Do not follow the crowd

Editor's Note: Jules Maltz is a general partner at institutional venture partners (IVP), late stage venture capital firm based in Menlo Park. You can follow him on Twitter @ julesmaltz.

Whenever I was going to make new investments, I always think of 2 × 2 matrix, I learned from Andy Rachleff, benchmark capital, former partner.

The idea is that if you do a new venture investment (or base the company), you may be "right" or "wrong" and you can be "consensus" (after the crowds) or "non-consensual." everyone knows that if you're wrong, you're not making any money. But the interesting part of the chart to the right and above consensus too great for your return. A lot of money, as any horse racing handicapper can tell you is when you're right and don't follow the crowd.

Fortunately (for leading players and savvy venture capitalists), the crowd expressed are often based on the "hype" and not reality. In conditions of effective market, each company will fall somewhere along the line of dotted black in the chart below (with equal basis advertising).

However, in reality, the venture market is inefficient. There are many companies (which I will not call) whose advertising is significantly higher than the base and there are a number of companies (which many of us do not know), which are the opposite. Perhaps I am wrong, as I am right in investment decisions, but my two favorite kinds of companies are the characteristics of the oval (a) or (B):

Hidden gems (Oval): these are the companies that have strong fundamentals that exceed their advertising. They are often on the market, or geographic location, are not widely enterprise of the branch and/or have their business in a market environment is still not understood. Examples of these types of investments in our portfolio of Buddy Media (2010) and Fleetmatics (2010) and outside of our portfolio include RPX (2009), Palantir is (2008) and now (2006) If you're right, the company will grow in advertising and as a basis. If you are wrong, the company will go away quietly without anyone noticing. You know that you're invested hidden gem, the if people tell you:

What they are doing again? looks like playThat niche in "interesting" investmentHave fun, flying in the x meeting of the Council! (sarcastically)

Although hidden gems is a non-consensus because their basis exceeds their advertising, you can make a non-consensus "hyped" investment company if you think it will outperform the expectations of the crowd. These rare (and expensive) companies are called:

Breakthroughs (Oval): they have early hype, but has not yet entered the mainstream. Consensus is that they can be "Roman candle", which will soon come crashing down to reality (blue dashed line). You may not be consensus if you think it is much more than even the early advertising offers. During the hidden Gem, investing uses low buy sell high strategy breakout investing is to buy high, sell higher. These investments in our portfolio examples of Twitter (2009) and Zynga (2008), and outside of our portfolio include square (2011), Foursquare (2010) and, most famously, Facebook (2006). If you get the investment law, the foundations are rising faster than anyone imagined you incredibly valuable business. If you get it wrong, the unanimous opinion is correct and massively overpaid. You know that you have invested in multiple companies, if people say the following:

Wow. I can't believe you paid valuationIt just seems fadWon't XYZ crush them? Remember what happened to Friendster

Ultimately, regardless of the location of your company on the graph, you always want to move in the right as soon as possible. So if you are a company of breakout, lucky to get some advertising and take advantage of it, make money by hiring great people and focus on fundamentals. And if you are a hidden gem, don't feel bad that no one knows you just remind them that you are a non-consensus!

Jules Maltz joined institutional venture partners (IVP) in August 2008, and already more than 10 years of venture capital and startup experience. It focuses on later stage venture capital investment in rapidly growing ...

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