Return and ridicule are highly correlated, prominent New York venture capitalist Fred Wilson recently wrote on his blog.
“When I see people laughing at ideas and companies we have backed, I smile,” Wilson writes. “It means we are going to make a lot of money on that investment.”
Wilson says that his firm, Union Square Ventures, has made more money on startups that were highly ridiculed than on those that were not. He has backed Twitter, Tumblr, Foursquare, and Zynga.
Many people in the venture capital business simply follow the herd, Wilson says. But “momentum investing” doesn’t work well in private markets. In fact, he says it hardly ever works:
So many folks in the venture capital business are sheep that just want to follow the herd. They are momentum investors purchasing highly illquid investments. That is a recipe for disaster. Momentum investing works in highly liquid markets (sometimes). From what I can tell, it almost never works in private markets.
Better to invest in laughing stocks. Because she who laugh lasts, laughs best.
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