…the market size slide.
My sense is most entrepreneurs feel like they have to have a $1B+ market size for investors to get interested. And, then the more aggressive entrepreneurs, knowing that everyone else has at least a $1B+ market size, come in with the $5B-$10B+ market sizes. The means to arrive at these numbers is usually to take a generous number of possible customers and multiply that times a large spend per customer to equate to the multi-billion dollar “addressable market size“. Others might site 3rd party data sources which is intended to lend credibility to the analysis, but which are largely derived by the same methodology. It’s this approach to market size analysis which I don’t find particularly useful and can generate a false sense of comfort if you actually believe it.
When I’m looking at a prospective investment in a company, here’s how I think about market size:
The first question I ask is how much revenue do the companies that sell principally the same product or service generate today. This is the “current market size“. For example, when we invested in Ensighten in 2012, which started out as a tag management vendor, if you added up all of the revenue (from tag management software) of all of the tag management vendors, the total would have been less than $30M, but with hyper growth. That, in my mind, was the current market size for tag management. It was a small number because tag management was a new market rather than an existing market. Alternatively when we invested in Globaltranz in 2011, which is an Internet freight brokerage, the revenue of all of the companies that broker freight capacity in the US was $127B. It was a much larger current market, but with more moderate growth given the maturity of the industry.
It’s important to establish the current market size because it helps to establish whether the company is going after a new or an existing market. If the current market size is small, such as tag management was two years ago, that’s not a deal killer by definition. It just means you have to develop strong conviction that the market will grow and appreciate the inherent risk with that. Lots of investments fail because a new market doesn’t grow at the scale or pace anticipated. If the current market size is large, but not experiencing hyper growth, such as in the overall freight brokerage industry, that’s also not a deal killer by definition. It just means you have to have a crystal clear rationale on why market spend will shift towards a new upstart rather than stay with the incumbent. These are important and fundamentally different questions.
The next question I then ask on market size when evaluating a company is how much revenue, in aggregate, will all of the companies that sell principally the same product or service generate in the future (5-10 years from now). I think of this as the “attainable market size“. When you define a market size by the aggregate revenue of the competitors, it immediately juxtaposes market size against market leadership. For example, if an entrepreneur wants to say their company will have a large multi-billion dollar attainable market (e.g. $5B in 5 years), but their company “only” projects $50M in revenue in 5 years, then it begs the question why 99% of the spend in the market did not go their way. You can claim a large attainable market, but it becomes harder to claim market leadership with little market share. Alternatively, if an entrepreneur wants to call their company a market leader by generating $50M of revenue of a $200M attainable market, then it begs the question of whether the product or service has that much value if the eventual attainable market isn’t that large. It forces everyone to think through the realities of how their market will evolve and how their company’s competitive position will evolve alongside that.
Today, Ensighten is one of the fastest growing SaaS companies in the country and Globaltranz is one of the fastest growing freight brokerages in the country. Despite coming from diametrically different current market sizes when we invested, in both cases, the attainable market has turned out to be large and both have established strong leadership positions within those markets. We’ve been fortunate that the stars have aligned for both.
In summary, my biggest issue with the bloated addressable market slides we see day in and day out in company pitches, is we all know that when we fast forward 5-10 years, almost in all cases, the actual aggregate revenue generated by the companies in those markets will not come close to equaling the addressable market size. In other words, the attainable market almost always turns out to be a small fraction of the addressable market. This tells me that the addressable market size slide is too theoretical to actually be useful and should have little or no bearing on an investment decision. For this reason, in my opinion, it is generally the least useful slide in the pitch deck.
Nearly every company pitch I’ve seen covers the topic of market size. And, in every serious internal discussion about a prospective investment, we talk about market size as well. Usually, the primary topic of discussion in both contexts is the size of the market boiled down to an actual dollar figure. Entrepreneurs and investors alike will come up with a very detailed, methodical way, to define the size of the market opportunity. While that’s fine and worth doing, comparatively less time is spent on the topic of whether the market is an existing or a new market – and the associated risks and opportunities related to that. And, the latter topic can be more indicative of the prospects of the investment than the former analysis on market size, itself.
An existing market is a market where customers already spend money buying more or less the same product or service that a given company is selling. That product or service may be delivered or sold in a different way, but at the end of the day, the customer that you’re targeting is already spending money on substantially the same thing. What’s an example of this? Care.com is an online marketplace to find babysitters. People already spend money on babysitters, Care.com is just helping them to find babysitters more easily. This is an existing market. Chewy.com is an e-commerce company for pet food. Their target customers already spend money on pet food. Again, an existing market. Amazon started out selling books, which people already buy. Uber started out replacing taxi services, which people already buy. Globaltranz is an online freight broker for trucking capacity, which companies already buy to ship goods. Square is going after the existing market of credit card processing. Prosper is a peer-to-peer lender, which sounds like a new market, but they’re really selling unsecured consumer loans, which consumers have been procuring for ages. These are all existing markets.
A new market is a market where the end product or service is new – in other words there isn’t really existing demand, but there could be. SpaceX just closed a big financing last week – space travel is a new market for certain. When Google first came out, it was targeting a new market of online search and search engine marketing. There really wasn’t much of an existing market in search at that time, outside of maybe Yahoo and Altavista. Everything related to drones is a new market. Twitter ushered in a new market that had never existed of micro-publishing. Many location-based applications on smart phones (though there are exceptions) are more than likely to be a new market given the technology didn’t exist to do it until the smart phone revolution. Even a lot of the SaaS companies are selling to mid-market companies that never spent money on traditional software applications before therefore making it a new market in practice. New markets abound in the world of venture-backed companies.
