AGILEVC My idle thoughts on tech startups

February 19, 2009

Being a successful early-stage VC requires striking a balance between optimism and critical evaluation of very raw companies.  It sounds like a simple notion… I know. But this ability comes naturally to extraordinarily few people, and even if you work hard at it over several years it’s still tricky to achieve.  In an almost schizophrenic fashion one must be able to look simultaneously through the “glass half full” lense all the while asking yourself and others “what’s wrong with this picture?”

The early-stage VC who lacks optimism undoubtedly misses great opportunities.  Not even the most promising startup investments have the “total package”:  a fully built-out team, a 100% proven market, years of customer traction, obvious paths to future exit, etc.    We as VCs literally get paid to evaluate and take these calculated investment risks, and every early-stage investment has them.  Each startup, just like every one of us humans, has its flaws.  Without a kernal of optimism it’s very easy to never look past these flaws and to be burdened only by the risks, without seeing the potential that exists in a particular startup.
But it’s easy to be carried away by one’s optimism too.  A challenge for me personally, and one that other former entrepreneurs turned VCs I know have similarly expressed, is to temper one’s optimism with a thorough, objective, and critical evaluation of each opportunity.  The best venture investors ask the hard questions and seek to “know what they don’t know” when making a new investment.  Failing to do so means you make poorer decisions, taking blind investment risks rather than calculated ones.
The best entrepreneurs are indeed a little paranoid, and are thoroughly aware of the risks their companies face.  But ultimately entrepreneurs are driven mainly by their optimism and rightly so, since building great companies is so hard to do.  Similarly other investing disciplines, in later stage companies or public markets, rely more on critical evaluation and analysis more than optimism.  As far as I can tell, early-stage VC is perhaps unique in the need to truly strike the balance between the two instincts.
Looking for the half full glasses, while always asking why might they be half empty, is harder than it seems.  Realizing this takes time and mastering it can only come with experience.