Last year I met Mark Suster. I like Marc and read his blog avidly. We were talking about our backgrounds. We both are graduates of the EMBA program at the Chicago Booth. Marc said to me, “It’s not totally clear to me why a person who was a floor trader trading their own money would be similar to a seed investor.”
It’s a good question. It’s a very hard one to answer, because Mark is correct. All floor traders are not cut out for seed stage investing. Floor trading, and seed investing are both highly specialized. It’s very hard to explain to people what floor trading was actually like. But, there are skills and psychological constructs that overlap.
One overlap is simply this. In both, an investor does their homework. They write a check (or make a trade) and then everything is mostly out of their control. In seed stage investing, it’s up to the entrepreneur to execute. In trading, it’s up to the market to go the way the trader thought it could go. People might say, “Well, I sit on the board of a company”, but by the time the shit hits the fan it’s too late to do anything. Your decision is to alter strategy to see if it can change, re-invest or take the hit. When a market moves against you, you either ride out the storm, manage the trade and take it, or blow out of the trade.
One thing about trading your own money, you get very comfortable with the emotion that comes with doing it, or you don’t last long. I cannot explain the depth of pain you feel when you are losing. You get used to it.
As soon as you lose money, your brain goes into a fight or flight response. It’s genetic, and programmed into us. Fear is a powerful emotion. I know a lot of people that just don’t have the stomach to accept the risk that comes with trading or seed investing. When you make decisions based on fear, usually you lose money. Harnessing that fear is an acquired skill. Ignoring it is the wrong response, but letting it control you is wrong too.
I have seen investors in seed stage startups act out of fear. Instead of being productive board members of companies, they meddle. Instead of supporting and helping the CEO, they backbite and snipe and try to get rid of them. This is why it’s very important for entrepreneurs to find out what their investors are like when companies fail, not succeed. Dealing with success is a first world problem.
I have seen companies ripped apart by emotional investors. The company might have failed anyway, but it was the action by a fearful investor that tore it apart rather than failure of the team to execute. Fear manifests itself as anger or other debilitating emotions. Ironically, fearful investors think they are going through an unbiased process to logically legitimize the actions they take and the line of thinking they are pursuing. I have seen it with traders, and I have seen it with startups.
Traders who traded their own money confronted fear daily. I shared this article with my friends that were traders and they laughed. The article is about a Wall Streeter that lost $200M. That hurts but none of it was his own dough. He lost his bonus. I saw guys lose their entire life savings-that they had made over their whole career.
When you were a trader, you ran into a lot of people that said they “traded”. We used to ask them if they traded their own dough. If not, then we didn’t categorize them as a trader. They were a broker, or an employee. In seed investing, I run into a lot of people that say they are seed investors. But, I never run into them on cap tables and I never see them writing checks. I don’t care about the volume or size that anyone does. It’s more about, “Are they taking risk with their own dough?” “Fake it till you make it” doesn’t fly.
My friend and I were talking about trading. One day he was down double his net worth. He wound up making five figures on the day. Imagine having to go home to your family and saying that you had to sell everything, and by the way we don’t have any money for the mortgage or groceries even after we sell everything. That’s true fear.
Knowing how to deal with fear is one thing that seed investors and independent traders have in common. There are others which I will blog about.
Here is one thing I know. I would never invest in a fund where a general partner didn’t have a significant portion of their own money at stake.