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The Lady Doth Protest Too Much
I may have to replace my VC Cliche of the Week posts someday with a series on great Shakespeare quotes to keep in mind while you are doing venture investing.
This one, from Hamlet, is some wisdom that I should have kept in mind but didn't.
The story goes like this.
Once upon a time, we had a very early stage company in our sights.
We met the Company shortly after it was formed.
We became users of the service, promoted it to a lot of our friends, and got to know the management team really well.
When it came time to consider an investment, we did what all good VCs do. We got on the phone and called ten people in the industry that we knew really well to get their take on the Company's service.
We heard pretty much unanimously that they "would never use it".
We passed on the investment.
But it was a huge headfake.
Because within six months all of the people we called had become customers.
What happened?
Is due diligence actually a bad thing to do?
I told this story last night at a dinner party with some friends and asked that very question at the end of the story.
Our friend Tom Evslin played a bit with his beard (which means he's thinking) and then suggested that when you get unanimous rejection you are actually hearing fear. And fear should be interpreted positively, not negatively. It meant that all of our friends didn't understand the company's service and were afraid of it. Probably because it was highly disruptive.
To which I replied, "the lady doth protest too much"
To which Brad replied, "that's the title of your blog post"
And it is.
October 20, 2005 Venture Capital and Technology | Comments (7) | TrackBack (0)
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Comments
Due diligence is a bad thing to rely on because venture outcomes are subject to randomness. You can either analyze the business so much that even selling pennies for quarters stops making sense, or you can screw due diligence altogether which is weird (to say the very least, especially if you're an LP).
Anyways...I think you have a good point. Luck is going to be a greater determinant of how the investment pans out rather than what person x, y and z had to say about it. It doesn't mean people’s input is totally useless. It's important- it's just that randomness is also important.
What happened with the startup you mentioned is just "one of those things". They got lucky.
The interesting thing is this (and you might want to try it);
Computers have been shown to be better at picking winning investments than actual venture capitalists. You might want to put in a predictive spreadsheet that'll help you make investment decisions. The important point is that consistence in due diligence criteria is essential.
Inherently human beings are not very good at making predictive decisions (like how a startup's gonna go). So don't feel bad about passing on that opportunity. Put a system in place to make better decisions.
The research was done by Babson College (leaders in entrepreneurship research). Here's the link;
TOWARD THE STANDARDIZATION OF VENTURE CAPITAL INVESTMENT EVALUATION: DECISION CRITERIA FOR RATING INVESTEE BUSINESS PLANS
http://www.startupjunkies.org/forums/viewtopic.php?t=383
Posted by: Daniel Nerezov | Oct 20, 2005 9:22:16 AM
'Methinks'...that's the best word in the quote!
Posted by: jackson | Oct 20, 2005 9:32:21 AM
This is the best vc post I've read in a long time. I think fear from established experts can definitely be a sign that you're on to something extremely hot. Of course, that's not always going to be the case, but I guess that's where good vc instincts come in. I imagine it's a lot like A&R at a record label. You can make safe/bland bets or you can go for the next big thing, which will be pretty much universally misunderstood at the time. The vision and guts required to go after the next big thing are really what separate the best from the mediocre in any field.
Posted by: Toby | Oct 20, 2005 4:35:42 PM
any hints on who the company is fred?
Posted by: Dave McClure | Oct 20, 2005 9:16:40 PM
your friend tom obviously had clayton christenson's two seminal books -- the innovator's dilemma and the innovator's solution -- in mind.
Tom hit the nail on the head -- if other VCs dont get it, maybe its time to ramp up your homework.
When google first hit the street looking for money, they got turned down over and over.
google's algorithim was disruptive; an ex-professor saw its beauty, wrote sergey & larry a check, and the rest is history...
Posted by: catablast.com | Oct 21, 2005 2:23:02 AM
I guess this would be the spot where "luck" comes into play. No?
Posted by: josh kerbel | Oct 23, 2005 4:47:27 PM
This reminds me of Malcolm Gladwell’s book, Blink, where he points out the fallacy of test-marketing . Gladwell gives the example of the Herman Miller Aeron chair which test-marketed very poorly. It was so radically different from everyone’s notion of a comfortable, high-status executive chair, that most respondents called it “ugly.” Luckily the executives Herman Miller went with their gut and launched the product anyway. Today it is, of course, the de facto standard in office furniture aesthetics and a status symbol in offices across the world.
Posted by: BArconati | Oct 23, 2005 8:19:04 PM
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