When investors and entrepreneurs go after a truly new market – the advantage is usually there are not entrenched competitors so if the market materializes as quickly and dramatically as they hope, market leadership is more attainable. In addition, new markets can grow exceptionally quickly, far faster than existing markets – and a rising tide can lift all boats as the saying goes. So, there is no doubt that you can win and win big in a new market. That being said, the risk one takes with a new market actually emerging is often profoundly underestimated. My guess is the most common reason companies targeting new markets fail is primarily because the market never really emerges at the pace and size that the company and investors expected. You can have great management, a great product, excellent sales and marketing, but if the market isn’t there, then it’s easy for a company to get stuck. It’s hard to have good product/market fit, when there’s no market after all.
When investors and entrepreneurs go after an existing market – the advantage is there’s little or no market risk. You can go into an investment knowing exactly how big the market is, that customers care about the product, that there’s already a product/market fit and customers derive value from what they’re buying. The value of that can’t be overstated. But, the risk of existing markets is there are already companies serving those customers so there is entrenched competition. If existing competitors have substantial customer loyalty or capital, they can be excessively difficult to displace. A new company entering an existing market has to not just be a little bit better, but meaningfully better than existing means of procuring that product to really win. That can be a tall order, but if that competitive distinction exists, there’s a high probability you’re onto a compelling opportunity and success is far more predictable than most companies targeting new markets.
A few companies dominate existing markets while simultaneously opening new markets. A great example of this is Uber. On the one hand, I said that Uber is going after the existing market of taxi services. But, I also said most location-based smart phone apps, which Uber is, are going after new markets. In this example, this is not a contradiction because both are true. Uber started out by displacing the $11B taxi services market. But, why is the company worth $40B? Uber has become so convenient, that they have changed the behavior of how people travel – so they’ve opened a new market as well that may be bigger than the existing taxi market. Certain studies say that Uber’s revenue in the Bay Area is multiples larger than the entire taxi market in the region – which suggests they have both won an existing market and opened up a large new market. That’s a beautiful thing.
So, next time you see a pitch or make a pitch that says the market size is $1 billion – note that not all markets of comparable size are created equal. And, the risks and opportunities of existing and new markets can be substantially different.
It’s only taken 16 years in the investment business for me to discover my favorite value proposition. And, I admit, it’s a boring selection. First, some context. A value proposition is the value a business offers its customer such that the customer decides to buy that companies’ product. To be fair, there are many categories of value props that all have great merit and can be the basis of building a valuable company. So, one is not by definition greater than another. But, we all have our predispositions, and I have a positive predisposition for one value prop in particular. I favor this value prop because, if it is structurally sustainable, it can be equally transformative as it is predictable – and those usually don’t go hand in hand.
So, without further ado, my favorite value proposition is offering a customer the opportunity to buy something they already buy, but at a structurally lower price. Yes, if the options are better, faster or cheaper – I like cheaper. Why do I like this value prop? Because there’s little fundamental market risk. If a customer is already buying a product, then you know they want that product and that product benefits them in some way. You know they are ready to buy it now because, well, they already buy it now – so you’re not taking market timing risk. Whether there’s even a market or whether the market is here now is a profoundly underestimated risk undertaken by many emerging technology companies. And, in this example, you meaningfully mitigate those risks.
Then you layer on top of a large existing market, a very clear reason to buy with you – you’re selling to them the very thing they already buy, for a lower price. Who doesn’t want that?
The key to a company with lower price as its fundamental value prop being a good investment, is their basis for having a lower price must be structurally defensible and sustainable. It can’t be that they’re doing exactly the same thing as their competitors, just charging a lower price. That’s the definition of unsustainable. There is usually some disruption in the supply chain or some technology innovation, which they can take advantage of above and beyond their competitors which is why they’re able to offer sustainably lower prices to their customers and quickly take market share of a large existing market.
When I look at our current and historical portfolio, where the ingredients of a structurally sustainable lower price value proposition is true, those companies have an inordinate propensity to be worth $1B+ in enterprise value. Xoom went public last year by offering online global money remittance at a lower price than folks like Western Union because they have an Internet front-end. Prosper offers loans to consumers at a lower interest rate because they use the Internet to cut out the banks who take a margin in the normal lending process. Globaltranz offers businesses access to trucking capacity at a much lower price due to the efficiency of their agent network, technology and buying capacity. Cortera is offering business credit data at a much lower cost than Dun & Bradstreet because of its proprietary data acquisition platform. And Chewy offers pet owners high quality pet food at a lower price than bricks and mortar competitors because they have no bricks and mortar. These companies are all taking significant steps in transforming their respective industries on the core value proposition of lower price.
While I can easily fall in love with companies that have other value propositions such as convenience, selection, revenue enhancement, service, etc., lower price is a tried and true value prop which while admittedly boring, can be extremely effective if it’s sustainable.
I love meeting with new companies. To me, it’s the oxygen of this business and the most energizing aspect of the job. That being said, the one thing that can take the energy right out of an introductory meeting is the obligatory 20-40 slide company pitch deck that drags on and on. Personally, I prefer a more conversational meeting in which slides are used to launch conversations, rather than claim the entire conversation, about various important topics relevant to the business. Therefore, I thought I’d provide a general framework for a succinct 10-slide pitch deck that should be more than sufficient for an introductory investor meeting. Keep in mind that given Volition is a technology growth equity investor, this is more geared towards companies with some revenue and customers rather than a pure start-up. But, I do think there are principles that are portable across different stages.
