Naval: When you want to develop your judgment, the first step is to calibrate it: Do I have good judgment or not?
It would be great if you could look at the results of your investments and see if you were correct. But you won’t know for 10 or 15 years, and the industry will have changed by then because it evolves and adapts quickly.
Look at markups in subsequent rounds
You can look at intermediate markups, noting when Sequoia, Andreessen or Benchmark invest in subsequent rounds and pay higher prices. That’s an interesting metric, although it really indicates your taste in what other tastes makers like.
It’s a Keynesian beauty contest where each judge is rewarded based on what the judge in the next round thinks. If your deals are marked up, it means you’re becoming a good arbiter of future taste.
That kind of judgment is a people proxy mechanism; it’s not really a way to build and calibrate your own judgment. Though it does have value: If you can predict what VCs will fund, your companies have a better chance of getting funded, which gives them a competitive advantage.
But being an arbiter of investor taste won’t help you with a deal like Bitcoin, where it’s incredibly strange, nobody understands it and there’s no subsequent round of VC funding to bet on. You have to make the decision yourself.
Are good investors piling in the round with you?
You can also look at which investors follow you in the same round. If they commit before you, it’s not a reflection of your judgement because you’re probably keying off of them. But if good investors with proven judgment pile into the same round after you, that is a reasonable indication of good judgment.
Ask people about your weaknesses
Finally, you can ask people. Don’t ask them if you have good judgment or not, because polite people will always tell you yes. Rather, ask them about your weaknesses. Of course, only ask people if they have good judgment themselves.