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How to find the next big promotions: lessons of venture capitalists

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This morning money…In reverse, regret and inevitability … venture capitalists and the hunt for the unicorn … appreciate the value of the idea as a venture capitalist … imagine the future … and more …

Marvel The Avengers: Final is the second most profitable film in history, with only about $ 50 million prevented from falling Avatar from the top.

Three more Marvel movies are in the top 10 highest grossing movies of all time. So, if you had the opportunity to apply for Marvel superhero intellectual property rights, how high would it be?

In 2009, Disney was successful with an offer of $ 4.3 billion.

But what if you could buy the rights for $ 25 million?

Yes, $ 25 million.

Sounds ridiculous.

But that’s how much such an opportunity once cost.

In 1998, Sony had a chance to own almost every Marvel character for a share of the price Disney paid years later.

How The Wall Street Journal reported (emphasis added):

In 1998, a young Sony Pictures executive named Jair Landau was commissioned to secure the rights to Spider-Man screens. His company had DVD rights to Web Slinger, but it took the rest to make the film.

Marvel Entertainment, then only a well-known name in the world of comics, has just started trying to make deals on movies. The company had just come out of bankruptcy and was desperate for money, so its new head Ike Pearlmutter responded with a bolder offer.

He argued that Sony could get the rights to the film for almost every Marvel character – Iron Man, Thor, Ant Man, Black Panther and others – for $ 25 million.

Mr Landau returned the offer to his Sony bosses, whose response was swift and decisive, he recalled in an interview: «None of the other Marvel characters bother anyone. Go back and make a deal just for Spider-Man. ”

Looking back, regret and inevitability

Sony’s missed opportunities are a common story of regret.

In 2000, Blockbuster had a chance to buy Netflix for $ 50 million.

And – most outrageously – to Excite, one of the original Internet portals, turned to the founders of Google, who were ready to sell then starting a startup for $ 1 million.

Excite refused them.

Of course, lately very insightful.

Knowing that we now know how could Sony and Excite pass such huge opportunities?

But retrospective also tends to obscure everything with a sense of inevitability.

But will Google inevitably become today’s technology hippopotamus in the 1990s?

Was it inevitable that Marvel superheroes would dominate modern cinema? After all, when Sony was asked to acquire the rights to many of Marvel’s characters, Marvel was poor, recovering from bankruptcy, and, above all, “no one cared about others. [non-Spiderman] Marvel characters. ‘

Who would have risked that moment?

And it made me think…

How to do do you see the possibilities of generations?

If you were offered to buy Google at an early stage for $ 1 million, would you have the foresight?

Analysts of venture companies discuss such issues on a daily basis.

Venture capitalists and unicorn hunting

Investors who have set their mission to track down the “next big deal” are often found in venture capital companies.

Places like Sequoia Capital, Andreessen Horowitz and Tiger Global.

Venture capital is not happy with exceeding market figures by a few percentage points, putting billions into blue chips.

He is chasing greater profits, taking great risks in the pursuit of the next pioneering business.

As financial historian Sebastian Malabi writes in his recent book, Venture capital and the art of destruction (underlined):

When modern venture capitalists support flying cars, space tourism, or artificial intelligence systems that write film scripts, they follow this logic of power law. Their job is to look beyond the horizon, to achieve high-risk opportunities and huge rewards that most people find unattainable.

“We could cure cancer, dementia and all the diseases of age and metabolic decay,” says Peter Till, ignoring the contempt. “We can invent faster ways to move from place to place on the planet’s surface; we can even learn to avoid it altogether and set new boundaries. ”

Of course, investing in something that is absolutely impossible is a waste of resources. But a more common mistake, more human, is to invest too timidly: to support obvious ideas that others can copy and from which it will therefore be difficult to make a profit.

I found the last point of illumination.

Venture capital firms are not going gently on this good night.

They are looking for the unforeseen, what is not talked about, new ideas that have not yet hit the financial press.

They may also have a larger time horizon, which can help in forecasting final earnings that others may not see due to the current low visibility.