The 10 Slide Pitch Deck (in no particular order):
1. The Problem Statement. This is the problem the company solves. What is the problem, why is it such a high priority for whoever has it? Why does this problem have to get solved?
2. How You Solve The Problem. This gets to what the company does. Why do you have unique knowledge of the problem, how do you solve the problem, and why is that a differentiated / defensible approach?
3. The Customer. This gets to who the target customer is specifically. The more detailed and segmented this is, the more credible I find it to be. I’d rather hear, “The chief compliance officer at hedge funds with $100M+ in assets” than “financial services companies”, as an example. Then provide examples of actual customers. How many of those target customers out there actually have the problem you articulated?
4. The Value to the Customer. This gets to the return on investment. How much does the customer have to pay (what is the pricing model), and why is it clearly worth it to them to pay it.
5. Actual Use Cases. Now that you’ve established the problem, solution and value in concept – let’s talk about it in reality. If there’s only one primary use case, given an example of a real customer with a prototypical use case. If there are 2 or 3 common use cases, let’s hear example of all of those.
6. The Product. This can go anywhere in the presentation, but if it’s at this point, I’m probably more than eager to see the product in action. A live demo is always best.
7. Competitive Position. Who else out there is also trying to solve this problem, and why are you better positioned to succeed? Why are you going to win your segment? This is a great chance to talk about win-rates against competition, etc.
8. Financial Overview. A simple slide with historical and projected (to the degree you have them) income statement, balance sheet, and cash flows. A couple of bullets on financing history and ownership breakdown are helpful.
9. Other Key Metrics. This is your opportunity to brag with the actual data that you consider leading indicators for your business. Maybe it’s retention rate, lifetime value/CAC, upsell dynamics, customer or transactional growth, etc.
10. Management Team. Who are the people behind this company? Don’t just put logos of past companies, but titles/roles, companies, and key achievements for each exec at their prior companies. Also worth noting if there are any key hires you want to make.
Every company is different, but hopefully this provides a helpful framework to organize a simple pitch deck. Don’t feel the need to address every sub-question with actual content on the slide. You can always talk to the details during the presentation. Often times, less is more when it comes to slide content.
My suggestion in terms of order is to start with the strongest aspect of the company. If the management team is the strength, lead with it. If the financial performance is the strength, by all means, lead with that. If you’ve got a breakthrough product, start with a demo. But, creating momentum in the meeting right out of the gate is always a good idea.
I’m probably missing something important, but hopefully this is helpful in getting readers pointed in the right direction.
Every venture-backed CEO wants “A” players at every executive position.
“A” players are executives that are 10x more productive than their peers. They are equally excellent strategically and operationally. They are equally capable at rolling up their sleeves or leading others. They thrive – with or without direction. They are big picture and detailed. They are the perfect mix of confidence and humility. They fit into any team culture, thrive under any leadership style, and raise the game of everyone around them, while befriending them all at the same time. Best of all, they miraculously fit within your pay scale, and you can retain them despite brutal competition for their services. “A” players are perfect – except for one small issue – as defined here, they don’t really exist.
In reality, all human beings have strengths and weaknesses. There are certain support structures and cultures within which we will thrive, and others in which we will not. It’s the rare person who is a persistent “A” player across any and all circumstances. A more realistic assessment is that many of us are “B” players who could perform like the “A” player in certain environments and perhaps even function like “C” players in other environments. We are profoundly influenced by co-workers, firm cultures, leadership styles and roles – rather than completely set apart from them. We are not robotic in the execution of our talents.
Therein lies one of the most important roles of the CEO. Many CEOs come with the emphasis that they’re trying to hire “A” players at every role. It’s an admirable goal, but may have a misplaced emphasis. The supposed “A” player arrives and 6 months later they are functioning like a “C+” player. The natural conclusion is that it was a hiring mistake – stoke up the recruiting engine and go out looking for that “A” player again. This might still be the right answer, but it may miss an important point.
The point is that a CEO’s job is to build a championship team, and that may be distinctly different than building a team of champions. A CEO’s job, when it comes to human capital, is to create the environment which will get the best out of people. Some of that is around hiring the right people. But, there are important elements to the equation that are completely distinct from hiring. There are important ingredients like firm culture, organizational structure, leadership style, delineation of roles, team dynamics, development, and others – which can be the difference between the same person functioning like an “A” player or a “C” player.
While I am loathe to use overused sports analogies – this dynamic shows itself very clearly in sports. It is not uncommon at all for a player of average historical performance to change teams – with a different system, different set of teammates, different culture, etc. – and to perform like an All-Star (e.g. Patriots’ WR Wes Welker). And, it is not uncommon at all for an All-Star to change teams – and perform like a mediocre player for the exact same reasons (e.g. Red Sox OF Carl Crawford). This dynamic plays itself out just as frequently in the corporate world.
Therefore, it is important for leaders of companies to not only hire excellent people, but to create a culture and system where the people they hire can and are likely to excel. For whether an executive becomes an “A” player may have as much dependency on the talents of that executive as it does the leader they’re working for and the environment they’re working within.
