Khosla and “black swan” investing and entrepreneurship

by takingpitches

Some lessons about investing and entrepreneurship generally from an Economist article on Vinod Khosla where he discusses his philosophy regarding investing (clean-tech for him now).

  • “I am only interested in technologies that have a 90% chance of failure but, if they do succeed, would change the infrastructure of society in some radical way.”
  • “Any one of these things is improbable but, if you have enough shots on goal, then it’s very likely that something improbable will win.  Ten years ago, no analyst in the world would have predicted 650m cellphone subscribers in India but only 300m people with access to latrines and toilets.  Even five years ago, no one would have predicted the way that Twitter took off. These are the black swan outliers.”
  • “But these things aren’t predictable.  Forecasting is based on assumptions, and technology changes these assumptions. I never compute returns. If you start forecasting cash flows, you lose innovation, you lose instinct. You average yourself down to mediocrity.”
  • “I’ve had many more failures than successes in my life. My willingness to fail gives me the ability to succeed.”
  • “I try a lot of new things. It’s fun to play the game and fun to play the odds — and long odds win a lot of fun.”

To oversimplify a lot, one can view two approaches to entrepreneurship and investing.  One approach is to focus the decisionmaking by going through a process to convince oneself that layers of risk have been stripped out such that the chances of failing are low. Another approach is asking whether this is a “black swan” opportunity.  The approach here is to acknowledge that there are a number of risks, and in all likelihood from an objective perspective one will fail, but success mean disrupting a huge area.  This approach is more fun, it might spur you into action (by focusing more on the opportunity than the risk), and it is potentially more clear-headed since most opportunities are risky, and perhaps the piece of information easier to estimate is the size of the potential opportunity, rather than the probability of success. This is not to say you don’t worry about risk (and hence the oversimplification), but risk is not the central focus. 

In terms of being an entrepreneur, where unlike Khosla the investor, you don’t have a portfolio to diversify the risk among multiple investments, the question is how to view the risk.  But how much risk is there really if you put yourself in the position (early on in your career or later in your career after you have a little squirreled away or something to fall on) so that you can spend two years intelligently rolling the dice.

Count yourself lucky if you find someone like Vinod Khosla to invest in and stand behind you when you do.

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