Could a great VC get to the top of the Midas list by just being lucky?
Suppose the Chicago Cubs had a special offer: guess the outcome of opening day’s game correctly and we’ll give you a free ticket to tomorrow’s game. Predict right two days in a row and you’ll get a free ticket to game three and so forth. If the team sold 32,000 seats on opening day, it would have to give away half of the tickets to game two, then a quarter of the tickets to game three and an eighth of the tickets to game four, and so on until the franchise gave away only one free ticket to the person who had successfully predicted the outcome of the first 15 games.
The press might pick up the story and track down the successful guesser, call him a clairvoyant, the Oracle of Wrigley Field. There would, no doubt, be discussion of how the guesser had come to his win/loss prediction each day. Did he take into account whether the wind was blowing in or out? Was his prediction a product of some hitherto unknown baseball brilliance? Should the Cubs manager consult him before each game for advice?
The guesser’s strategy might have been as simple as flipping a coin, however. And this might be the most maddening thing of all.
It could, of course, explain how people such as Peter Lynch always seem to come out ahead. An investor’s decision isn’t as simple as win/lose, but when the base of investors is big enough, there’s bound to be someone who wins almost all of the time.
Could such a principal hold true in venture capital? Could a successful VC pick the right companies all the time as the product of sheer dumb luck?
These questions get to the heart of what VCs actually do. Do you have an anecdote about how a VC has been a big help to you?