I’ve spent the past two years selling to, building for, and raising from VCs. In this time, I have met with thousands of people who play various roles in the deal sourcing and dealmaking process, and I’ve learned a fair amount about the thinking behind sourcing deals. These are some of my observations.
The Art vs. the Science
Due to firm economics and succession, there is generally an “old guard” defending the art and a crop of associates and analysts fighting to bring the science to venture capital.
Most investors initially tell me they have so much inbound they can’t possibly need a tool that will help them source investment opportunities. Given the broad distribution of outcomes in VC, with many funds underperforming market benchmarks in 2014 according to Cambridge Associates, I challenge investors to ask themselves how their results are going to improve if their top-of-funnel doesn’t improve.
Few investors view the deal pipeline like a sales process, measuring conversion from one step to the next and iterating constantly to make it better. Some go through the motions of adopting a CRM system like Salesforce, RelateIQ or Pipedrive but few use CRM as the system of record for whether or not a “rep” gets paid.
Associates, especially those with little work experience beyond college internships and perhaps a stint as a founder, have very little context for how many meetings they need to take a week to source a deal. Successful professional calendar and email management skills aren’t taught in school, even business school, and I am surprised how often these people lament things have been too “crazy” to source proactively, because they’ve got 15 calls lined up this week.
Just to make this crystal clear: 15 is not a lot. A normal week for a sales person entails 30–40 calls of 30 minutes each, and this is table stakes. I do this much just time blocking 1 p.m. to 5 p.m. each day and doing back-to-back calls.
The traditional Monday partner meeting feels as outdated as the New York Times Page One review meeting, but few have taken steps to actually become the BuzzFeed of this metaphor. Some are thinking about it.
Once an investor has an impressive deal under their belt, they analyze the conditions of the deal and try to draw a correlation to non-essential things. Behavoiral psychologist B.F. Skinner describes this as “pigeon superstition.”
“Maybe I just need to keep doing (XYZ thing I was doing when I sourced that deal) and I’ll find more like that,” type thinking kicks in, and VCs start making exceptions for themselves or others, often as a rationalization for why someone doesn’t need to be contributing to deal sourcing in a methodical way, entering info into the CRM, taking more meetings and generally participating in the vetting process in the same way as others.
Justification for some cargo cult-like behavior which may or may not ever work again usually lasts less than a year and is then replaced with some new superstition. Some have gone so far as to turn these superstitions into their investment theses, and it seems to be a rising trend to rewrite a thesis on a quarterly basis, rather than sticking with some much deeper theme.
Investor insistence on “pattern matching” to justify irrational behavior is resilient, yet a command of truly objective data-driven pattern matching is still fairly unpopular with the old guard. This can be observed when favorite anecodotes of unicorn-sized wins are trotted out to justify the latest trend.
Warren Buffett captured this mentality perfectly when he wrote in his 2000 Chairman’s Letter:
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money.
After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.
Attribution, Brand and Ego
I used to look to understand VC at the firm level, but it has been helpful to realize firms are a collection of individuals with wildly different approaches and results.
There are big-name firms that bring a halo to partners with otherwise unimpressive personal track records; while firms with mediocre to poor results, or good results but a less flashy brand, boast several investors with stellar accomplishments who go relatively unknown.
As the ongoing Ellen Pao versus Kleiner Perkins trial has shown, it is rarely clear how to go from associate/analyst/principal to partner. Maybe you need to source one deal — or 10, sit on a couple boards, have one of your companies go public and you still might not get promoted. The people who are founding and/or senior partners in a VC firm aren’t necessarily interested in succession planning, even if their LPs want them to be. They’re also not necessarily great managers of other people.
Figuring out who sourced a deal in the deeply interconnected world of Silicon Valley is tough, and often quite political. Even in firms with flat economics, being seen as someone who can regularly bring in new opportunities in hot companies before any other firm sees them is the most important currency for promotion and long-term job security.
The biggest risk to VCs is missing the whale… or what people are now referring to as unicorns. This feels like the secret hiding in plain sight, the thing no one wants to talk about. This is where I think the greatest opportunity is… here are some of the ideas I’ve talked about with VCs when they ask me, “Okay Danielle, you have a strong opinion, how would you do my job? How would you find the next Uber?”
If I were a VC, with the tools available today (shameless pitch!) I would build a system for looking at everything and everyone that moves, globally. I would become a student of all emerging tools, both in consumer life and business life, and use them to do my work and augment my personal life. I would read voraciously like Charlie Munger, who said:
“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
I would stay young (at least at heart) and open to the world and let its trends flow around and through me in a Zen kind of way, delighting in the way it changes and how the things that look stupid or like silly toys often bring incredible happiness to people and become big businesses.
I would beware of the first time I tell those damn kids to turn their music down or get off my lawn. That is probably the moment when I’d embrace that I am joining the “old guard” and either need to fight back against that mentality or work to pass on my knowledge and method to my successors.
I would move to San Francisco to be part of the faster-moving and more global ecosystem we have here in the city, but avoid the temptation to become risk-averse and locked in to a certain level of income too early (read: no Atherton mansion, no San Francisco mansion, no horses, no private plane — at least until I am a billionaire ☺).
Instead of taking a large salary from fees, I would invest in the absolute best talent, tools and training for my successors. I would create short and medium-term cash bonus incentives to motivate sales-like behavior for things like meeting volume, qualified deals brought in beyond meeting one, and deals sourced. Since many associates and analysts won’t stay on to become partners and see the economic impact of an investment that takes 7–10 years to ripen in the best-case scenario, I’d create incentives that are less about “paying dues” and more about rewarding hustle every day.
I would get to know other investors, and build relationships that last beyond the immediate deal. I would crave the level of camaraderie with my VC peers that I enjoy with other founders, even as we compete for cash and customers. It’s still amazing to me how often I find two investors who I know would be fast friends and fantastic working together, and yet they’ve never met.
I humbly remind you I am not a VC. I have had the pleasure of learning about the industry these past two years through the eyes of my customers, and I hope these reflections resonate and continue the conversation about building the next generation of truly great startup investors.