An entrepreneur I really admire asked me for advice on how to handle associate cold calls from VC firms. I thought the best way to answer that question is to share what happens after the cold call so entrepreneurs can deduce for themselves how to handle it. I’ll describe what happens at Volition Capital, but having been in the industry for 14 years at a few different firms, we’re a broad proxy of what happens at other firms. Where we might be distinct is as a smaller firm, the partnership probably gets involved earlier and more broadly than at other firms. Given that, let’s see what happens after the cold call:
[click] The conversation with the associate is over. The associate will then enter the notes of the call into Salesforce. If the company is deemed by the associate to fit our specs both in terms of what the company does and our investment focus (more on this later), the notes of the conversation will be emailed to the entire investment team. Elevating the visibility of the company through this means happens irrespective of whether the company is interested in raising capital. Every investment partner at the firm will read the notes of that call within 24 hours. Typically some email dialogue on the company occurs at this time. In addition, those notes will be included in a packet for discussion at our Monday team meeting. We discuss every company that has been elevated in this way every Monday. It is at this meeting that we decide next steps, if any, with the company.
So, the net of it is very clearly this: If you want partner visibility for your company – talk to the associate.
Associates are assets to you in two ways: (1) They know what kind of opportunity the firm gets excited about, and (2) They know which partner would probably like the opportunity the most. As one of the managing partners in my firm, I absolutely pay attention when an associate is excited and has conviction around a company. I trust the judgment of the associates at our firm. So, my advice to companies is if you want to have the conversation with the associate – treat the associate like you’re talking to a partner because the salient points of what you communicate will not just get to one partner, but all of the partners of our firm.
What about the conventional wisdom that some entrepreneurs adopt which is to tell the associate you won’t talk to anyone besides a partner? I presume entrepreneurs ask this question to assess how interested the VC firm really is in their company so as to not waste their own time. The logic being that if the VC firm is really interested, they’ll get a partner on the phone. I don’t believe this approach actually accomplishes that. What this approach forces is for the associate to make a deduction about whether your company is worth partner time, without knowing much about your company. So, the associate essentially has to guess. Whether this approach leads to a call with a partner is based less on the merits of your company, and moreso on whether the associate is a good guesser. It’s more or less left up to chance.
The better approach in my mind is to ask the associate what specifications he or she is looking for and decide whether you should do the call based on how closely your company fits those specifications. For example, if you asked a Volition associate what our investment focus is, they would say this:
- Sectors: Internet, software/SAAS, tech-enabled services, information services
- Revenue: Typically $5M-$30M+ revenue
- Revenue growth: 25%+ minimum, typically 50%-100%
- Financing history: limited or no prior capital raised
- Profitability: Near break-even or profitable
- Most importantly: Aspirations for Greatness.
Companies that get elevated to the entire firm typically fit most, if not all, of these criteria. Other VC and growth equity firms likely have very different criteria, so this is clearly Volition-specific. If the associate can’t give you specific criteria of what they’re looking for, then he or she is probably just fishing and their firm probably has more of a referral-based orientation. In this case, it may make sense to ask for a partner.
Given this backdrop, if you think your company does or will eventually fit the spec of the calling firm, and you either want to build relationships with investors for down the road or raise capital in the not-too-distant future, then I’d say have the call. If your company doesn’t fit the spec and likely won’t, then it’s completely fair game to let the associate know that and politely decline the call. If you’re not sure, it never hurts to know what firms are looking for and just keep your own database for future reference.
I hope this is helpful. If you have other questions to demystify the VC process, please feel free to comment. If your company fits the criteria I stated above, feel free to call me or any of our associates – it’s all the same :).
The unit of measurement in the venture capital industry has long been the “fund”. A fund is typically a discrete pool of capital that a firm raises around a particular strategy, and then deploys by investing into companies aligned with that strategy. The fund has had longstanding significance in the venture industry because it’s how returns are calculated. LPs calculate their returns based on multiples and IRRs of the fund. GPs calculate their carried interest based on how the fund performs. And research firms like Cambridge Associates have been built around comparing the relative performance of various funds.
But, the utility of the fund as the metric of measurement for the venture capital industry relies on a fundamental assumption which is slowly, but increasingly not true. That assumption is simply this: that you can invest in that fund, and only that fund.
Let me elaborate. There have been two parallel trends in the venture capital industry that are eroding the utility of the fund as the unit of measurement in the industry. The first trend is that LPs increasingly are consolidating their positions around the branded venture capital firms. More dollars are flowing to fewer firms. Prior to and in parallel to that trend, the branded venture firms are creating a menu of different types of funds with distinct strategies with which to deploy that capital.
Ten years ago, venture capital firms were making new investments out of one fund at a time. Now it is not uncommon for the largest firms to have their seed fund, their early stage fund, their growth fund, their China fund, their India fund, their specialty fund [mobile, data, etc.], and on and on. Here is the key point: some of these firms will not allow LPs to select the fund that most interests them and invest in that fund on a discrete basis. They force a broader asset allocation into multiple fund vehicles in order to invest with that firm.
The logic works in one of two ways. Sometimes the GP will hold out the most attractive fund – the fund that every investor wants to get into – and stipulate that in order to get into that fund, the LP must invest in their other funds as well. Other times, the GP will say that the LP isn’t investing into a “fund”, rather they are investing in a “franchise”. This means they allocate capital to the firm, and the firm may decide the relative allocations to the various funds. It’s another approach to the same end result.
