On Oct 24 nuTonomy, which builds self-driving car technology, announced it was being acquired for $450 million. I had been part of the seed round in November 2015 and the series A in April 2016. It is a fantastic story with a huge cast, and the nuTonomy team is undoubtedly the protagonist.
When I first met nuTonomy, no other institutional investor had yet made a bet on the company. I remember very well hearing the question “But why are other VCs not investing?” from many different parties, including my teammates.
This is a common challenge for both entrepreneurs and investors at the very cutting edge. VCs are supposed to spot an emerging technology or trend before everyone else sees it, and then nurture it through capital, advice, introductions, and governance. Even the best of us succeed only sporadically, but as a class, VCs have identified and backed many companies that have changed the world.
So how do you gain support for taking a risk? Below are three counterintuitive lessons I have learned from this journey, as well as from observing the investments my colleagues and other investors have made.
1) Don’t (Just) Listen To Your Gut
When I first discovered nuTonomy I was absolutely intrigued — but instincts aside, I had, at best, a superficial understanding of the space they operated in. To have conviction in making an investment I decided first to learn more, which involved months of debating with professors, talking to industry experts, reading analysis and research papers, and understanding the competitive landscape. Eventually, our thesis around autonomous vehicles allowed me to convince my partnership to take the bet, not just around a gut feeling I had, but based on my convictions around the team and the space. I have seen this repeatedly in a variety of frontier technologies, whether it be AR / VR, big data, or blockchain — where there just isn’t enough data, and traditional metrics can actually blindside you.
2) Embrace The Unconventional
Self-driving cars have two big challenges: perception, which means understanding the world around you, and decision-making, which means what to do once you understand that world. Most companies are focused on perception, but I saw in nuTonomy the unconventional approach of focusing on decision-making. Furthermore, self-driving cars are very different from social apps — there is really no room for errors when you play with people’s lives — and I saw in nuTonomy a very high precision in how they modeled a car’s decisions. This conclusion was driven not by pattern recognition, but by a fundamental principles-first analysis — something which I would argue is true for many of the most disruptive investments. I was not expecting universal consensus, but just enough to garner support for an unconventional bet that the majority might not have made.
3) Let Your Cons Be Your Pros
Financial VCs are often competing against each other on their speed of decision-making, their personal brands, and the networks they can leverage. Corporate VCs have a different value proposition — which is usually the platform they can provide — and are not as beholden to the other aforementioned factors. Knowing that my decision-making would be slower also gave me the opportunity to be thoughtful in my diligence; which I might not have had the luxury of doing in a fund that has to move faster.
Having seen this consistently with colleagues on my team and in other corporate VCs, it leads me to wonder about whether corporate VCs are more grounded — i.e., less likely to invest just because someone else is investing. Ultimately, a willingness to be the first institutional money in means bucking many cognitive biases around social proof, and having consistent conviction is the key to getting there.
Therefore, “Why are other VCs not investing?” may be a valid question, but the line between misguided conviction and rational precognition is very fine indeed.
Happily, nuTonomy went on to get a huge amount of interest from VCs. My lessons are arguably most relevant for other investors, but hopefully can also provide some insight for entrepreneurs into how VCs think.
Thanks to Ajay Singh for inspiring this article and to him, Raymond Liao and Ryan Lawler for feedback. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. I work for Samsung’s innovation unit called NEXT, focused on early-stage venture investments in software and services in deep tech.
