We all have biases, and I’d claim that it’s especially true for early stage investors.
Most of us rely on “pattern recognition” and experience in our decision-making. It’s an imperfect art, but a practical one. We all see many more investment opportunities than we could ever seriously diligence, and so we rely on snap judgements that are often heavily influenced by some of our more deeply held biases.
I want to share some thoughts on some of the most common types of biases I see (mainly Founder biases and Market biases) and share some of the biases I carry, for better or worse.
Most VC’s will claim that it’s “all about the team”. But then, most are extremely unscientific about how they evaluate teams and what they are exactly looking for. Many investors rely on gut feel to inform them whether an entrepreneur is “backable”. Honestly, I hate this reality of the business – it seems pretty silly to completely dismiss folks based on one or two interaction, but it happens all the time.
Founder biases are all over the map. Some folks are looking mainly for repeat entrepreneurs. Some like founders that are great presenters and salesmen. Others love investing in socially awkward engineers.
I’ve heard investors say that if a founder hasn’t “done anything” by the time they are 40, there is probably something wrong. I’ve heard others say that they only back founders that they could see leading a public company. I see others that want to back founders that suit the task at hand, but are ok knowing that they will have to replace the founders at a certain point.
Whatever the biases, I think it’s fairly easy to spot given the profile of the founders that the investor has backed previously. Of course, every investor hopes to invest in great repeat entrepreneurs – so take those founders out of the data set. What do you have left? That’s usually a pretty good indication.
Investors also have strong biases against certain market segments or types of businesses. Some prominent investors don’t love companies that require lots of paid customer acquisition early on (and thus, aren’t fans of ecommerce). Others love companies that can prove out their customer acquisition economics early and really pour money into the marketing machine (and thus, love ecommerce). Who’s right?
Some investors steer clear of entire industries. Many investors really fear doing anything in Music (and thus missed out on Pandora). There was also a time when a lot of investors really avoided mobile. Some love marketplaces, others are very skeptical of marketplaces.
Funny enough, I’ve found that entrepreneurs-turned-investors are usually the hardest on companies in their domain of expertise. Usually, it’s because you know so much about the nitty gritty challenges of a market, and find it harder to suspend disbelief for a moment. My partner Lee is a Paypal alum and part of the LinkedIn founding team. I rely on him quite a bit when it comes to new companies in the payments or recruiting space. I always learn a ton, but the bar to get him interested in a company in this space is definitely higher than it is for me. The good news though, is that if you get someone like this involved, it really shows you have something special and you get a lot of really practical help. Think about the value and validation Keith Rabois gives to Square, for example.
Biases are pretty fickle. They are also not always that rational. For what it’s worth, here are a few of the biases I am carrying around these days:
- Inauthentic Founders: I find it very important for companies to stem from the passions and experiences of the founder. So I find myself quite biased against “academic” founding stories. By that I mean founders who decide to study a market and look for a problem to solve. Or, someone who starts fundraising for a company to solve a problem without really immersing themselves in the market or the heads of their target customers.
- Digital Tourists: I really believe that being a digital native is a huge advantage when starting a company in the sectors I focus on (internet-enabled innovation). It pervades many elements of a business – how you recruit, how you interact with customers, how you stay in touch with your market, etc. I find it very difficult to invest in founders who are not digital natives, or are re-invented entrepreneurs in a different and unrelated market. I guess this is pretty closely related to my first point, so maybe it’s just one big bias.
The Failure of Bias
The reality is that biases fail. As I’ve shown, biases are all over the board – if they were all right, no company would ever be successful. Based on my biases, I would totally have missed Polyvore. I mean, look at these founders – do they look like fashion visionaries? Still, they came up with a unique product that delights millions of users.
Biases need to change too. As markets evolve, what a “great entrepreneur” looks like will change (although some characteristics will never change). Markets that looks unattractive long enough will usually become a great place to start hunting, because you will probably find unhappy customers and unmotivated incumbents.
I’m not ashamed of my biases. But I know that they are quite imperfect, and also reveal some blind spots. Plus, I still feel like I’m learning too much every day to really hold any biases too strongly.