Some Reflections on VC Investment Decisions

I was having dinner with a friend last night and we were chatting about venture capital and a bit about what I’ve learned. I started in 2007 with a thesis that my primary investment decision would be about the team (70%) and only afterward about the market opportunity (30%).

I was telling him that it was much easier when I started because there were fewer deals, life was less public and somehow the world seemed to be spinning more slowly. A year into my tenure the world went into economic collapse and that seemed to dominate the consciousness more than which deals one was chasing.

Today we’re in a world where 10 accelerators are bombarding you with emails to meet their 10–15 companies. Seed investors are aplenty and of course they need downstream money to fuel their early-stage bets. Angels have been prolific for years now and they, too, rely on downstream money to cover their bets.

And we live in public so many people are able just to reach out.

And there’s conferences. Oh, the conferences. Disrupt. Recode. Web Summit. Collision. Fortune Brainstorm. Lobby. Of course these are great places to network with other investors, meet great entrepreneurs and keep your connections strong with senior execs at larger companies like Yahoo!, Twitter, LinkedIn, Salesforce not to mention Disney, Warner, GM, P&G. But they are also a tax on your time with portfolio companies, looking for new investments, running your shop and honestly they are a tax on your family life. You have to do enough to be in the flow but you can’t sweat the ones you miss. The ones above are the ones I’ve prioritized this year (other than Disrupt — I never seem to get invited to that one).

Don’t even get me started on Demo Days. You could spent 20 days / year at Demo Days now. I guess if you’re in high-volume, low-differentiation mode perhaps this is efficient for you.

I told my friend that I felt that in 2014 too many new VCs feel the pressure to chase deals, to be a part of syndicates with other brand names and to pounce on top of every startup whose numbers are trending up quickly. They worry too much about missing out on a deal. FOMO.

I don’t.

I know I can’t be in every deal and I know that the easy part of being a VC is writing the first check in a deal. But if you’re a concentrated investor who takes board seats then you know the hard bit starts the day after. And when the press releases and the attaboys wear off it still comes down to real work.

When you’ve been around for 7 years you also see the inevitable cycles. You have to decide where to lean in on follow-on rounds. You have to decide how hard to help with downstream marketing for your deals. You have to strike a balance between the commitment you have to each and every entrepreneur but also to your own reputation in the market not to be over-selling the performance of companies to downstream investors.

You have to deal with CEOs who resign. Co-founder discontent. Products that ship late and place entire companies under serious stress. Health destroying stress. You have to figure out when to be the up-beat coach, “It will all get better, stay confident, keep the course” or the honest voice in one’s ear, “Listen mate, you’ve been protecting your head of product for far too long. You can’t have this many quality issues and still protect his job. It’s time for change.”

Hours and hours if you’re engaged. Weekends. Evenings. I’m not complaining — I just pointing out why I don’t take new commitments lightly.

And why my advice to newer VCs would be not to feel bad if you’re missing out on what is perceived as a few hot deals.

Of course I would like to be in every great deal ever done. Yes I wish I were in Uber, DropBox and RelateIQ. But I feel plenty comfortable with the great deals I have gotten involved with from inception and more importantly the returns are strong so my investors remain happy.

In early-stage, concentrated venture you have to be willing to let some “hot” deals pass you by whether it’s because you’re not persuaded about the team, the market, the price, the syndicate or a host of other reasons including it being too similar to other investments you’ve made.

Fred Wilson as usual said it better and more succinctly than I in this post:

“ … we only manage funds in the $150mm to $200mm range, we only need to invest in 6–10 new companies a year and we only need a third of them to work. So that means 2–3 good investments a year and we are doing well.

Given how much opportunity is out there, 2–3 good ones a year is doable. Even if we miss on lots of great opportunities.

I don’t lose a lot of sleep over missing good deals. We can afford to do that.”

