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@MgmtAnalyst

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MgmtAnalyst retweeted

Dan Gray

@credistick

6 months ago

"The VC evaluated the deals it scored on team, market, product and exit characteristics. Team is most successful at explaining VC funding of at least $1 million, but does not explain larger financings or success. Market and product have more explanatory power for VC funding of more than $10, $25 and $50 million as well as longer term outcomes. Consistent with other recent work, this is consistent with VCs overweighting team in their initial investment decision." (source: "Venture Capital Start-up Selection") There's a growing body of evidence that venture capitalists overweight founder attributes when making investment decisions, leading to poor performance. The three main contributing factors: 1) Simplicity Bias Simple ideas are better at building confidence, and stating "we focus on great founders" is a good way to obfuscate complex market and business concerns. (see: "Don't Blink! The Hazards of Confidence" by Daniel Kahneman) 2) Founder-Friendliness There's an obvious incentive for venture capital firms to be generous with their language about founders, and readily give founders full credit for selection. 3) The Halo Effect With hindsight, it's easy to attribute a company's success to great leadership, when those qualities typically evolve with the company and are influenced by many other people and events along the way. (see: "The Unicorn’s Shadow", by @emollick, "The Halo Effect", by @philrosenzweig) As a result, investors spend much of their time talking about founders with a focus on verifiable attributes that enable credentialism and pattern-matching. The hunt for a repeatable recipe for greatness. The underlying premise is that if a founder checks enough boxes they'll have a better chance at succes. Essentially, a mega-firm style 'smart beta' approach to VC, rather than an 'alpha-seeking' approach. This misses two incontrovertible truths: - VC has antipatterns, not patterns. It's an outlier business, and there is no formula for a good founder. - Much can be learned from the problem a founder chooses, and how they approach the solution. (see: "Entrepreneurs as Designers of Problems Worth Solving" , "Should VCs bet on the 'horse' or the 'jockey'?") In conclusion, founders are obviously at the heart of early stage investment decisions, but VCs should avoid filtering for simple, verifiable factors that aren't necessarily predictive of success (but are often priced in). This includes qualitative attributes like charisma, plus acadmic/career credentials, location, age, etc. Instead, build a process that is focused on recognising out-of-pattern brilliance. Learn as much as you can about the individual character of the founder, so that you might recognise unobvious potential. This will include learning how they think and operate. How they view markets, competition, technical strengths, systemic factors, etc. Speficially, it means tackling topics that are fundamentally complex and uncertain, and making a uniquely subjective judgement each time. Over time, you can build a framework around these factors which will make them easier to measure, and allow you to learn more from success and failure. (see: "Paper Belt on Fire", by @William_Blake)

credistick's tweet photo. "The VC evaluated the deals it scored on team, market, product and exit characteristics. Team is most successful at explaining VC funding of at least $1 million, but does not explain larger financings or success. Market and product have more explanatory power for VC funding of more than $10, $25 and $50 million as well as longer term outcomes. Consistent with other recent work, this is consistent with VCs overweighting team in their initial investment decision."

(source: "Venture Capital Start-up Selection")

There's a growing body of evidence that venture capitalists overweight founder attributes when making investment decisions, leading to poor performance.

The three main contributing factors:

1) Simplicity Bias
Simple ideas are better at building confidence, and stating "we focus on great founders" is a good way to obfuscate complex market and business concerns.

(see: "Don't Blink! The Hazards of Confidence" by Daniel Kahneman)

2) Founder-Friendliness
There's an obvious incentive for venture capital firms to be generous with their language about founders, and readily give founders full credit for selection.

3) The Halo Effect
With hindsight, it's easy to attribute a company's success to great leadership, when those qualities typically evolve with the company and are influenced by many other people and events along the way.

(see: "The Unicorn’s Shadow", by @emollick, "The Halo Effect", by @philrosenzweig)

As a result, investors spend much of their time talking about founders with a focus on verifiable attributes that enable credentialism and pattern-matching. The hunt for a repeatable recipe for greatness.

The underlying premise is that if a founder checks enough boxes they'll have a better chance at succes. Essentially, a mega-firm style 'smart beta' approach to VC, rather than an 'alpha-seeking' approach.

This misses two incontrovertible truths:

- VC has antipatterns, not patterns. It's an outlier business, and there is no formula for a good founder.

- Much can be learned from the problem a founder chooses, and how they approach the solution.

(see: "Entrepreneurs as Designers of Problems Worth Solving" , "Should VCs bet on the 'horse' or the 'jockey'?")

In conclusion, founders are obviously at the heart of early stage investment decisions, but VCs should avoid filtering for simple, verifiable factors that aren't necessarily predictive of success (but are often priced in). This includes qualitative attributes like charisma, plus acadmic/career credentials, location, age, etc.

Instead, build a process that is focused on recognising out-of-pattern brilliance. Learn as much as you can about the individual character of the founder, so that you might recognise unobvious potential.

This will include learning how they think and operate. How they view markets, competition, technical strengths, systemic factors, etc.

Speficially, it means tackling topics that are fundamentally complex and uncertain, and making a uniquely subjective judgement each time.

Over time, you can build a framework around these factors which will make them easier to measure, and allow you to learn more from success and failure.

(see: "Paper Belt on Fire", by @William_Blake)

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