- On June 13, legendary venture capitalist Marc Andreessen told angel investor Sriram Krishnan about his approach to building a firm and evaluating potential investments, for Krishnan's newsletter, The Observer Effect.
- Andreessen said that he doesn't have the gambling gene in that he doesn't feel a dopamine rush when he gambles and wins.
- Although many people outside venture capital have compared the practice to gambling, Andreessen said it's actually those who are detached from the emotional aspects of it that perform the best.
- He likened his industry to poker players who make increasingly large bets on mundane outcomes, like how many blue cars show up in a parking lot, to emotionally distance themselves and gain an edge on the competition.
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Venture capital is regularly compared to gambling because of its incredibly high stakes and the essentially unknown outcomes years down the line. Wall Street financiers and hedge fund managers trade quickly on publicly available knowledge. Venture capitalists go with their gut.
But one of venture capital's most prominent figures disagrees. His trade might be compared to gambling, sure, but there's a lot more to it than outsiders think.
On June 13, Marc Andreessen told angel investor Sriram Krishnan about his approach to building a firm and evaluating potential investments for Krishnan's newsletter, The Observer Effect. In that conversation, Andreessen said that he doesn't feel elated when he wins at the poker table or in the boardroom, a process that has helped him methodically approach all his investment decisions.
"Honestly, this also goes a little bit to my psychology — I actually don't have the gambling gene," Andreessen said. "I get no rush from the bet or the result. I sit down for one of those and nothing happens. My pulse chemistry is just flat. And then the mathematical part of my brain is like, well, the expected return for this exercise is negative, what the f--- am I doing? And so it becomes unfun in the first 10 seconds and then I just walk away."
Naturally, Andreessen's psychology has seeped into the culture at his firm, Andreessen Horowitz. He admitted that the team doesn't necessarily celebrate their "wins" as often as they should, but it's part of a process of objectively measuring the firm's success on the typical 10-year cycle within which most venture firms operate.
"It's really hard to get good metaphors but it's poker, right? It's really, really, really hard to be a good poker player," Andreessen said. "And if you're kicking yourself every time you have a bad hand, the bad habits just simply happen. You just need to be able to have a system that lets you think through the process."
Andreessen's system, then, could be compared to professional poker players, although more in theory than in practice. He said that many professional poker players gamble by night, but during the day they make increasingly large bets on mundane outcomes to help soften the emotional effect of the dopamine rush most people naturally have when gambling.
"It's literally a side bet of sitting in a diner and betting on whether there are going to be more red cars than blue cars passing by," Andreessen said. "What they're doing is 'steeling' their own psychology to be able to pull the trigger on bets like that with a purely mathematical lens and with no emotion whatsoever. They're trying to steel themselves to be able to be completely clinical."
That's similar to how Andreessen sees investing, he said. It's all a set of probabilistic outcomes, and so his success or failure is nothing more than a mathematical equation that needs to be solved.
"What they then hope for that night when they sit across the table from someone is to hope they're dealing with somebody who's super emotional. Because the clinical person is going to just slaughter the emotional person," Andreessen said.
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