How does this all net out? It simply means that fund-level returns aren’t always relevant because LPs never had the opportunity to invest in that fund discretely. If LPs had to invest in a basket of funds to invest with that firm, then the true unit of measurement of returns is the basket, not an individual fund. But, it’s impossible to know how these baskets take shape so the individual fund persists as the unit of measurement, despite its increasing irrelevance with a number of the largest and most branded funds in the industry which may slowly but surely portend a broader trend for the overall industry as well.
Coming out of college, without even really knowing what they do, my dream job was to one day work at Bain Capital. Their reputation was that they took the very best of the young investment bankers and management consultants a couple of years after college. Since I was headed into the management consulting world after school, I always kept in the back of my mind that maybe I’d have the chance to work at Bain Capital one day. Having grown up in the 80’s, I viewed Bain Capital as the “Top Gun” of investment world. It’s where the best of the best went.
Nearly a couple of years into my management consulting experience, I called up a friend at Bain Capital. I said what much more informed candidates today would never say, “I am very interested in venture capital and wonder if there are any opportunities at Bain Capital.” That statement is the equivalent of looking for a job at an ice cream store because you like frozen yogurt. My friend politely informed me that Bain Capital was not a venture capital firm (at that time), rather they were a leveraged buyout (LBO) firm. Not knowing the difference, and considering they still wanted to interview me, I went along for the ride. For the next few months, I went to several interviews at Bain Capital’s pristine offices in a downtown Boston skyscraper. I started to learn about what LBO firms do. I was impressed.
At around the same time, I randomly saw a job posting on a website called CapitalVenture.com about a role at Bessemer Venture Partners. I had never heard of Bessemer, but they said they were the oldest venture capital (VC) firm in the country. That sounded good to me. I decided to apply and for the subsequent few months, I went to several interviews at Bessemer’s “office” in Wellesley, MA. Their office was a converted two story home. I am pretty sure I interviewed in what would have been the guest bedroom, the master bedroom, the library, the kitchen, and the kids’ rooms. Nearly every step I took in that office, the floors creaked because the house was old. It was no Bain Capital in appearance. But, I started to learn about what VC firms do. I was also impressed.
I came to appreciate that Bain Capital and Bessemer Venture Partners had commonalities and differences. These traits would be true more generically of any LBO firm relative to any VC firm. Their commonalities were clear: they both invest in businesses, help shepherd businesses, and ultimately aim to generate good financial returns for their investors and the other shareholders of these businesses. Their differences came in how they generated financial returns.
Bessemer, as a proxy for the VC industry, did well on investments if those companies grew, and grew aggressively. They bet on being right on trends, technology leadership, and new markets emerging. Bessemer pushed me hard on my risk tolerance during the interview process. Bain Capital, as a proxy for the LBO industry, principally relied on sound financial engineering to generate returns. They emphasized things like terms on debt, balance sheet structuring, and predictability of cash flow. They pushed me hard on my quantitative and modeling skills throughout the interview process. I came to appreciate that the VC and LBO worlds were two very different worlds.
The question the political world is grappling with this week is whether Bain Capital created jobs during Mitt Romney’s tenure. I hope that through that discourse, the difference between VC and LBO firms comes out. I am convinced that successful venture capital firms create jobs as a byproduct of their investment practice. The companies VC firms invest in have to grow to be successful, and a byproduct of growth is jobs. I also believe that while LBO firms don’t have to create jobs to have a successful investment, the great ones like Bain Capital probably have done so in meaningful ways over the long run. I don’t have any numbers, but that’s my belief.
What I am sure of for both firms is that they have been successful over long periods of time because they have generated good returns for their investors. In Bain Capital’s case, their investors probably include many state pension funds, corporate pension funds, university endowments, sovereign wealth funds, and insurance companies. It would not shock me at all if a surprising number of the readers of this blog have at least someone in their extended family who has benefited in some way from indirectly (and probably unknowingly) investing in a Bain Capital fund or working at a Bain Capital company. That value can not be under emphasized when it comes to understanding the contributions of any investment firm.
Back to my personal story. I remember the day that I turned down the offer from Bain Capital. I called the same friend and said with surprise in my own voice, “I feel like I’m turning down my dream job, but I’ve decided to go to Bessemer.” When people asked me how I could possibly turn down Bain Capital, I told them the truth. Working at Bessemer and doing venture capital investments just sounded like more fun to me. What could be more fun than coming to work every day and investing in companies that are trying to change the world in some way? And, with that call 14 years ago, I started my venture capital career. I certainly respect the work of LBO firms like Bain Capital, but have had such a great time in the venture capital world. The last 14 years have absolutely flown by. I guess time flies when you’re having fun.
Despite the fact that often times the majority rules, that doesn’t mean the majority is right.
The most poignant example comes from a premier venture capital firm I once worked for. One of the opportunities they gave their investment professionals was the opportunity to invest personally and on a discretionary basis in each round of each financing the firm participated in. You didn’t have to invest, or you could “max out”, or you could do anything in between. There was a maximum amount you could put into each round based on your level in the firm.
Most interestingly, after each financing round closed, they would publish to the entire investment team how much each person invested for their discretionary investment in that round. There is no better way to tell how a person feels about an investment than to see the size of their personal check. It was the most honest moment of the entire investment discussion. There were certainly cases when everyone in the firm maxed out their personal investment (e.g. the “max out scenario”). And, there was a similar frequency of cases when nearly everyone didn’t participate except the individual partner sponsoring the deal (e.g. the “zero out” scenario). These decisions were always made after individuals would talk to each other behind the scenes to discuss how much they were going to put into each investment – they were rarely made in isolation.
