Avoid the Expert Trap
Updated: Apr 25, 2021
What a ride we are on! I have been in venture for a bit more than 5 years now. Looking at the industry's current status, though, it feels like tech is only getting started. Funding at every stage is up this year, with late-stage funding growing the most. While the current environment is, of course, exceptional, one thing is clear: Tech will dominate the next decade.
I am fortunate to have had the opportunity to work with exceptional founders. And it is precisely this which makes this industry such an incredible adventure. Founders always blow me away with their passion, energy, vision, and resilience. Every time a great entrepreneur reaches out, I feel pumped and honored that they did so...
The anti-perks of being a VC
But looking back also means being confronted with a bunch of misses. These are the great developing companies that we could have invested in at Seed or Series A stage, but where we decided against. As Christoph puts it: 'One of the anti-perks of being a VC is that after a few years in the job, you’ve accumulated so many mistakes (which you’re constantly being reminded of) that you can’t help feeling like a f***ing idiot...' There are some unicorns on my list, of which one is expected to go public soon, and some more are on the path to greatness. This really reflects the incredible maturity that the European and Israeli ecosystems have gained over the last years. While a decade ago, we were confident that we would have a one billion dollar outlier in our portfolio, we can now expect more than one multi-billion dollar outcome in a fund.
So, is it not in the nature of this business to have a strong anti-portfolio? Doesn't it mean that you are doing your sourcing job right and seeing enough high-quality companies? I guess sometimes you just get it right when others get it wrong, and sometimes just the reverse?
But wouldn't I be insane if I would just accept these misses? Each miss must be a learning opportunity, helping you to avoid them in the future. How do we go about doing that?
The rationale of a 'Pass'.
Every firm has its own investment strategy. This is what makes a firm unique. It is part of its 'IP' (have a look here for more on this). For an investment opportunity to be a fit, many factors come into play (more in this blog post). Here some important ones:
Two criteria are key for entrepreneurs to get a foot in the door of potential early-stage investors: Can you get investors to believe in your vision, and/or can you show them something that helps them believe in your vision (usually an amazing product with some engaged users, or some promising early revenue traction, depending on the investor).
The other three criteria usually come into play post the first call. Can you make them confident that you can execute on your vision, and do you have the storytelling skills to hire excellent people and raise more capital from great investors in the future?
Then you have to agree on a deal that makes sense. The most important terms are, of course, investment amount and valuation. I usually sit down with founders to work it out together. The essence of the exercise is simple: 'If we invest this much capital into your business, what will be the value of the company in x months when we plan to raise the next round? This will define your present valuation...'
My key learning: Dodge the 'Expert Advice'.
There are many reasons why you can decide against an investment. For example, you can feel uncomfortable with the metrics, you simply can't get your head around the nature of the market, or you just think that it is too expensive.
But there is one reason that is not acceptable: Some experts told you so. When you ask for an opinion, you get one if you are lucky... It is up to you how you use it. When it comes to the misses, I sometimes gave too much weight to external 'expert' advice. While their insights are extremely useful for decision-making, they cannot replace your process.
Oliver put it well: 'Seed vs. growth: If you do a late-stage investment: the more people you talk to, the more you will like it. Everybody has to say something good about a big company. Few people will say it will be worth less in future. With seed it's the exact opposite: The more people you talk to, the less you will like it. You only must listen to yourself and it's a scary and lonely decision...'
The Expert Trap.
On one of my first trips to the Valley, someone shared this great book, which I recommend every venture investor read. The author conducted many research experiments to see who can predict the future better: experts or random people. Guess what? Well, the latter do, and not only better but much better.
'You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.' Experts, who are most of the time market incumbents, have a hard time seeing or accepting a potential new reality.
Founders, let VCs visit 'your future'.
When you found a special insight (more on insights here), you usually found something that is not obvious to the world. Often it is based on the inflection of new technology and/or the adoption inflection of an existing technology or product format. In both cases, it is something that is not easy to see. On top, at the early stage, you don't have so many 'tangible' metrics to demonstrate your insight yet. So, a lot really all comes down to the vision. If you don't articulate it well, the VC you really want on your cap table might make the classic mistake that all early-stage investors do: They focus too much on what you are doing at the time and on the current 'status' of the world, and not enough on what you could do, and will do. So, you really need to help the investors see clearly from time to time 😜.
So, to the awesome founders out there, please make sure you take VCs back to your future. They can't know everything, but I can promise you, a great one is always willing to visit the future with you. Why now? Describe the wave you are catching. What have you seen? Who is on it already? Why does it have the power to create a market, a movement that will attract tons of people in the years to come?
High-impact companies do not come along that often, and most of them look weird at first sight. When they do come along, VCs have to find a way to 'get it', and say yes.
So, please tell me. What are the weird, but potentially game-changing early businesses out there? Simply put, which companies do you think VCs should definitely not miss?
One week ago I spent a weekend in the Pyrenees. While the snow wasn't perfect anymore, the weather was. So, we grabbed some touring skis (first time I tried them), and climbed up the hill. One of the best skiing experiences I've had so far, and I've been skiing for a long time. There is always a bright side to anything...
Life is awesome,
Other content I liked
- 70% of U.S. teens own AirPods, up from 52% last Spring! This is big news. On top of Apple’s ability to drive additional hardware growth outside its primary product set, the company is pioneering a new platform, yet again... I have only met very few people thinking about this seriously. More on this in a future post.
- Here a cool survey by Dominic on whether Europe's startups will return to offices after covid? The results are relatively aligned with what I see in our portfolio: 'There is a loose, and perhaps unsurprising, correlation that the smaller the company, the more radical the shift towards remote working vs. remaining office-centric...'
- Huge news for SouthEast Asia. Singapore's Grab is to go public in the world's biggest, $40B SPAC merger... Check out this video with theGrab CEO if you want to learn more about the company's 'Super App' strategy.
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