In addition to announcing a new $1 billion fund, while onstage today at Disrupt SF, Reid Hoffman and David Sze of Greylock Partners talked about how they actually choose the startups they back.
In fact, Sze said the firm conducted a study of partners’ voting patterns and decided to change the process by which it decides on investments. He didn’t go into too many details about those changes, but apparently the team observed that when everyone thought backing a company was a bad idea, it was indeed a bad idea. More surprisingly, if all the partners loved the startup, “the returns turned out to be very mediocre.” The problem, Sze suggested, is that those ideas are probably “too easy.”
The investments that resulted in the biggest returns? Those were “the ones in the middle, where there’s a lot of debate and it’s not completely clear.” In those cases, Sze and Hoffman said they’re looking for something to tip the firm in the startup’s direction, like passion and experience.
These results tied into a broader point that Hoffman made, that “almost every great investment has a contrarian check.” In other words, the best investments are the ones where “a lot of people will think that’s a bad investment but you will think that’s a good investment.” A good example is LinkedIn — when Greylock backed the professional social network, Hoffman (who co-founded the company) said it was dwarfed by other social networking sites.
One of the other panel topics was Greylock’s interest in backing in enterprise startups. That’s something Sze discussed in our post about the new fund, and he started to reiterate those points on-stage — except that interviewer (and TechCrunch founder) Michael Arrington made it clear that he wasn’t all that interested in the topic.
Arrington has expressed his boredom with enterprise startups before. Today, he acknowledged that many of the best investments at his firm CrunchFund are enterprise startups, but he said that when his partner Patrick Gallagher proposes investing in these companies (“He loves this crap”), Arrington replies, “I’ll agree to invest if we can stop talking about this.”