Wait for Your Pitch
Why discipline matters in venture capital
“For me, plate discipline is being able to know what pitch you want to put in play before you step in the box and not swinging at anything else but that.”
— Hall of Fame Atlanta Braves third baseman Chipper Jones
As in baseball, venture capital funds must “score runs” to succeed. Institutional VCs score by returning capital to limited partners (“LPs”), as measured by metrics such as multiple on invested capital (“MOIC”), total value to paid in capital (“TVPI”), internal rate of return (“IRR”), and distributions to paid in capital (“DPI”). The “game” is to provide a risk-adjusted return that exceeds what these LPs could have received by investing in other asset classes.
For corporate venture capitalists (“CVCs”), winning can be measured not only in financial terms, but also by including strategic metrics such as market intelligence, new revenue opportunities, and commercial partnerships, as Touchdown’s co-founder David Horowitz describes.
However, VCs have perhaps oversimplified run-scoring, frequently equating it with home runs (one swing, outsized results) and subsequently debating whether they need to hit more or longer home runs. This nuance minimizes how VCs and CVCs can score. Is it deploying substantial capital (hitting the weight room)? Or seeing more deals (more at-bats)? Or is it simply skipping deals that go under (on-base percentage and avoiding strikeouts)?
My favorite analogy is plate discipline, the art of swinging at good pitches. In venture capital, plate discipline means having the patience to 1) set, 2) follow, and 3) update your investment strategy:
1) Set strategy: This is equivalent to knowing where the strike zone is. As our co-founder Scott Lenet wrote, “thinking about your strategy carefully and in advance” is fundamental to any fund’s success. If a batter flails aimlessly at pitches while at the plate, any contact with the ball can be attributed more to blind luck than skill. Similarly, a “spray and pray” investment approach tends to be less successful in venture capital, particularly due to the “pray” element. Instead, when establishing a new fund, it’s important to match your strengths — your team or organizational resources — against the pitcher you’re facing (your industry or market) to recognize the “hot zones,” or the sectors, stages, and geographies on which you will focus. By establishing a clear strategy, you can source and screen deals confidently.
2) Follow strategy: Once you define what is in scope, you need to wait for pitches that are in the strike zone. In venture capital, this means screening out deals that don’t fit, and also following the size and pace guidelines in your strategy. While VCs frequently debate whether seeing or picking the right deals is more crucial to delivering top quartile returns, determining how much to invest in each opportunity can be equally vital. Deploying capital too quickly can create concentration risk: if a few early investments fail, insufficient reserves remain for future opportunities that may be more appealing. This is akin to a batter swinging and missing at the first two pitches, getting down in the count early and raising the odds of needing to swing at a bad pitch just to stay in the batter’s box. Conversely, measured portfolio pacing can empower VCs. Laying off pitches outside of your fund’s expertise can enable you to see more deals and develop a better perspective on what makes a good opportunity. Additionally, while “spray and pray” investors inherently have little time to dedicate to each opportunity they see, disciplined VCs can deliberately lean into the deals that fall into an established area of expertise. This early discipline can also be helpful when portfolio companies request follow-on capital, which is analogous to coming back up in the batting order.
3) Update strategy: Neither investors nor batters should stick with a strategy or routine that doesn’t work. If an umpire is calling a strike zone that’s different from what batters expect, they must adapt. Bill Gurley captured this sentiment when discussing how his venture capital firm Benchmark has responded to increases in deal sizes, noting: “…adjust to the reality and play the game on the field.” As an example, this repositioning could be an acknowledgment that customers may make product purchases based on the best user experience rather than the best technology, leading the fund to alter its deal sourcing approach. Similarly, if the pitches you are swinging at consistently fail to score runs, perhaps you need to alter your stance. For investors, this could mean revisiting your investment charter to change your strike zone, rounding out your team with complementary skill sets to see pitches more clearly, or integrating more data into your decision-making. While annual updates to strategy are difficult to accomplish in the 10-year fund structure of institutional venture, minor adjustments can be a normal practice in CVC.
Patience at the plate also requires not getting frustrated when immediate success does not materialize. If your investment committee turns down a deal you recommend, or if you don’t get into the current round of a company you like, it doesn’t mean you need to throw out your strategy or start yelling at the umpire. Discipline means sticking with the plan until there is real evidence that the strategy is flawed. In venture capital, the pitches keep coming as long as you are in the game.
“Plate discipline” alone won’t guarantee success. Luck also plays a role — whether it’s a fan reaching over the wall or a high multiple exit happening sooner than expected. But discipline and best practices should increase the odds that fund managers’ venture capital investments can achieve desirable financial and, if relevant, strategic returns. Then, and only then, should you consider imitating Hall of Fame baseball player Vladimir Guerrero, famous for being a “bad ball hitter.”
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Jack Taylor is a Senior Associate at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs.
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