Peter Wagner: 27 Years of Investing Lessons of Picking Founders, Price Discipline & Reserve | E1123

Intro (00:00:00)

• Peter Wagner discusses the importance of working with talented and capable founders.
• Founders with glaring deficiencies in current approaches can be frustrating to work with.
• Wagner finds joy in working with founders who are passionate and driven to solve problems.

Intro & VC Entry (00:00:19)

• Peter Wagner joined Venture in July 1996 after trying to get a job in a startup.
• He inadvertently became a venture capitalist while working as a product manager at Silicon Graphics.
• Wagner took a pay cut to join Excel, thinking he would stay for 18 months but ended up staying longer.
• He realized he wanted to be a venture capitalist fairly quickly due to the fertile ground and fun environment of the internet boom in the late '90s.
• Early hits in an investing career can be a double-edged sword, providing credibility and relevance but potentially skipping important lessons that could be learned from failures.

Fear, Greed & AI (00:03:11)

• Venture capitalists often make the same mistakes because they believe that if everyone else is doing it, they won't be punished.
• This behavior leads to cyclical returns in the industry.
• Maintaining discipline can sometimes lead to missing out on transformative phases.
• There is a balance between fear and greed when investing in new technologies like AI.
• AI could be the next super cycle, but it is important to participate in a way that aligns with your investment strategy.

Relationships & Assets (00:06:06)

• There are two business models in Venture: asset gatherers and return generators.
• Asset gatherers need places to put assets that deliver "good enough" returns.
• Return generators aim to maximize multiple uninvested capital.
• Boutique providers can play in a world of asset accumulators by finding a harmonious model that leverages the strengths of both types of investors.
• Scaled-up capital deployers recognize the quality of early-stage work done by boutique providers and may find it attractive to invest in companies where the boutique provider has been hands-on and helped build a strong foundation.
• In some cases, it may be advisable for founders to take a 10 on 50 offer from an asset accumulator rather than a 3 on 15 offer from a boutique provider, depending on the circumstances.

VC Landscape & Accel (00:09:38)

• Peter Wagner believes that great founders can achieve even more with a good business partner, but they don't necessarily need help from venture capitalists (VCs).
• The caliber of the founder is crucial in maximizing the benefits of relationships with investors and board members.
• Excel, where Wagner worked for 14 years, aimed to be among the top venture capital firms and excelled in talent development, identifying and nurturing exceptional talent within the company.
• Excel's approach to talent development involved granting talented individuals autonomy and accountability while providing guidance to prevent significant mistakes.
• The "sleepless night factor" refers to the level of accountability that drives individuals to work diligently and feel responsible for their decisions.
• Wagner emphasizes the importance of personal accountability in investment decisions, describing the feeling of "sleep well" as confidence and comfort in investment choices, while "sleepless" nights occur when investors are deeply concerned about a particular investment or a problem within a portfolio company.
• Wagner personally experiences sleepless nights due to his strong sense of responsibility towards his investments.

Stress & Patterns (00:14:21)

• Peter Wagner discusses the challenges of making consequential decisions in uncertain environments, emphasizing individual accountability and group responsibility.
• Wagner reflects on the success of Excel but cautions against adding opportunity funds without fully understanding the consequences, emphasizing the need for focus and specialization in investment strategies.
• He views pattern recognition as a useful tool but warns against being a prisoner of it, as anomalies can sometimes be the key to identifying exceptional companies.
• In B2B technology, Wagner emphasizes the importance of founders having a deep understanding of the industry they are disrupting, as they are often the best entrepreneurs due to their personal motivation to change things.
• Insiders to a product or market tend to be preferred over outsiders when it comes to founding successful companies.
• There are two main types of innovation: market creation (new category creation) and optimization innovation (making something better in an existing market).

Market Innovation & Timing (00:21:21)

• Product innovation and improvement are both viable strategies, but finding the balance between creating a new category and enhancing an existing one is crucial.
• Snowflake successfully leveraged cloud technology to transform data warehousing, while Pine Cone exemplifies a more evangelical category creation mission in AI.
• Market timing risk is a challenge for early-stage investors, but thematic focus and deep domain knowledge can help predict architectural transitions.
• Startups should aim for a well-defined entry value proposition that leads to a large addressable market, avoiding multi-layer dependencies that increase complexity.
• Peter Wagner emphasizes market size and contained wedge when evaluating investment opportunities, reflecting on a missed opportunity due to misjudging market size.
• The missed opportunity involved a trust and safety product using AI to support businesses' trust and safety efforts.

