Losers for winners

Every great investor knows a secret that can only be learned from first-hand experience: The best investments often come from bad losses…

There are two reasons that an investor writes a check. The first one is obvious — They want to back a great founder and generate financial returns. The problem is that there are usually many companies that *could* produce the financial return you’re looking for.

So, what actually prompts an investor to pull the trigger on a specific company?

There’s a second element to the investment decision that carries a lot of weight and it has to do with the surface area of the investment.

Or, more simply put, how will this deal lead to the next one?

Sometimes, a long-shot investment is worth the risk not just because of the potential payoff, but because of the other opportunities it creates. Sometimes, it takes making a bad investment to get into the good ones.

For example, let’s say I invest in an exciting, high-risk company in an industry/technology that I am trying to become more involved in. In the process of working with that startup, I meet dozens of other founders and investors in the space. Even if that initial company goes to zero, I might have additional opportunities to invest in the founders that I met as a result of that investment.

Investing in a bad company actually still helps you build the expertise and network that will give you the context needed to find the winner.

There is power in network effects and your surface area of luck. Your first 10 investments might go to zero, but you won’t find a winner if you don’t have losers.