What I learned from watching these personal investment decisions made over and over again was somewhat surprising. A great predictor of failure for an investment was when the max out scenario took place. If everyone loved a deal and backed up the truck on their personal investment, it was more than likely to not succeed. In fact, those deals often failed in quick fashion. The inverse was surprisingly true as well. More often than not, for those investments where the zero out scenario took place, they often became successes – sometimes the biggest successes. At the other firms I have worked at, various forms of this experiment have taken place and this observation holds true through different economic times, different investments, and different firms.
Why? How can it be that when a group of intelligent, seasoned investment professionals agree – they are often wrong? The answer is simple: investment partnerships are the perfect breeding ground for groupthink. Groupthink according to Wikipedia is: “a psychological phenomenon that occurs within groups of people…. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative ideas and viewpoints.” There are important cases in history where groupthink played a material role such as in Pearl Harbor and the Bay of Pigs.
The reason venture partnerships foster groupthink is best articulated by Irving Janis, a pre-eminent researcher on groupthink. He suggests that certain contextual ingredients make groupthink more likely including:
- High Group Cohesiveness
- Group Insulation
- Lack of Impartial Leadership
- Lack of Norms Requiring Methodological Procedures
- Homogeneity of Members’ Social Background and Ideology
Venture partnerships are often cohesive, insulated, and homogeneous groups – a perfect breeding ground for groupthink.
How do you protect against groupthink? I think you simply ask yourself two questions trying to be as impartial as possible:
- Ask yourself – could the dissenting opinion be right? Listen to and fully understand the point of view of the person expressing a dissenting opinion, especially if that person is the sole voice in the room. Fully consider their point of view as it may very well be the right one. Give it weight in your mind.
- Ask yourself – could your majority opinion be wrong? Have you arrived at your opinion without sufficient critical analysis? Are you basing your position on assumptions that you presume to be true, but that perhaps are not sufficiently tested or researched? Be humble, don’t think too highly of your own point of view.
Until you’ve understood how your majority opinion could be wrong, you should strongly question whether your opinion is right. Until you’ve understood how a dissenting opinion could be right, you should strongly question whether it is wrong. A great and simple test is whether you can argue both the majority and dissenting opinion well – irrespective of which one you hold.
The best venture partnerships understand this dynamic and take it into account in their decision-making. One firm I used to work at mandated a dissenting partner on all deals. Another firm always allowed for a single champion to carry a deal through rather than requiring partnership consensus. While groupthink may ultimately exist within the partnership model, it doesn’t have to be nor should partnerships let it be the deciding factor at the end of the day.
This is the 4th edition of the Venture Capital Blog Directory (1st edition, 2nd edition, 3rd edition). This directory includes 149 venture capital, microVC/seed, and growth equity blogs. The imperfect statistic used to rank these blogs is their average monthly uniques in Q410 from Compete (more methodology info below). Blogs that have seen increased traffic over Q409 by 1,000+ uniques/month are highlighted in bold. There is an additional list below of VC blogs below that had insufficient Compete data. To subscribe to the top 15 VC blogs through Google Reader, click here: Top 15 VC Blogs. As always, if there is any information missing or incorrect, please leave it in the comment field. Many thanks to my colleagues at Volition Capital for their assistance with this directory – we hope it’s a useful service for everyone.
The Global VC Blog Directory (Q410 Avg. Monthly Uniques)
- Paul Graham (@paulg), YCombinator, Essays (97,227)
- Fred Wilson (@fredwilson), Union Square Ventures, A VC (81,483)
- Mark Suster (@msuster), GRP Partners, Both Sides of the Table (53,655)
- Brad Feld (@bradfeld), Foundry Group, Feld Thoughts (38,821)
- Chris Dixon (@cdixon), Founder Collective, cdixon.org (20,988)
- David Skok (@bostonvc), Matrix Partners, For Entrepreneurs (14,173)
- Charlie O’Donnell (@ceonyc), First Round Capital, This is Going to be Big (13,970)
- Larry Cheng (@larryvc), Volition Capital, Thinking About Thinking (13,215)
- Dave McClure (@davemcclure), 500 Startups, Master of 500 Hats (11,127)
- Ben Horowitz (@bhorowitz), Andreesen Horowitz, Ben’s Blog (10,686)
- Jeremy Liew (@jeremysliew), Lightspeed Ventures Partners, LSVP (9,344)
