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October 21, 2013

I’ve been hearing a similar lament recently from founders of seed stage companies.  It goes something like this:

“I thought seed funds would be faster at getting to a decision than large funds. But I’m finding these guys are actually pretty slow,  and do so much work vs. some large funds that make decisions surprisingly quickly.”

I’ve been thinking a lot about deal selection in Venture Capital, so this meme is particularly interesting to me.  Here’s what I make of it.

Many seed funds are getting slower in decision-making.  This is good in some ways, but bad in some ways.  Here’s why I think this is happening

  1. More seed funds are realizing that they need to have more concentrated portfolios to generate good returns.  In other words, these funds need to be pickier, choose their spots better, and say “no” more.  By definition, this means that they will work harder to build conviction around an opportunity and move more slowly.  This is good because when you get a “yes” from a seed fund, you are more likely to have a partner who has thought deeply about your business and be in a better position to help.  In theory, this could turn a 3-7 day process into a 7-15 day process. Still reasonably fast in the scheme of things.
  2. Many seed funds are growing up, which is leading to more distractions and more reasons to be slower and more pessimistic.  Many of these investors have larger portfolios now, which is a major tax on time.  These investors have come face to face with more companies that have failed or are struggling, especially in the wake of the series A crunch, so the problems with early stage companies are more salient than ever.  This leads more seed funds to approach investments with a defensive mentality vs an offensive one.  In early stage investing, offense wins.
  3. Many seed funds are expanding their teams.  What used to be a 1-person show now involves multiple investors, and potentially multiple levels of professionals.  These firms are working through how to best collaborate as a team and drive to efficient decisions quickly.  But in the meantime, this additional set of people adds complexity and friction to the decision-making process.
  4. Many seed investors don’t lead or have limited experience leading.  What they’ve found is that it’s reasonably effective to hang-around-the-hoop as a deal is coming together, and pounce once a high-quality syndicate seems to be forming.  This leads these investors to not drive aggressively towards a decision, rather keep a conversation going slowly to maintain optionality if/when someone really good does decide to lead.

On the flip side, large funds move faster than many would think.  It doesn’t always seem that way, because just like seed investors, large funds will “hang around the hoop” on many of the companies that they like but are not chasing aggressively.  But they can move pretty quickly driven by a few reasons.

  1. Some partners at larger funds just have tons of experience to draw from and enough political capital in their firms to make stuff happen quickly. I was having breakfast today with a partner at a large, top-tier venture fund, and he remarked that one of his colleagues, who is over 60, is in the “prime of his career”. And what impressed him most was the speed and decisiveness of his thinking. If you are talking to the right partner and your company is right in their power alley, you could have an extremely fast process
  2. The level of competitiveness among larger funds is ridiculously intense and has only been getting more so.  This is probably less true at the seed stage, but that intensity has spilled over into all segments where these firms invest.  This increased competitiveness has forced these funds to figure out how to be agile.  I find that the “best” funds often are also the ones that drive fastest to a decision, and compress a fair bit of work into a short amount of time if they are really serious about an investment.  I’ve often heard entrepreneurs remark positively about the speed of great funds.  I’ve never heard an entrepreneur remark positively about the speed of mediocre funds.
  3. Some funds continue to do high-velocity, passive seed investments.  These investments have the signaling risk that has been talked about ad-nauseam.  These investments also have a separate process, by which one or two partners can decide to pull the trigger, without necessarily getting full partnership buy-in. In this case, I see speed as a negative signal, not a positive one.

Overall, I’m a believer that VCs can and should make careful but fast decisions. You can do a lot of reference calls and market due diligence in 3-7 days.  The trick is to make the decision up-front to clear one’s schedule and do the work, with the goal of driving to an independent decision. In an ideal world, this allows everyone to win.  Investors make good decisions. Entrepreneurs get investors that have well informed opinions and high conviction around their companies.  And this can get done in a reasonable amount of time so founders can keep their foot on the gas and keep building their companies.

 

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