet. It felt just as exciting as other companies that I invested in around the same time that went on to fail. I invested my usual amount, with my usual offers of help, and used my usual approach.

Ryan and I only met because he had heard of Techstars and thought it was cool, so he stopped in Boulder to check it out. Now let’s think about luck here for a second. If I had still been living in Florida (where I was born) I would not have been in Ryan’s path on that particular drive. If I had been on a business trip that day he found himself in Boulder, I would not have met Ryan. If Ryan had been in a bigger hurry he might not have stopped to check out Techstars. If I was not open to randomness, I might not have set up a quick conversation with Ryan that day. After all, I had no idea who he was back then. Further, Ryan himself would never have even heard of Uber had he not noticed one particular tweet on one particular day.

Luck is not a reason that impossibly good things happen. It’s a pre-requisite!

You can see this in the honest stories of any successful entrepreneur. If you are being regaled by the story of a founder who sold his company for enormous amounts of money, and they tell you only stories of skill while they pretend that luck had nothing to do with their success, then you are talking to a very lucky liar indeed.

In the spirit of Jerry’s original post as well as Sim’s thoughts on this subject, I wanted to submit a few additional considerations for the aspiring angel investor or early stage investor. On some level we should simply factor luck out of our equations for how to be a better angel investor. Just as we tell founders we work with, let’s focus only on what we can control. In my view, you must be open to randomness, work tirelessly to assist every entrepreneur you invest in, focus on consistent high velocity investing (shots on goal), build a quality filter that does not involve your crystal ball, all the while constructing a method of detection of the very best companies so you can continue to invest in them.

Easy, right? Good luck. 😉

file under: Venture Capital

13 responses to “The Pony’s Lucky Horseshoe

  1. If you want to be an angel, you have to actively network for your deal flow. It gives you better information. Because you actively network, you got a shot at Uber. If you were passive, it might have never dropped over the transom.

  2. Any thoughts on angel networks/groups that are organized for lesser experienced angels? In many cases, it reduces the risk of loss, spreads the decision making amongst the group, and gives greater access to deal flow over the life of the fund. These have seemingly been an important part of the angel ecosystem.

    1. well, the quality of angel groups varies WILDLY. there are some good ones, but many are not great. i’ve been around lots of angel groups that waste founders time and never really make investments. some are very strong and can be a good source of deal flow. i think it’s a good place to start and learn, which is what i did early on. they can provide some safety in numbers and a look at some sourced deals. but don’t mistake “groupthink” decision making with safety! my best angel investments have been some of the ones others thought were crazy and where i did almost no due diligence.

      1. Excellent. Thanks for the prompt response. This article is great and runs closely with my life lesson of ‘make your own luck.’ We are actively trying to change our community dynamic to invest in startups and are faced with the challenge of overcoming the past failures of the angel groups in the city. Your comment strikes a cord with wasting time, both investors and founders.

  3. Great article and thanks for sharing “Betting on the ponies.” So many quotable statements in one article! And a great Caddie Shack reference…

  4. Nothing wrong with being or investing in a clydesdale. Slow, but strong enough to pull in a wagon of beer.

  5. David – can you expand on “build a quality filter that does not involve your crystal ball”. Separately, Jerry argues for domain expertise. You and Brad have historically been in the “promiscuous investor” camp, where, arguably, luck is more of a factor. Thoughts?

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