Baseball, Venture Capital & Failing
I think psychological literature says people feel greater pain losing money than from missing out on an opportunity. So, errors of commission tend to hurt us more than errors of omission.
Yet, that’s the job of baseball players and venture capitalists. I was watching a Meat Eaters episode on Netflix and an MLB player was a special guest on the show. It was a random episode my brother decided to play in the background and I remember the MLB player saying how if a baseball player failed 70% of the time, he’d probably make it into the Hall of Fame. The way he framed it made me think about it some more.
I think he was equating a 70% failure rate to a 0.300 batting average. It’s true. If a baseball player could maintain a 0.300 batting average for his career, that would make him an outstanding baseball player. In the 2020 season, only 14 players had a batted above 0.300. But 2020 was a shortened season with 60 games. In 2019 (a full 162 game season), 32 players had a batted above 0.300. If I only look at players who played 120+ games, it goes down to 22 players, which is out of ~270 batters (9 batters per 30 teams). Let’s not forget that these 270 are probably among the best of the best in the world. Only a handful of the 22 will probably end up with a career batting above 0.300. Heck, only 3 of the 22 were among the 14 in 2020. I get it. It’s a small sample size, but it seems fair to say only failing 70% of the time for one’s career is a hard feat to achieve.
If the average person hurts more from swinging and missing, the guys who make a career out of swinging and missing 70-90% of the time….are they just wired differently? I imagine so. There are probably only a handful of people who are wired to be able to shake off a miss and do it over and over again. The best of the bunch probably become baseball players.
I imagine this to be similar for great VCs. I’ve only had one investment of mine go to $0. It didn’t hurt as much because it was a tiny 1% position. But what if it happened over and over again? I don’t quite know how I would react. I imagine I would feel rather shitty given the statistics for an average person.
I think Chris Sacca’s lowercase capital is a great early-stage VC and they’ve made 186 investments with 54 exits to date….a 30% success rate thus far. I’m sure some of his investments are still alive but having publicly said he was retiring from investing in 2017, it’s a decent look at a hit rate since an exit is the only way VCs return capital and lock in returns. If this guy is one of the best, others must have much lower hit rates. It’s not so much looking at how much money he made but more so thinking about (maybe even admiring) how someone could stay in a profession where you are wrong so often.
I’ve heard that some professional angels and/or VCs keep a majority of their wealth in t-bills, index funds, etc… Investments that have a very low probability of going to 0. A barbell approach with the majority of assets in “stable” investments while a minority are invested in startups. This might be how one overcomes the human tendency of overweighting pain related to loss. By building a portfolio that makes all the failures seem so small and trivial to one’s overall wealth. But it’s still one’s livelihood to be okay with swinging and missing so often.
Something that might be lost in the conversation of being okay with failure and errors of commission over omission is that every time a bet is made, it’s not made carelessly. Whenever a professional baseball player swings, I’m sure he is aiming to knock it out of the park. I doubt one swings with the intent of missing or not giving a shit about the attempt. VCs are professionals who want to do well and I’m sure most will invest with the view that each business has a solid chance of success. Unlike me investing my own capital in the public markets, they are both businesses with called strikes. Most VCs have to deploy the funds capital within a set period of time and a baseball player has to swing before being struck out.
Even among such professions that live with constant failure, there seem to be distinct roles. Some are willing to fail more often for a chance at a bigger outcome. The first batter up on the roster isn’t the home-run king. He’s going for the singles, doubles or walks to get on base. That’s his role. The 3rd and 4th guys up are the sluggers who are going to go for the home run. The role of these big guns is to hit home runs or far enough to get the fast base runners home. These guys can’t settle for walks. They’ve got to swing. I wonder if this shows the role of startup investing from angels up to Series B VCs. The latter being investors whose roles are to hit singles/doubles while the former need to focus on slugging while facing 90% failure rates.
Certain games are designed for certain personality types. There are also various roles within a game that are better suited for some more than others. Everyone wants a 1,000x return but I think it requires a certain type of individual to make such a bet.
Now, maybe the way around it is to design such a portfolio where one is able to achieve this like having 80% of one’s wealth in t-bills and 20% in startup moonshot bets. As always, it’s a matter of understanding one’s predisposition and knowing what game to play. When Buffett talks about staying within one’s circle of competence, I think that competence needs to be applied to how much we understand our own predilections as investors. As I continue to learn more about myself as an investor, I thought constantly facing failure over the last three years of building OMDV might mean a tilt towards something akin to such startup investing but I think it’s quite apples to oranges. As far as public equities are concerned, I think it’s best for me to stay away from the trigger and rarely swing.