Making up your mind
An argument for speedy decision making when investing or raising venture capital
“Choisir c’est se priver du reste” - André Gide
When you look back on years that have passed, certain things remain etched in your memory. Events like graduating from university, landing your dream job, embarking down an unanticipated path…these are all meaningful and formative for the future. Exposure to ideas and concepts, however, often have a more lasting impact on your thought process than obvious milestones. In my case, one such concept is epitomised by a quote from 20th century French author and 1947 Nobel Laureate in Literature, André Gide: “choisir c’est se priver du reste”. This phrase translates to “making a choice deprives oneself of the other options on the table”. Indeed, we’re tasked with making decisions every day of our lives. More often than not we make these decisions with imperfect information, which has led us towards a probabilistic approach to determine likely outcomes and work backwards to the best decision in the moment.
What it means for investors
As an early-stage investor in the technology space, I understand that we operate on the side of the market where the future outcome of a startup is most uncertain (compared to Series A and beyond). This is often due to the dearth of data points when working with young businesses and embryonic markets. Of course, the high level of risk in this market is often commensurate with returns. Has anyone made it big without putting significant value at risk?
At the same time, technology moves fast, the competition moves fast, and customers in the market evolve. Important decisions (e.g. should our fund back these founders or not?) need to be made, implemented, and executed. Fast. That’s what we do at Playfair Capital. There are heaps of aspirational startups born every year and we’re tasked with sifting, selecting, and supporting those who we believe will rise above the rest. We don’t hedge our positions in a market by investing in more than one startup tackling the same problem. So if we’re bullish about a market, team, and technology, we’ll go for it with conviction and decisiveness.
For me, Gide’s quote suggests that as investors who have formed a view on a market using experience and data, we should endeavor to pay less attention to what other investors in the market believe and instead drive our differentiated thesis forward. To generate outsized returns for Limited Partners (LPs) who have entrusted us with their capital, being right isn’t enough. We need to be right where others failed to see an opportunity. As humans, we’re comforted by validation from our peers. That’s natural. But flocking to hot deals (i.e. herd mentality) or waiting for others to put down their cash first isn’t the solution. That’s akin to outsourcing one’s thought process to a third party, in which case I’d question why an LP committed capital in the first place? Instead, be contrarian and invest where you fervently believe opportunity exists.
What it means for founders
In my mind, Gide’s quote is also important for founding teams. Management have to distil a grand vision into prioritised tasks that are actionable by their team today. Recruiting and retaining top-tier talent also consists of seminal decisions that will have ramifications on all aspects of the business. Architecting a product and laying down milestones for its development means selecting an optimal strategy from a plethora of potentially workable approaches. You get the idea.
Raising money presents yet another sea of options from which an optimal decision must emerge. How should a founder select the lead and/or optimal syndicate from the increasing diversity of players in the venture market (angels, VCs, hedge funds, banks, family offices, corporates)? Which General Partner or entity has the most salient experience in the market in which the founder’s company operates? How will they help mitigate downside risk and enhance the probability of success (i.e. what is their value add)? These are just some of the key questions that ultimately shape a founder’s decision to work with some investors over others.
In the same way that I argued for investors to act fast and be contrarian, I believe that founders should undertake to leverage available data to choose wisely, but do so in a timely manner. In an era where investors openly share their views online and portfolio companies are accessible for feedback, there’s more information than ever before to make an informed decision. But of course, being spoilt for choice (both in terms of offers on the table and information to consider) magnifies the fear of making the wrong decision. This leads to longer periods of reflection, a drawn out fundraising process and much time lost from running the business.
I think it’s fair to say that it’s in the best interest of both founders and investors to be swift and decisive. Both parties only succeed in their respective aims if the business in question makes it out of the gates to become a market leader. Unfortunately, I’ve seen instances where the process of choosing investors becomes unnecessarily protracted. For example, although keeping investors who committed early on in the process hanging while further discussions ensue is a way of hedging your options, it means you’re spending too much time fundraising. If investors give you their decision in a week, it’s only right for founders to return the favor. For those who do, I applaud you for leading the charge :-) All in all, I think one can optimise for a value add syndicate without taking too much time away from the business such that you don’t risk losing all too precious momentum.
Where this leaves us
Building a company from scratch is hard, and so is investing capital in this complex market. We’re all faced with forks in the road where options present themselves. Times can get tough and our vision of what to do next becomes blurred. But what separates those who go on to thrive from those who fade away is the ability to act decisively and fight for what you believe in during this incarnation of the struggle, as Ben Horowitz puts it. As an industry, let’s endeavor to make up our minds faster and move on to build the truly awesome companies that make us jump out of bed in the morning.
Thoughts? Hit me on Twitter @nathanbenaich