Success leaves clues and Stanley Druckenmiller has been described as on of the greatest money-making machines in history. Macro Ops wrote a tremendous article on Stanley, partly taken from the great Jack Schwager book The New Market Wizards. You can read the Macro Ops article here.
The Macro Ops summary of key Druckenmiller concepts aligns closely with the Tribe approach VC. We’ve used key parts as inspiration in describing aspects of our process that aligns with what is described about “the Druck” and his approach to investing.
What will make this investment go up and down?
At Tribe Global Ventures we focus our analysis on seeking to identify the factors that were strongly correlated to an investment’s value movement up and down. We’d suggest that many investors don’t really understand what makes particular investments go up and down in value long term.
We are not talking about something like “sales will make this go up”. Below the surface, there are a handful of factors that are the actual drivers of the business. We invest in companies that demonstrate an ability to understand those drivers as well as an ability to impact them. Often the drivers are understandable but can’t be directly impacted easily. These are hard businesses to be in even if the market is large and the product awesome.
Many VCs take recent traction and revenues and just extrapolate them into the future. They fail to really look at the mechanism that drives the bottom line for a particular company or sector going forward. The key to being a good VC is to identify the factor(s) that will drive earnings going forward, not what drove them in the past. This is especially true for companies expanding into new geographies.
Tribe employ a range of approaches (fundamental and macro based) to broaden our view of this future playing field, and as the old saying goes, our experience shows what got you here won’t get you there.
The richest are in the niches
Even with a focus on understanding what will make this investment go up or down in the future, the next mistake we’d say a good chunk of investors and VCs make is they feel like they’ve got to be playing in a wide range of stuff. But the greatest success we see time and time again is putting your eggs in one area of focus/niche and then watch the basket very carefully. For Tribe, this area of focus/niche is B2B focused companies that have product market fit in Australia and/or NZ, now seeking to expand to the UK and US. We are the pathfinders to help this vertical.
We suggest our LPs would have a range of baskets they seek to get exposure in based on their own goals, but the investment managers they choose to manage the individual baskets should be focused.
Protecting against losses as much as seeking the gains
To earn superior long-term returns, you must be willing to bet big when your conviction is high. And the corollary is that you need to protect your capital by not wasting it on a “bunch of stuff” you don’t have much conviction on.
Whilst no one wants to incur losses, you couldn’t prove it from an examination of the behaviour of many VCs, however. The recent collapse of FTX and crypto in general is a great case in point. The speculative urge that lies within most is strong; the prospect of free lunch can be compelling, especially when others have already seemingly partaken. It can be hard to concentrate on reducing losses when others are greedily achieving gains and your deal flow sources are on the phone offering the latest “hot” Co. Yet the avoidance of unnecessary loss is the surest way to ensure a profitable outcome long term.
We have learned that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. An intense focus on capital preservation coupled with a focused bet approach is the barbell philosophy used by Tribe.
Keeping your losses small and pushing your winners hard is the name of the game in profitable VC.