- Bijan Sabet (@bijan), Spark Capital, Bijan Sabet (8,256)
- Ryan Spoon (@ryanspoon), Polaris Venture Partners, ryanspoon.com (7,828)
- Albert Wenger (@albertwenger), Union Square Ventures, Continuations (7,469)
- Roger Ehrenberg (@infoarbitrage), IA Capital Ventures, Information Arbitrage (7,182)
- Rob Go (@robgo), NextView Ventures, robgo.org (6,934)
- Josh Kopelman (@joshk), First Round Capital, Redeye VC (6,778)
- David Cowan (@davidcowan), Bessemer Venture Partners, Who Has Time For This? (5,993)
- Mendelson/Feld (@foundrygroup), Foundry Group, Ask The VC (5,963)
- Bill Gurley (@bgurley), Benchmark Capital, Above The Crowd (5,428)
- Jeff Bussgang (@bussgang), Flybridge Capital Partners, Seeing Both Sides (5,223)
- David Hornik (@davidhornik), August Capital, VentureBlog (5,157)
- Seth Levine (@sether), Foundry Group, VC Adventure (4,858)
- Eric Friedman (@ericfriedman), Union Square Ventures, Marketing.fm (4,706)
- Andrew Parker (@andrewparker), Union Square Ventures, The Gong Show (3,854)
- Mark Peter Davis(@markpeterdavis), DFJ Gotham Ventures, Venture Made Transparent (3,602)
- Lee Hower (@leehower), NextView Ventures, AgileVC (3,459)
- Christine Herron (@christine), Intel Capital, Christine.net (2,484)
- Will Price, Hummer Winblad, Will Price (2,348)
- Jon Steinberg (@jonsteinberg), Polaris Venture Partners, Jon Steinberg (2,318)
- Jason Mendelson (@jasonmendelson), Foundry Group, Mendelson’s Musings (2,171)
- Marc Andreesen (@pmarcablog), Andressen Horowitz, Blog.pmarca.com (2,151)
- Jon O’Shaughnessy (@j_oshaughnessy), Dace Ventures, jonoshaughnessy.org (2,095)
- Sarah Tavel (@sarahtavel), Bessemer Venture Partners, Adventurista (1,968)
- Ed Sim (@edsim), Dawntreader Ventures, Beyond VC (1,948)
- Mike Hirshland (@vcmike), Polaris Venture Partners, VC Mike’s Blog (1,910)
- Dan Rua (@danrua), Inflexion Partners, Florida Venture Blog (1,510)
- Rob Hayes (@robhayes), First Round Capital, Permanent Record (1,509)
- Matt McCall, DFJ Portage Venture Partners, VC Confidential (1,430)
- Mo Koyfman (@mokoyfman), Spark Capital, Mo Koyfman (1,422)
- Fred Destin (@fdestin), Atlas Venture, Fred Destin’s Blog (1,405)
- David Feinleib (@vcdave), Mohr Davidow Ventures, Tech, Startups, Capital, Ideas. (1,353)
- Rick Segal (@ricksegal), JLA Ventures, The Post Money Value (1,308)
- Alex Taussig (@ataussig), Highland Capital, Infinite to Venture (1,239)
- Christopher Allen (@christophera), Alacrity Ventures, Life With Alacrity (1,188)
- Nic Brisbourne (@brisbourne), Esprit Capital Partners, The Equity Kicker (994)
- Chris Fralic (@chrisfralic), First Round Capital, Nothing To Say (844)
- Ouriel Ohayon (@ourielohayon), Isai.fr, MYBLOG by Ouriel (799)
- Multiple Authors, Highway 12 Ventures, Highway 12 Ventures Group (780)
- Martin Tobias (@martingtobias), Ignition Partners, Deep Green Crystals (723)
- David B. Lerner (@davidblerner), Columbia Seed Fund, David B. Lerner (716)
- Baris Karadogan, ComVentures, From Istanbul to Sand Hill Road (615)
- Dan Grossman, Venrock Associates, A Venture Forth (614)
- Jason Caplain (@jcaplain), Southern Capitol Ventures, Southeast VC (599)
- David Aronoff (@dba), Flybridge Capital Partners, Diary of a Geek VC (539)
- Mike Speiser, SutterHill Ventures, Laserlike (490)
- Tomas Tunguz (@ttunguz), Redpoint Ventures, Ex Post Facto (441)
- David Beisel (@davidbeisel), NextView Ventures, GenuineVC (427)
- Eric Ver Ploeg (@everploeg), Metric Ventures, Pocket Watch (403)
- Allan Veeck (@aveeck), Pittsburgh Ventures, Pittsburgh Ventures (353)
- Ryan McIntyre (@ryan_mcintyre), Foundry Group, McInblog (314)
- Satya Patel (@satyap), Battery Ventures, Venture Generated Content (310)
- Saul Klein (@cape), Index Ventures, LocalGlo.be (306)
- John Ludwig (@jhludwig), Ignition Partners, A Little Ludwig Goes A Long Way (296)
- Pascal Levensohn (@plevensohn), Levensohn Venture Partners, pascalsview (251)
Derek Pilling, Meritage Funds, Non-Linear VC (250)
Paul Fisher, Advent Venture Partners, The Coffee Shops of Mayfair (122)
Greg Foster, Chrysalis Ventures, SouthernVC (15)
Other VC Blogs
This list includes other VC blogs that didn’t make the primary directory for one of the following reasons: (1) They don’t have any Q410 Compete data due to insufficient traffic, (2) There was insufficient data on the blog subdomain, or (3) They are a hybrid blog/corporate website meaning the actual blog traffic is hard to decipher. They are in no particular order.
- Multiple Authors, Union Square Ventures, Union Square Ventures Blog
- Multiple Authors, Foundry Group, Foundry Group
- Multiple Authors, True Ventures, Early Stage Capital
- Multiple Authors (@volitioncapital), Volition Capital, Ask Volition
- Multiple Authors, Brightspark Ventures, Let the Sparks Fly!
- Multiple Authors, Golden Horn Ventures, Golden Horn Ventures
- Multiple Authors, OpenView Venture Partners, OpenView Blog
- Christine Tsai (@500startups), 500 Startups, 500 Startups Blog
- Lisa Suennen, Psilos Group Managers, Venture Valkyrie
- Scott Maxwell, OpenView Venture Partners, Now What?
