Global Macro Trading Journal

Interesting thoughts from Peter Thiel

What have you learned about Venture Capital now that you have been doing for so long?

There are a lot of different lessons, one is that when something works, people often underestimate it and when things arent working, they underestimate how much in trouble they are in. In most areas of investing, momentum is not that good of a way to invest, when a stock has gone up, you don't necessarily want to chase it. When I did the backtest on our portfolio I have found that when a company has had a big upround, lead by a smart investor, it was always a good idea to take your pro-rata (investment from investors from earlier rounds designed in a way that prevents them from decreasing their % ownership in the business). Flat rounds or down rounds, it was almost always a bad idea. In addition, the steeper the upround, the cheaper it was. The biggest miss we had over the last decade was not doing the pro-rata or full series B on Facebook. It was a 12x upround from the previous round 8 months earlier. It was the steepest upround in that amount of time in any company that we had been involved in and in retrospect, it was also the cheapest.

I think one of the reasons it was so underpriced is that investors don't want to step up that much but even the people on the inside often underestimate how much things change once things start working and you have that sort of momentum. It was still 8-9 people at the company, it was this horrible office with graffitti on the wall. On the inside it didn't feel like things were changing that much. So people underestimated it. You had these subtle but very important points when the leverage shifts, or dynamics shift very powerfully but they tend to get very underestimated
 
When it comes to uprounds, he's got a small sample to prove much (though I suspect he is onto something), but in terms of downrounds, I'm sure his sample is larger. Furthermore, VCs like him get the best piches. I'm told the best startups go to the best VCs for funding. So he's got adverse selection to his advantage, yet he still found that flat rounds or downrounds (investing more in companies that are not suceeding at increasing their valuations) is a loser's game, despite they being the best startups. For smaller VCs and small players like me, with much more adverse selection to deal with, it seems to be a nobrainer to pass in virtually every single down or flat round as a hard rule
 
Great article talking about why has Sillicon Valley been so sucessful

http://www.paulgraham.com/america.html

-US allows immigration (less so these days)
-US is rich, so basic infrastructure is not an issue
-American universities are better
-You can fire people easily in the US (This gives the US a huge advantage vs other countries, my own country suffers severly from the lack of labor flexbility, it just kills startups to have all these costs)
-US doesnt care about some of the law breaking that happens with early stage companies (and perhaps its a reason to be optimistic about what the SEC will do about ICOs)
-US has a large domestic market (300M of consumers that can pay)
-US has a lot of angel investors
 
Its also very interesting his comments about taxes

"There are also a couple things you could do to beat America at the national level. One would be to have lower capital gains taxes. It doesn't seem critical to have the lowest income taxes, because to take advantage of those, people have to move. [7]But if capital gains rates vary, you move assets, not yourself, so changes are reflected at market speeds. The lower the rate, the cheaper it is to buy stock in growing companies as opposed to real estate, or bonds, or stocks bought for the dividends they pay.

So if you want to encourage startups you should have a low rate on capital gains. Politicians are caught between a rock and a hard place here, however: make the capital gains rate low and be accused of creating "tax breaks for the rich," or make it high and starve growing companies of investment capital. "

Lower capital gain taxes also enable successful entrepreneurs to keep more of their big gains (when they sell their company) which then enables them to invest more when they do angel investing (which a lot of succesful founders do), which creates a virtuous circle (more startups funded, more sucessful companies, more founders turning into angels, etc, etc).

That is an a well thought out argument in the name of lower capital gains, yet, when people criticize it, they dont bring up thought out counter arguments. Its just the old 'these are good for the rich and thats it'. The typical Paul Krugman blog type stuff.
 
Daal said:
One of my biggest mistakes was not having exposed myself to SF type folks (through books, videos, courses) earlier in my trading/investing career.
More...

One of the ways that I'm starting to see this mistake is to understand what Sillicon Valley/SF is, which I'm seeing more and more by reading Paul Graham. Its essentially a vortex that sucks financial and intelectual capital from all over the United States, with the goal to change the world and get rich. And it feeds on itself (more profits, means more angel/venture funding which attracts more intelectual capital, and so on).

But this is even more powerful than it looks, especially for non-US citizens. In finance in Brazil, for instance, when I read things like investing newsletters, articles, etc its almost like 10-20% of the words coming out of the authors, are english words. Especifically american terms and quotes coming out of american authors/practioneers. People will talk about 'crowfunding' 'cap rates', even the Brazilian version of Shark Tank uses the term 'valuation' or 'b2b' and many others in english instead of portuguese. The truth is that the US has a giant amount of intelectual capital, its the most brillant country on earth. And its not only in finance, a lot of other fields tend to suck information out of american books/courses/videos/schools, etc. In enterpreneurship as well, the other day I met a 30 woman who was pitching me her startup, at some point I told her that about 20% of the words that came out of her mouth were in english ('pitchdeck' 'cap table' 'CTO', all words she used, despite the fact that it was a conversation in portuguese)

When you look at the intelectual influence of the US on the rest of the world, you realize how the US was the center for innovation and learning of concepts for the last 100 years. And when you compound that with a place like Silicon Valley (which is a vortex that attracts intelectual capital like crazy), you realize that having exposure to SF/SV is very important if you want to have a glimpse about what is going on with the world, what happened in the past, ideas about good thinking, etc etc. For instance, I would like to read about Marc Andressen's take on the financial crisis, its quite possible that he would only say a bunch of nonsense (he is not a macro guy after all) but at least it would be INTERESTING nonsense, stuff that you might not have considered. Maybe that would be hard to debunk, etc. Its certainly would be food for thought

Finance and NY tends to attract intelectual capital as well, but at this point of my investing/trading career, I believe I have absorbed what I had to absorb from it. There is not much more for me to learn from those types of influences, certainly when compared to SF.
 
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Here his a good example. Fred Wilson, a respected VC, calling the housing bottom in December of 2008 based on simple ideas like rent vs own analysis
http://avc.com/2008/12/when-will-housi/

Back them, if you red the finance blogs (from typical NY influenced thinkers), it was mostly all about how housing prices would continue to go down and people should not buy

VCs and smart SF thinkers can provide good diversification in terms of information one needs to properly analyse things
 
Charlie Munger outlined the following in “The Art of Stockpicking”:

“If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”
 
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