The Market vs The Frontier – My View

Many times, as a venture capitalist, I hear entrepreneurs keep saying “This time is different” or “We will change the world with this”. With the mandate to help great entrepreneurs with interesting ideas and the new technology, I sometimes wonder if people are simply using buzzwords for the sake of it. Some come to claim that they are worth $100m even though they are pre-revenue because of all the technology they have employed in the solution. So, it comes to the question, should I invest or should I not invest?

Being a value investor in the public markets, I have been applying the techniques of Berkshire Hathaway and making quite decent results. However, after reading this article, I need to look at my portfolio differently, especially for my very growth startup portfolio piece. Indeed, value investing faces a block when we go into the case of early stage, high growth startups (hence I have earned myself the nickname “The Schizophrenic Investor” – very conservative in the public markets and yet very aggressive in the private markets).

Many venture funds in Singapore tend to invest in what I like to call “The Market”. In fact, many of my friends who run their own venture funds advised me to “invest mainly in copycats”. Venture economics aren’t predicated on easily modeled 20% gains, but the unlikely 2,000X returns — which tend to only exist on the frontier. So looking at it from this perspective, investing in the frontier does indeed have its upside (which is coupled to its risk of 99.99% losing everything – but all you need is ONE to take off to a moonshot, much easier to find in the frontier).

The rules are so much different in the frontier. Some of them don’t resemble anything like we have seen before, and others are newer, way better versions of something in a rapidly maturing market. The fundamental bet in this scenario is an immensely huge future cash flow potential in the future. Like William Janeway said, “if an investor can determine what the mature cash flows may become for the investment, it’s all for naught.”

Unfortunately, many of us fall into the trap of mixing the market and the frontier into the same picture, when they are from two separate universes. We look for safety in the frontier, hoping to limit the downsides and maximize the upside by doing it that way (which in theory is very sound, but in all practicality, doesn’t really make sense). It is definitely good that we spread out by splitting our exposure between “safer” or more established assets and playing for true volatility around the frontier, but we need different lenses when we evaluate opportunities in the market and in the frontier. Both has its strengths, the markets being proven and the frontier has the opportunity for moonshots.

I love Lux Capital‘s philosophy, where the edge is the key. The edge can come from informational, analytical or behaviorial sources. It is about looking at that information differently in a way that leads to a novel conclusion (a variant perception). The magic lies in seeking what others don’t seek, avoiding the herds and fads and having the courage to venture out into the unknown. The key edge is leveraging on information asymmetry in the frontier to your advantage. If you want to know more, you can go ahead and read this article.

Indeed, we need to know: are we playing in the Market or the Frontier? If the latter, they ought not to swing big — for the future is unknown. And up for grabs.

Time to go back and review my firm’s mandate…