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Venture capitalist Fred Wilson, of Union Square Ventures, has helped his firm post some of the best returns in the entire VC industry over the past five years.The firm’s performance has been nothing short of spectacular, and Fred Wilson’s reputation has justifiably soared.
And yet, in 2012, even though USV had some amazing exits that coined money for the firm, its partners, and its clients, Wilson said in a recent blog post that he feels like it was a “shitty year.”
Because Wilson did not make a single investment in 2012.
In fact, Wilson has not made a single investment since the summer of 2011–more than 18 months ago.
For a firm that has made dozens of investments over the last five years, and has been on a tremendous roll, that is highly unusual.
Usually, when firms and investors get on a hot streak, the partners get giddier and more aggressive as the streak continues.
They begin to feel like they’re playing with “house money,” boatloads of it, and they start throwing that money at whatever strikes their fancy.
They also feel pressure to continue to justify their reputations (and fees), and keep the momentum going.
So when they’re not making investments, they feel like they’re “doing nothing”–resting on laurels based on past accomplishments having nothing do to with what they are doing right now.
And yet, for those who have been around long enough to understand the ebb and flow of investment cycles, it is clear that “doing nothing” is often the smartest investment decision of all.
Every great investment opportunity goes through this investment cycle.
In the beginning, when the opportunity is truly “speculative”–when most people think investing in the opportunity is obviously stupid–a few brave souls make brave bets and then cash in on extraordinary early returns.
Then, everyone else sees those returns, and the money rushes in.
Soon, all the investment money bids up prices and creates a wave of competitors vying for the same opportunity, and investment returns begin to drop.
Eventually, the “fools” rush in, bidding prices up to truly silly levels, and dozens of competitors fight over the tiny crumbs of opportunity left on the table.
Then returns collapse and the cycle ends.
The consumer Internet cycle that drove Union Square Ventures’ returns over the past 5-7 years began to wind down a year or two ago. So many investors had jumped into the game, so many companies were attacking the opportunity, and valuations had gotten so high that expected returns for small startups had begun to drop. There was massive excitement in the sector, of course–and huge “buzz” (in part because so many people were in the game)–but the fundamentals were no longer attractive. So the smartest investors began to scale back and look elsewhere.
Or, in the case of Union Square, they just began to say “no.”
It’s hard to imagine how many serious business plans and opportunities Union Square has said “no” to over the past 18 months. If I had to guess, I’d say it was on the order of 10 per day, or about 500 over the period. And that’s just the serious ones.
Saying “no” when the rest of the industry (and your competitors) are in a feeding frenzy is difficult.
You often look and feel like an idiot.
No matter how confident you are that the cycle has played out, you know that you might be wrong, and that you’ll end up with your reputation in tatters, looking like a fool.
So saying “no” is extremely hard to do.
But, in investing, it’s occasionally the smartest thing to do.
So, even though Fred Wilson feels like he had a “shitty year” in 2012 because he didn’t make any new investments, it’s possible (likely, even) that he will end up having had a much better year than almost every other VC in the industry.
In other words, Wilson may have demonstrated again that the performance Union Square has delivered over the past 5 years is no fluke and that he and his partners Brad Burnham and Albert Wenger deserve their reputations as one of the most talented investment teams in the industry.
SEE ALSO: FRED WILSON: 2011 Was A ‘Shitty Year’