Opportunities & Cynicism (00:26:57)

• A small number of businesses account for the majority of online spending.
• Founders' passion and unique insights help prevent cynicism in investing.
• Successful new products offer clear and significant benefits, leading to budget reallocation.
• Adapting to rapidly changing venture market dynamics is crucial, as highlighted by Snowflake's investment.
• Peter Wagner shared a missed investment opportunity due to the financing size exceeding his fund's capacity.
• Wagner emphasizes the importance of being a focused player in a scaling industry with large capital pools.
• When faced with an attractive investment opportunity beyond the fund's size, Wagner suggests resizing the check rather than passing on the opportunity.

Investment & Risks (00:32:28)

• Peter Wagner, with 27 years of investment experience, shares valuable lessons learned.
• Missed an opportunity to invest in a successful company due to existing investors' resistance.
• Invested in competitive local exchange carriers during the Broadband buildout, which proved challenging for Venture Capital-backed companies.
• Experienced significant losses after 9/11 when access to capital suddenly disappeared, emphasizing its importance for certain businesses.
• Some businesses, though potentially good, may not be suitable for Venture Capital due to high capital intensity and engineering requirements.
• Raises concerns about current Venture investments in defense, climate, battery, and energy sectors, which share similar risks as past mistakes due to capital intensity.
• Price can be a mental trap, especially in early-stage investing, and a low price alone does not justify an investment.
• Queasiness about price can indicate a lack of conviction, and excessive focus on price can lead to missed opportunities.
• Open-mindedness and considering different perspectives are crucial for successful investment decisions.

Ownership & Cycles (00:40:39)

• Founders should carefully consider who they partner with in business, as ownership is not simply a matter of price.
• The traditional 20% ownership rule is outdated in today's market, where fund sizes and outcomes have changed significantly.
• Venture returns may be negatively impacted by increased capital supply, dilution, and larger fund sizes, leading to a potential decline across the industry.
• Despite these challenges, technology's growing importance in the global economy has helped sustain venture returns.
• Liquidity in venture capital is cyclical, with limited opportunities for exceptional returns.

Liquidity & Investor Insight (00:49:53)

• Peter Wagner tends to hold onto public stocks of portfolio companies that have done IPOs, even if they underperform, as he believes successful investments outweigh the losses.
• He emphasizes the importance of listening closely to management teams as they are closer to the action and their recommendations should be carefully considered.
• Wagner admits to making mistakes in the past by not fully understanding management teams' perspectives, leading to missed opportunities.
• He highlights the need to pay close attention to what management teams are communicating and to be sensitive to their insights.
• Wagner does not believe that rich investors necessarily make better investors due to their reduced fear.
• He argues that hunger is important for all investors, as it motivates them to achieve their goals and overcome challenges.
• Some people remain hungry even with substantial personal wealth, driven by other motivations or personality traits.

Quick-Fire Round (00:53:20)

• Peter Wagner, a partner at Wing Venture Capital, shares his 27 years of investing lessons.
• Focus on an area of interest and become a leading authority in it, even if it means being lonely for long periods.
• Avoid over-reliance on quantitative metrics in investment decision-making, as they can miss important factors.
• Develop strategic analysis, judgment, and other skills that won't show up on a spreadsheet to become a good investor.
• There is a high demand for experienced early-stage venture capitalists with a track record, and investors are frustrated with the lack of focus on early-stage strategies in larger firms.
• Inexperienced founders often prioritize quick fixes and "good enough" solutions over long-term value creation.
• The current trend of ludicrous funding rounds for hot AI companies, driven by large institutional investors, raises concerns about repeating past mistakes and distorting industry dynamics.
• Wing Venture Capital's mission is to be the best partner to founders building B2B technology companies from their early stages to self-sustaining companies of enduring value.