Bet on the Horse or the Jockey? How does a VC invest
Besides the usual screening process, every investor I have met so far, also has an unwritten methodology known as the "gut feel". It is difficult to admit but investing is as much an Art as it is a science. Partners of the same firm who would follow the same technicals sometimes differ from each other when taking an investment decision.
What exactly is that gut feel? I think it is the Big Data analytics derived by the super computer in our head by scouring through years of varying experiences. I was looking back at my experiences and how my gut feel has evolved over the years. Do I tend to invest in a good idea or a good founder? Essentially the age old question that every investor has in mind - Bet on the horse (idea) or the Jockey (Founder)?
Before I formally started my investing stint, I used to think that a good idea is everything. All you need is that one bright spark...and thats it. I used to take execution for granted. My belief was that if you believe in your idea and are investing your blood and sweat into it then it should have a high probability of success. But when I saw some really passionate and dedicated guys making deadly mistakes, I realised the importance of founder's capability of being a real chief "Executing" officer.
Naturally, I started giving lot of importance to the Jockey. But then, as luck would have it, I met a lot of capable founders solving the wrong problems. Either the idea they were working on was too early or too late. Investors who believe in the Jockey often argue that a smart founder would timely pivot and steer the company in the right direction. Easier said than done. You never know how many pivots are needed before the original idea transforms into a successful investment. And also, there is a new fashion of failing fast. If something is not working out, chuck it. Investors already know that not all of their investments are going to succeed.
But is this really a either/or question? or is this a neither/nor question?
Practically you can never find out whether the founder is good or not until you spend time with them. Needless to say that finding a good idea is exactly equally difficult. So does it mean investors can neither bet on the Jockey nor the Horse? Then what ...... Spray and pray (like most Angel investors)/ Lean VC (Poker) style like Dave McClure - Bet a little, assess and then raise your bet. How should professional VCs invest? I looked at some big name VCs in the valley.
One thing was common: They all start top down. They identify industry trends, zoom into the sectors that makes sense to them and then pick the founder and idea. KPCB is investing in Mobility heavily. Sequoia is looking for SaaS deals. Accel launched a 100 million big data fund in 2011.
Is it time we start looking around the region, figure out what CWCs (Companies-with-cash ) are/would be looking for and fund those sectors? May be its time to bet on the right race (and not just on the Jockey or the Horse)...
What do you think? Do we have enough deal flow in the region to do that? I will let you know if I change my mind again.
About the Author :
Piyush Chaplot is VP-Finance & Investments at www.innosightventures.com and is based in Singapore. You can subscribe to his blog at www.piyushchaplot.com or follow him on twitter @piyushchaplot