- Tony Tjan (@anthonytjan), CueBall Capital, Anthony Tjan
- Stewart Alsop (@salsop), Alsop-Louie Partners, Alsop’s Small Thoughts
- Matt Winn (@mattwinn), Chrysalis Ventures, Punctuative!
- Marc Averitt (@ocvc), Okapi Venture Capital, OC VC
- James Chen (@cxo), CXO Ventures, PureVC
- David Pakman, Venrock Associates, A Venture Forth
- Rachel Strate (@wasatchgirl), EPIC Ventures, Wasatch Girl
- Max Niederhofer (@maxniederhofer), Atlas Venture, Life In The J Curve, baby
- Jason Ball, Qualcomm Ventures Europe, TechBytes
- Tim Oren, Pacifica Fund, Due Diligence
- Jeff Clavier (@jeff), SoftTech VC, Software Only
- Stu Phillips, Ridgelift Ventures, Soaring on Ridgelift
- Raj Kapoor (@rajil), Mayfield Fund, The VC In Me
- Howard Morgan (@hlmorgan), First Round Capital, Way Too Early
- Rob Day (@cleantechvc), @Ventures, Cleantech Investing
- Steve Jurvetson, DFJ, The J-Curve
- Philippe Botteri, Bessemer Venture Partners, Cracking the Code
- Marc Goldberg (@marcgoldberg), Occam Capital, Occam’s Razor
- Allen Morgan, Mayfield Fund, Allen’s Blog
- Daniel Cohen (@coheda), Gemini Israel Funds, Israel Venture Capital 2.0
- Max Bleyleben (@mbleyleben), Kennet Partners, Technofile Europe
- Jeremy Levine (@jeremyl), Bessemer Venture Partners, Nothing Venture, Nothing Gained
- Michael Eisenberg (@mikeeisenberg), Benchmark Capital, Six Kids and a Full Time Job
- Sagi Rubin (@sagirubin), Virgin Green Fund, The Grass is Greener
- Vineet Buch (@vineetbuch), BlueRun Ventures, Venture Explorer
- Richard Dale (@rdale), Sigma Partners, Venture Cyclist
- Steve Brotman (@stevebrotman), Silicon Alley Venture Partners, VC Ball
- Ho Name, Altos Ventures, Altos Ventures Musings
- George Zachary (@georgezachary), Charles River Ventures, Sense and Cents
- Jacob Ner-David, Jerusalem Capital, VC In Jerusalem
- Ed Mlavsky, Gemini Israel Funds, GOLB: Is This Israel?
- Michael Greeley, Flybridge Capital Partners, On The Flying Bridge
- Sid Mohasseb (@sidmohasseb), Tech Coast Angels, Sid Mohasseb
- Peter Lee, Baroda Ventures, Seeing Eye To Eye
- Ted Driscoll (@easydjr), Claremont Creek Ventures, Evolving VC
- Justin Label, Bessemer Venture Partners, Venture Again
- Adam Fisher, Bessemer Venture Partners, Savants in the Levant
- Gregoire Aladjidi, Techfund Europe, Investing In What’s Next
- Todd Dagres (@todddowl), Spark Capital, Todd Dagres Tumblelog
- Santo Politi (@santopoliti), Spark Capital, This and That
- Robert Goldberg, Ridgelift Ventures, Tahoe VC
- John Abraham, Arrowpoint Ventures, JMA’s Views On Everything
- David Dufresne (@daviddufresne), Desjardins Venture Capital, Dav-Generated Content
- Brad Burnham, Union Square Ventures, Unfinished Work
- Brian Hirsch, Greenhill SAVP, New York VC
- Charles Curran, Valhalla Partners, VC Blog
- Jon Seeber, Updata Partners, Jon’s Ventures
- Todd Klein (@tdklein), Legend Ventures, Media VC
- Adi Pundak-Mintz, Gemini Israel Funds, Adisababa’s Weblog
- Don Rainey, Grotech Ventures, VC in DC
- Art Marks, Valhalla Partners, Entrepreneurial Quest
- Rob Schultz, IllinoisVENTURES, Go Big or Go Home
- Cem Sertoglu, Golden Horn Ventures, SortiPreneur
- Larry Marcus, Walden Venture Capital, Walden Venture Capital
- Steve Jurvetson, DFJ, Uploads from Jurvetson
- Gil Debner, Genesis Partners, TechTLV
- Multiple Authors, Tech Capital Partners, Tech Capital Partners Blog
- Simon Olson, FIR Capital Partners, Venture Capital Thoughts and Reflections
- Josh Sookman, RBC Ventures, Startup Life
- Vishy Venugopalan, Longworth Venture Partners, Longworth Venture Partners Blog
- Ed French, Enterprise Ventures, TechGain.net
- David Stern, Clearstone Venture Partners, The Raging Insterno
- Jonathan Tower, Citron Capital, Adventure Capitalist
- Dan Parkman, Venrock, Disruption
- Charlie Kemper, Steelpoint Capital Partners, Opine Online
- Jeff Bocan, Beringea LLC, Jeff Bocan
- Boris Wertz, w media ventures, w media ventures
- Charlie Federman, Crossbar Capital, CosmicVC
(Methodology: We aggregated the unique visitors for each blog on Compete.com for Oct-Dec 2010, and then divided by three to get a monthly unique traffic score. If blogs only had data for one or two of the months, it was presumed that the missing months had no traffic and the aggregate number was still divided by three.)