Scaling Up

Last week I read Fred Wilson’s post on ‘Reserves‘, and I have had some thoughts noodling around ever since because the idea of scaling up into an investment even as it rises in value has been something I struggle with. Though, it makes sense if the idea is to try and hit a home run. I thought this snippet to be interesting:

But at USV, we typically will make four to six investments in a “name” over five to seven years.

-Fred Wilson

That is a run rate of about one ‘add-on’ investment each year, and those additional investments are knowingly at increased valuation. A bit inverse from what I have always read and followed from a variety of value investors.

Following this sort of strategy makes quite a bit of sense if your goal is to invest in a business over a long time horizon. In venture, you have a goal to help fund and keep the business liquid with capital and maintain your investment as the company grows. In public equities, your goal is to grow a position and let it run.

To be honest, I have thought about this a lot even before Fred wrote up his post. As my investing strategy continues to evolve and turn into focusing on the business, I basically have to be willing to add to a position even it is ‘above’ my prior purchase price on both a share and valuation basis. Buying additional at higher prices ends up actually being a good thing.

I’d like to put it into practice, hopefully I can commit.