Some random reflections after 7 years on the industry? I suppose each of these could be a post. But since I haven’t written since I went on Spring Break I thought I’d go for stream of consciousness …

• Today’s hot company can often be tomorrow’s problem child. I don’t need to name companies for you to come up with your own examples
• You can’t reference check your way into a “yes.” If you don’t feel hugely compelled to invest then you shouldn’t. Reference checking is to confirm or disprove a strong, positive intuition you already have about founders that could lead to an investment or a pass.
• If you rush into investments with people you barely know you’ll have a much higher percentage of problem deals. You may catch a hot deal that blossoms and you feel psyched but you’re more likely to catch a few problem children that you end up having to fix
• If a situation sounds too good to be true it almost always is. That sounds simple, I know. But it’s very easy to be flattered into “here’s why we want YOU as an investor” by entrepreneurs and earlier-stage investors alike. A little Groucho Marx always helps.
• Motives matter. Why is this exact person building this business? It is an authentic desire, knowledge and skills set? What would this founder do if he got an offer to be acquihired quickly by Facebook? What would she do if things got really bad and she had to lay off 50% of her team to survive? If we got an offer to raise $25 million to grow would she take it or be too worried about exit price, dilution, valuation expectations, etc.
• Know how you’ll make money. I have a strong belief that the magic of being an early-stage investor is that you get a ringside seat to make investments in companies with great potential. When they really start working you have asymmetric information and can “lean on your winners,” which is an inviable investment position to be in. But … if you’re in a party round with 6 other investors your chance of getting to increase your allocation is limited. So if you’re an index investor that’s still great. If you’re a concentrated investor less so.
• Companies go through great changes as they level up. Each major change is an inflection point and a chance to get things really right or horribly wrong. You need to be very present in these periods of time. This is when founders need you the most — either are coach, mentor, interviewer, work off-loader or honest-mirror-reflection of reality. Being active, engaged, present, knowledgeable and having earned trust from the core team can make a huge difference on the eventual outcome of the companies. It’s these transitional times that can often determine the long-term arc of a business. Pay attention.
• Be careful not to spend all of your time on inbound. Inbound is seldom differentiated dealflow. If an accelerator is writing you they’re also writing 25 other VCs. Probably more. If your favorite angel investor is sending you what looks like a form email it likely is. If you say yes to every inbound meeting you don’t have the time to search out the harder-to-find, crazier ideas that are often lurking around university research projects or getting out to meet senior executives at tech companies to find out whom they’re partnering with.
• I don’t believe in paying the highest price to win deals. I believe in paying a fair price but if “highest price” is the key differentiator there are two key problems. 1: You clearly haven’t persuaded the entrepreneurs that you are value-add to their deal. And 2: I’m dubious of entrepreneurs who key buyer value is highest price. Building a company is hard and the chances of success are low. I’m looking for entrepreneurs that recognize that supportive VCs who bring relationships, experience, perseverance, tolerance and who are unflappable in difficult times are worth their weight in gold. People who solely value highest price as the decision factor exhibit something about their decision-making processes.
• Co-investors are critical. As in with the right ones you can weather big storms and stay the course. The wrong ones can leak information (yes, bad investors actually do this), can be short-sighted in difficult times, can chase the latest shiny objects, “why doesn’t your product look more like Pinterest?” and when the chips are down the worst ones often aren’t willing to support companies financially. It’s hard enough being an investor in the roller-coaster life that is startups. But investing alongside myopic co-investors can make your life miserable. You face choices like, “Do I put in money to the benefit of other un-supportive investors?”
• Along these lines … in bull tech markets like we’re in you often find non-venture investors entering our market. Hedge funds, other public investors, corporates, etc. Their money works the same way as mine does. The biggest difference from experience is that in bad markets people without venture capital experience or strategies are the first to the exit. When I work with entrepreneurs I work hard to make sure we know what the commitments are of downstream investors.
• Price matters. Anybody who says otherwise is a bullshit artist or somebody who’s only been an investor in a bull market. The industry is filled with both. Turns out it is very hard to sell a business for more than $100 million and exceedingly hard to get one whose value ends up exceeding $1 billion. The number of $200m, $300m, $500m, $1 billion valuations these days is just pure insanity in my mind.
• Just because the press says it is so doesn’t make it so. Usually the press doesn’t have total access to data and is often a lagging indicator of the market. I’m not talking negatively about journalists — I love the industry and profession. Just that as an investor you really can’t base your decisions on the press, “Company X is killing it!” nor be dissuaded the presses views about a company or industry.
• Be a non-conformist. Money is made most by people who bet on movements before they are known. Or by people who bet against a trend that the masses see differently. By definition this means others will doubt you. Have conviction. At our partner meetings the number one thing I look for in our decisions is the conviction level of the sponsoring partner. I also love it when I see really big ideas that seem a little bit too outrageous but where the entrepreneur seems just crazy enough to possibly pull it off.

Bonus. One of my favorite jokes from childhood. I shouldn’t give it away because I swore I would use it at a speech one day. But enjoy. The non-conformist oath