The nature of "the miss"

In December, I spent time thinking about the investing work I had done coming to that point. I gleaned lessons from companies we were lucky to be involved with where something was working, but candidly, I beat myself up over perceived misses — companies I had seen at pre-seed or seed that weren’t in the portfolio who had some early signs of success. The rationale for not investing varied, spanning a lapse in judgment to a lack of experience in the category. These investments bit at me not only because the strength of the founders started to shine through over a longer period of time, but also because the full potential of the market became more legible in hindsight. It absolutely killed me.

So much of the venture business is guided by opportunity cost (in many ways, it defines it), and I was starting to internalize that. I’m not as concerned about errors of commission - I’d like to push to a place on the risk curve that feels apt for the asset class and support companies that reach global, not local, maxima.

But, focusing too much on supposed mistakes and over-extrapolating can be dangerous. I’ve come around on my thinking in recent weeks and am approaching “misses” with a different lens.

1. Opportunity cost is contextual and based on firm dynamics. As fund AUM grows, the paths to returning it shrink narrowly with increased pressure. Missing Uber or Airbnb hurts more and more. Specialization can also grow the burden of proof, especially if winners stand out in certain categories. I’m lucky to be a generalist early stage investor, which alleviates some of these concerns.
2. There is a high degree of markup activity in the ecosystem, but there’s little to point to on the durability of the outcomes. While Series A and Series B raises do de-risk companies, the end results may be years away. And that’s the ultimate concern, not TVPI. Trust the inputs.
3. Over-indexing on missed investment opportunities could contribute to even more FOMO-driven investing. Part of venture does rely on this; it’s quite difficult to be 100% contrarian and succeed in VC, but I know that I personally do not want to be heat-chasing all the time. Investing edge has three components — informational, analytical, and behavioral. If the first is closer and closer to dissipating and the second isn’t as applicable to seed, perhaps the third drives alpha. Just a thought.

None of this is to say that misses don’t hurt, but there are likely healthier approaches and framing. For example, I really enjoyed this video with Felicis Ventures’ Aydin Senkut. While he notes that he missed Uber and Airbnb, their success keyed him in on the rise of global payments as a second-order effect and his subsequent investment in Adyen. What can I learn from a miss about what’s working in the world? What are the complements of the opportunity I wish I was involved with?