JIM BREYER IS THE founder and CEO of Breyer Capital, an investment and venture philanthropy firm. He is also a partner at the venture capital firm Accel. His most famous investment has been Facebook, but he has also been involved in many other successful businesses, including Etsy and Spotify. Breyer’s parents arrived in the United States as refugees from Hungary in 1956. He started his career as a summer and part-time employee at Apple while he was an undergraduate at Stanford. Breyer and the Chinese venture capital firm IDG Capital have raised one of the largest venture capital funds in China. Breyer has served on the boards of Dell, Marvel Entertainment, and Walmart. He meditates each morning to clear his mind.
1. “I’ve learned that when the pessimism is high, dial up the investment pace. When the optimism is high, take a breather.”
It is easy to advise being fearful when others are greedy and greedy when others are fearful, but it is hard to do. People’s desire to run with the crowd can be unyielding at times. Most investment mistakes are based on emotional and psychological errors, but so are most investment opportunities since it is when others make mistakes that mispriced assets become available. In short, being contrarian based on the bipolar actions of the mob can generate market-beating investment returns. As an example, Jim Breyer was very cautionary before the Internet bubble burst and took a lot of heat as a result. He was wrong in the timing of his prediction—until he was eventually right.
2. “Investing is very psychological. Whether you’re Warren Buffett or early-stage technology venture capitalists, psychology plays such a central role.”
The hardest aspect of investing is keeping control of your emotions. As Buffett has said, “Investing is simple, but not easy. The most important quality to do well is temperament.” Like Buffett, Jim Breyer is saying that what is not easy is the investor psychology needed in venture capital. Keeping control of your emotions is a never-ending struggle since most mistakes are emotionally or psychologically based.
3. “There’s a pattern recognition and real-time knowledge that comes with investing and building companies from the earliest stages over an extended period of time.”
Becoming a successful venture capitalist takes time since pattern recognition comes from making a range of mistakes that help one acquire good judgment. One key to this process is avoiding certain errors that fall into what the Nobel Prize–winning psychologist Daniel Kahneman calls “System 1.” Michael Mauboussin describes the two types of thinking as follows: “System 1 is your experiential system. It’s fast. It’s quick. It’s automatic and difficult to control. System 2 is your analytical system: slow, purposeful, deliberate, but malleable.” Mauboussin provides the right cautionary note: “For System 1 to work efficiently, you need to deal with situations that are linear and consistent. If you’re dealing with decisions in a realm where the outcomes are nonlinear, or the statistical properties change over time, intuition will fail, because your System 1 doesn’t know what’s going on.” Investing decisions are best made as System 2 decisions since the business world is nonlinear. When you use System 2 the right way, the power of counter-intuition can be a source of investing opportunities since others will make valuation mistakes by using System 1 thinking. Using System 2 correctly requires training so that investors develop the right outlook when making decisions.
4. “We like to think that we will make a mistake only once and learn from it. We also are humbled every day by a new mistake.”
If you are repeatedly making the same mistakes, something in your investment process is broken. To acquire the right decision-making outlook it is a useful habit to rub your nose in mistakes shortly after you make them. The natural human tendency is to gloss over mistakes with psychological denial. But by celebrating, rather than burying, your mistakes, you learn faster.
5. “The investment and venture capital cycle is continuously changing, and one of the most fascinating internal discussions is often around where we are in the cycle.”
We will have many booms and busts forever in Silicon Valley.
All markets are cyclical. People do not make decisions independently, and when one person makes a decision and acts, other people tend to follow until they unpredictably stop. The idea that the sequence of behaviors that make up a business cycle is precisely predictable is a triumph of hope over experience. Venture capital is more cyclical than other markets, not less. One of the most talked about “tells” that a change may be coming in the business cycle is when people start talking about there being no cycle anymore.
6. “The dangers of over-capitalization are, in many cases, even higher and graver than under-capitalization.”
We’ve always said that risk reduction is all about, in the first twelve months, take out the technical risk; in year two, take out sales and marketing risk; in year three, build for working capital and international distribution; year four, take the company public. That’s a classic venture model regarding how we stage investment. But, in fact during the Internet bubble, there was no staging. No risk reduction was occurring because the capital was so free; the companies could raise it all at once and were simultaneously trying to address all these issues.
Too much money at a startup can lead to a range of problems, including a lack of focus and a failure to innovate. A business that attempts to solve problems with money rather than doing things that do not require much money, like changing broken processes or culture, is making a terrible mistake. Too much money can also wreck a capitalization table, make later financing rounds hard to achieve, and make a painful “down round” of funding inevitable.
7. “We look for a business that demonstrates differential insight.”
If you are not searching for ways to be contrarian and to be right about that contrarian view, you are not going to outperform markets as an investor. This applies to many levels and domains in investing, including the process of defining a target market for a startup. Startups that chase the tailpipes of other startups and companies are far less likely to be a success. The essence of strategy is intelligently deciding to be different in significant and enduring ways.
8. “Most of the best businesses in Silicon Valley started with a very simple concept and extended into adjacent market segments as well as into global markets.”
Focus matters. The most successful companies tend to concentrate on serving a market where there is not a lot of competition or on inventing a new market. This allows the business to grow faster and to possibly generate a strong base from which to expand into adjacent markets. This is a variant of a “land-and-expand” strategy.
9. “We are always looking for a fit between people, opportunity, ideas.”
The balance between optimism, candidness, intellectual honesty, and integrity results in a virtuous set of characteristics that are shared by all exceptional entrepreneurs.
The Harvard Business School professor Michael Porter is an advocate of including “fit” as an objective in creating a company strategy and in assembling a moat for a business. He writes, “Fit drives both competitive advantage and sustainability: When activities mutually reinforce each other, competitors can’t easily imitate them. Fit is leveraging what is different to be more different.” This focus on fitness is in some cases enhanced by what Charlie Munger calls a “lollapalooza.” The impact of a lollapalooza involves vastly more than a simple addition of the interacting components. In other words, the right fit in a business can have nonlinear benefits.
10. “The history of technology businesses, as well as many others, suggests that it’s very often the case that the second or third mover ends up winning. Sometimes it pays to let someone else create a market and be the second or third entrant. That was true in the spreadsheet business with Lotus. That was true in the personal computing business with Dell, true in the router business with Cisco; and true in the operating system business with Microsoft.”
What wins in the market is being first to product–market fit rather than first to market. What seems like sustainable competitive advantage can be far more brittle than people imagine. The cable television and wireless pioneer Craig McCaw has said to me several times, “Sometimes pioneers get an arrow in the back for their efforts.”
11. “In every deal I can think of there’s a dark day when board members sit around the table and simply wonder how we can dig ourselves out of the hole we’re in.”
Many very successful startups nearly expire in the early months and years of building the business. Successful venture capitalists know this and do not give up easily. Knowing when it is time to fold up the tent versus when it is worth continuing to fight is a skill acquired only with time and experience.
12. “Some people get real lucky. But that’s no way over an extended period of time to operate a venture capital firm or an investment business. It sure helps to get lucky, but you can’t count on it.”
To rely on luck to bring you success is just plain dumb, as it is to discount the role of luck in your success. If you are not thankful for your luck, you have not been paying attention. As one gets older, one should become more humble.