Maximizing VC Batting Avg
MARCH 12TH, 2019
Fred Wilson of USV recently wrote a great note on whether it is better to back the team or the product (the “jockey or the horse”) in VC investing, noting that "When I think about the big wins we have had over the years, they almost all exhibited a combination of a large market, a great product, and a talented founding team."
This resonated with me because Fred's investment criteria are very similar to our core investment criteria at Brightstone, and if I look back over our portfolio, the winners have all exhibited the tenets of our core investment criteria. Our batting average is very high when an investment meets all of Fred's / our criteria.
While our criteria are similar to Fred's, the ranking of importance is different. Step-one is the same- we do a lot of work identifying large emerging markets and the beginnings of trends. I wrote a piece on VC deal-flow a few weeks ago, and an important factor in managing deal-flow is biasing the dealflow. One of the ways we bias our dealflow is by limiting the sectors we look at to emerging sectors with favorable high-growth TAM trends. Our next step is different than Fred's- instead of identifying great products within a given high-growth sector, we first look to identify great teams. This biases our deal-flow further by focusing on teams with prior successful exits, sector thought leadership and significant traction with their current business. Finally, we want to see that the team has created a disruptive/defensible technology that imposes a competitive advantage and entry barriers to competition.
While we operate from a market > team > product orientation, we need to see all three characteristics in order to make an investment. This is our .400 hitter sweet-spot. We don't miss on these opportunities, and we're very careful not to swing out of this zone. Our rigorous adherence to this core thesis differs from a lot of investors. Some investors feel that the team is unimportant. They believe that teams can be replaced. We don't want to be in a position where we have to replace a team. Some investors feel that product is unimportant if you have a talented founding team. In our experience, this results in pivots. Pivots are expensive in terms of capital, time, and focus. We don't like pivots. Lastly, but not least, large markets are a must. A great team can build a great product in a small market, but they can’t build a big business (or the type of returns our model requires).
If I could boil that all down in terms of finding the best opportunities, I would say something to the effect of: we look for large high-growth markets, find an 'A-quality' team addressing those markets, and ensure they've built an excellent product that gives them a defensible competitive advantage.
That's how we maximize our VC batting average and, ultimately, our returns.
