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Peter Thiel is one of the world's greatest investors.
But in 2005 he made his biggest mistake ever costing him billions.
A valuable lesson on following your winners:
But in 2005 he made his biggest mistake ever costing him billions.
A valuable lesson on following your winners:
Rewind to the start of 2005:
"Thefacebook" raised $12.7M for 15% of the company.
At the time, Facebook had an eye-watering $98M valuation.
The round was led by Accel.
"Thefacebook" raised $12.7M for 15% of the company.
At the time, Facebook had an eye-watering $98M valuation.
The round was led by Accel.
In 2006, Facebook raised again off the back of high user growth and revenue numbers.
The round was $27.5M from firms including Greylock, Meritech Capital Partners and Founders Fund.
Accel participated again.
Now here's where it get's interesting...
The round was $27.5M from firms including Greylock, Meritech Capital Partners and Founders Fund.
Accel participated again.
Now here's where it get's interesting...
Accel was one of Facebook's earliest investors.
Even after selling $500M of equity in 2010, their position was worth $9B upon Facebook’s IPO in 2012.
This made Accel’s IX fund one of the best performing venture capital funds of all time.
The lesson:
Even after selling $500M of equity in 2010, their position was worth $9B upon Facebook’s IPO in 2012.
This made Accel’s IX fund one of the best performing venture capital funds of all time.
The lesson:
They doubled down and defended their position in Facebook.
This was also a bet that Peter Thiel, Facebook’s first investor missed...
This was also a bet that Peter Thiel, Facebook’s first investor missed...
Thiel invested $500K back in the summer of 2004 for 10% of Facebook.
At the time he said:
“It was a very reasonable valuation. I thought it was going to be a pretty safe investment.”
At the time he said:
“It was a very reasonable valuation. I thought it was going to be a pretty safe investment.”
When Facebook raised more money only 8 months later, Thiel did not participate in the round.
He felt the company was overvalued and avoided following his winner.
Facebook was growing rapidly and was actually undervalued...
He felt the company was overvalued and avoided following his winner.
Facebook was growing rapidly and was actually undervalued...
Many people underestimate how fast exponential growth increases.
This is known as the “exponential growth bias”.
In Thiel’s case, his behaviour had profound consequences.
He would later miss out on Facebook’s Series A round which would serve as a serious lesson.
This is known as the “exponential growth bias”.
In Thiel’s case, his behaviour had profound consequences.
He would later miss out on Facebook’s Series A round which would serve as a serious lesson.
He wrote:
“Our general life experience is pretty linear. We vastly underestimate exponential things… When you have an up round with a big increase in valuation, many or even most VCs tend to believe that the step up is too big and they will thus underprice it.”
“Our general life experience is pretty linear. We vastly underestimate exponential things… When you have an up round with a big increase in valuation, many or even most VCs tend to believe that the step up is too big and they will thus underprice it.”
In venture capital, only a few investments become home runs.
Thiel missed the opportunity to double down on his winner and maximise his return.
However this is extremely difficult to do.
Only the best VC firms do this well and benefit from the huge upside.
Thiel missed the opportunity to double down on his winner and maximise his return.
However this is extremely difficult to do.
Only the best VC firms do this well and benefit from the huge upside.
The big takeaway is the idea of conviction.
A fund must have strong belief in their portfolio company to follow on even when there is a steep rise in valuation to capture future upside.
A fund must have strong belief in their portfolio company to follow on even when there is a steep rise in valuation to capture future upside.
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Sources:
https://www.cbinsights.com/research/best-venture-capital-investments/
https://www.getrevue.co/profile/alexbanks/issues/doubling-down-on-your-winners-1151563
https://www.cbinsights.com/research/best-venture-capital-investments/
https://www.getrevue.co/profile/alexbanks/issues/doubling-down-on-your-winners-1151563
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