I listened to a podcast the other day of Nuggets GM Tim Connelly discussing the process of drafting Nikola Jokic and it struck me that the NBA Draft is a lot like venture investing.
Sometimes the largest payoffs happen by getting in early.
Jokic was a relatively unknown commodity toiling away in the middle tier of European leagues when Connelly saw him for the first time. He was big and skilled, but there was almost no interest from NBA (or major European) franchises because he looked slow, out-of-shape and didn’t have the right “body type.” But Connelly couldn’t shake the skill set: he saw a diamond in the rough before others fell in love. Ultimately, the Nuggets made a 19-year-old Nikola Jokic the 41st pick of the second round of the 2014 NBA Draft. Fast forward to today, and this late-second rounder is arguably the best center in the league, and the face of a fast-rising Nuggets franchise.
Investing in a company at the earliest stages poses the biggest risk, but it also rewards that risk immensely. Success can happen when you see what others don’t.
Successful venture investors tend to invest in multiple companies. Because early stage investments are so risky, they know that spreading investments across multiple-early stage companies can increase their chances to succeed.
Think about NFL teams that draft well. While they try not to miss on early picks, the later picks can provide more impact and value. The Seahawks’ 2012 draft is a great example. Analysts were critical of what were seen as Seattle’s series of “reach” picks in the draft. After using their first round pick on Bruce Irvin, who turned out to be solid, but far from a star, things got very interesting. They got Bobby Wagner -- a consistent All-Pro -- in the second, despite warnings that he lacked the right football pedigree (Utah State). They hit a home run with Russell Wilson in the third (who one analyst called the “worst pick in the draft” at the time), and got a regular starter in Jeremy Lane in the sixth. These investments, while seen as risky by some, paid off immensely. If they’d hit on just Wilson, we’d still be talking about their 2012 draft as a major success. As it stands, the draft transformed the franchise’s fortunes and made Pete Carroll look like a genius.
Some of the best venture investors not only invest, they add value. That could mean connecting companies with partners, advisors, and even future customers to ensure success. The same thing happens with pro sports teams. Some situations are better for certain players. The right team, coaching staff, and infrastructure enable certain players to take their games to the next level, while the opposite may be true in other environments. The Nuggets invested in Jokic’s development, committed to him as a starter (trading away first-round pick Jusuf Nurkic), and gave him an offensive system where he could flourish. Venture capitalists are looking for the same kinds of opportunities -- it can be much more rewarding (both personally and looking at the bottom line) to play an active role in transforming potential into success.
If you’re trying to understand venture capital, start by looking at your favorite sports organization.