Surf's Up! Swim with your clothes ON!

The last couple weeks I've been obsessed with Warren Buffet's recent biography, Snowball.   I am about halfway done but so far, it's been very interesting read, and I highly recommend it.  

One might ask: What does Warren Buffet have to do with venture capital and entreprenuerialism? 

Mr. Buffet is the king of what's known as "value" investing,investing in undervalued hard assets and cashflowing assets.  As his wealth outgrew the opportunties, Buffet has goten deeper into branded products as he got older, like Coca Cola, McDonalds, American Express, etc, but he's still at heart a deep value guy.   

Venture capital is widely believed to be the exact opposite of value investing: more like "extreme growth" investing.  It's more like investing in companies with little to no revenues, product or real brand value, where the hope 1 in 10 is a big home run.  It behave more like how an option contract might behave, worthless or worth a lot.   In the book, Warren is fond of pointing out how he likes investing in companies with a "margin of safety".  He hates to lose money on the downside.   While VCs are "supposed to take risk", what they really do is evaluate returns on a risk adjusted basis.  If given the opportunity to invest $1M in a company that has a 10% chance of returning $100M, a VC would look at that opportunity and take it, as the risk adjusted expected return is $10M (10% x $100M), a 10X return.   10X is a nice margin of safety.

The other quote I've been obsessed about from Mr. Buffet was last May's oft repeated comment about the housing crisis:  "You only learn who has been swimming naked when the tide goes out."    Personally, as an investor, I've been waiting for that tide change since April myself, when we closed our last two investments, Pontiflex and FTRANS.  But not for the same reason.  VCs look for the change in tide, because you can finally spot the ones swimming with clothes *on*!  Investing in this environment is a lot more like shooting fish in a barrel, not so much because you can see the weaker companies, but you can see the strong ones much more clearly.  Those companies that powered through Q4 are likely to be the emerging winners as they overcame once in a generation countervailing winds. 

As Warren Buffet said in 1974, during the bottoming of the last major financial crash: "[I feel] like an oversexed guy in a whorehouse."     While I've never visited a whorehouse, I can relate from an investment opportunity perspective: for venture capital firms with capital,  from 2009 to 2011 are going to be great years to invest in great entrepreneurs with great opportunities and excellent expected return expectations.   If your company had record Q4 numbers, as many of our portfolio companies did, including the aforementioned, you are swimming with your clothes on.  And we want to talk to you, as I am sure other venture firms will as well.   So get out those surf boards, surf's up for those with wetsuits-- and, yes, clothes-- on.