AGILEVC My idle thoughts on tech startups

December 13, 2011

One of the hardest things for me as a VC remains telling entrepreneurs I like and respect that we’re passing on their investment round.  I often tell these entrepreneurs that I genuinely hope they prove us wrong, and are wildly successful with their startup.

I recently was having one of these conversations with an entrepreneur I’ve known for a couple years.  I looked at this founder’s prior startup, which ultimately had a successful exit, and then was happy to connect with him again as he launches a new project.  My partners and I would be thrilled to support this founder in general, but we don’t have enough conviction about the market opportunity he and his co-founders are pursuing to proceed with an investment.  I think he stands an excellent chance of having a successful fundraise and continuing to build the startup, but we’re simply not the right fit as an investor.

I wished this entrepreneur well and said I hope he proves our skepticism wrong and builds a massively successful company.  In a friendly way, this person then asked me “Wouldn’t you be bummed if that did happen?”  And the honest answer is “not at all.”

Our job as VCs is to source, select, and win the best investment opportunities.  In NextView’s case that’s seed stage internet and software companies.  All VCs make decisions by drawing on the data we have at hand, information gleaned through our diligence process, and our own experience and judgement.  It’s impossible for anyone to predict the future with perfect clarity… if we were onmiscient we’d never lose money in any investment and invest only in the grand slam opportunities.  And we all know that doesn’t happen all the time, even for the best VCs.

So we can’t be right all of the time.  We hope that impact of the times we’re right significantly outweighs the losses from times we’re wrong.  But what we can do is seek to make good decisions, and be very intentional about how we make those decisions.  You look back at investments you made that went bad or opportunities you passed on that did spectacularly.  If one can still say that based on the information you had at the time and your own good judgement as a partnership you made the right decision, then you’re doing your job as a VC firm.  

I’ve always respected Bessemer for publishing their “Anti-Portfolio” on their website.  It’s only one half of the decision ledger… understandably they don’t shout from the rooftops the stuff they did invest in but later blew up.  And of course in some ways it’s a toungue-in-cheek way to show off the firm’s great dealflow over the years.  But if you can look back and still be comfortable with your decision making, even if you missed some great outcomes, your firm’s process must be working pretty well.

My partners and I at NextView know we’ll be wrong a decent chunk of the time, especially as seed stage investors.  It’s still early to judge all our outcomes at this point, but we do work hard to make good decisions and continuously evaluate our broader process for selecting among a large number of investment opportunities.  So in addition to sleeping reasonably well at night, I will continue to wish entrepreneurs we don’t invest in the best of luck in proving us wrong.