Like my copy of Paul Samuelson’s long-term work Economics the textbook noted:

To have extraordinary performance, you need to be able to predict the increase in earnings per share of companies before the market as a whole learns about them.

There is a risk in all this … and a reward.

Evaluate the value of an idea as a venture capitalist

But how do you assess the value, originality and potential of an idea?

The famous venture company Sequoia Capital provides one way.

In his book Crowd Storm: the future of innovation, ideas and problem solvingSean Abrahamsan described the overall process in Sequoia for evaluating ideas:

To evaluate the ideas, Sequoia asks those presenting their business plans to anticipate a number of issues, including:

  • Did you understand the problem well?
  • Will this solution solve the problem?
  • How big is the market (and therefore how big can a business become if it succeeds)?
  • Why is it time for that (since it is often too early or too late in business to turn to opportunities)?

While some of the best ideas started out as doodles on napkins, evaluating and validating these ideas requires much more work. Most of the statements Sequoia receives do not meet one or more of the criteria they use to filter ideas.

Why do most of the pitches that Sequoia listens to don’t work?

A working prototype can prove that a company can solve a problem; however, questions may remain as to whether the market is ready for this idea.

Or the business may work well, but the market may not be large enough to provide a good return.

A future firm may offer a valuable service, but the cost of its sales and marketing may make it too expensive to provide value to a sufficient number of customers.

The ability to pinpoint a societal problem and assess whether a business can solve it in a dominant way can be profitable.

Harvard Business Review cites a study by Play Bigger, a Silicon Valley consulting company, about post-IPO value creation.

How HBR reported (emphasis added):

The group evaluated companies in their sample based on whether they tried to create entirely new categories of products or services to meet needs that consumers did not understand. Among other criteria, they considered whether firms are formulating new problems that cannot be solved by existing solutions, and whether they are cultivating large and active developer ecosystems. They found it the vast majority of post-IPO value creation comes from companies they call “category kings”. occupying entirely new niches; think of Facebook, LinkedIn and Tableau. These niches are mostly “winners take everything” – the necklace of categories occupies 76% of the market.

“We keep hearing,‘ Oh, it’s going to be a huge market, a place for a lot of players, ’” Lochhead says. “But that’s really not true.”

Reading about the techniques used in venture companies, I realized how much weight is given to long-term thinking … and imagination.

Transformational businesses need many nights to become a “overnight” success.

So you need to have a distant look and patience to see it.

But what partly determines the long view is the ability to imagine.

Imagining the future

Philip Lafont manages Coatue Management, a hedge fund and venture capital firm that specializes in technology.

Lafont is also known for being a “tiger” who worked with Julian Robertson’s famous Tiger Management hedge fund.

In 2021, Laffont spoke about how the lessons of private market investment can benefit investors in public capital.

He thought (underlined):

Patience and confidence in history for 7-10 years will bring stocks much higher than can be handled during painful stock fluctuations.

Private investing is to imagine the future because there is less data left for analysis than in a public company, and this anticipation usually worsens the perception of options over time.

Conclusion: imagination is a skill. Uncertainty is an opportunity. The data is important, but so is the story. Patience is underestimated.

Part of the reason why representation is so important is that finding the next “king of categories” is impossible just by extrapolating from past data.

In many cases, transformational ideas – and business – were step-by-step changes, not something of growth.

As Malaby aptly noted in his book on venture capital companies (emphasis added):

Extrapolating from past data will predict the future only when there is nothing to expect; if tomorrow is a simple continuation of today, why bother with predictions?

Revolutions that will matter – major disruptions that create wealth for inventors and anxiety for workers, or that upset the geopolitical balance and change human relationships – cannot be predicted based on extrapolation of past data, precisely because such revolutions are so severely destructive.

Imagination is a skill, uncertainty is an opportunity.

Sincerely,

Kirill Prokopenko,
For Morning money

https://www.moneymorning.com.au/20220426/how-to-find-the-next-big-stock-lessons-from-venture-capitalists.html

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