All venture capital gets invested in a sweet spot at the intersection of risk and opportunity.
If you understand where a VC fund’s sweet spot is, raising investment for your start-up should be relatively easy. But some VC funds may not truly understand where their sweet spot is.
Partners in a fund are quite likely to have slightly different sweet spots as individuals, and the size and position of the sweet spot may change over the life of the fund, generally migrating away from risk and towards opportunity the older a fund gets.
Risk and opportunity will change over time but it’s all going to happen in the future. None of us are from the future, but venture investment favours those of us good at pretending we’ve been to the future and know how it will play out.
The rest of us are slow to decide because we’re relying on past experience to predict a future risk/opportunity curve for a start-up.
When you’re looking at the portfolio investments of a venture fund, it’s a good idea to pay attention to the obvious stuff — who the founders were, what industry verticals the portfolio tends to focus on, what technologies were involved, what business models were involved, and what stage (pre-seed, seed, Series A, later stage) most of the portfolio companies were first invested in.
But it’s also a great exercise to map out the portfolio on a graph like the one above.
At the point the fund invested, where do you think each start-up was sitting on the risk/opportunity graph? All over the place, or mostly clustered in one corner? Fuzzy borders or distinct?
Now graph your own risk/opportunity line – do you see a future potential intersect between your path and their sweet spot?
The bigger the VC fund, the more likely they are to invest in people to track a start-up’s progress over time on the risk/opportunity graph.
Those people are paid to track each start-up irrespective of whether they show signs of intersecting with the fund’s sweet spot.
I think this is the cause of most of the “slow no” behaviour in venture capital.
Look again at the graph above and imagine the start-up lines are the paths of meteorites and each VC fund is a planet.
Most analysts, associates and junior partners are observed as astronomers — it’s their job to plot the changing positions of all the start-ups in the night sky, and to let the fund know in advance if there’s a chance any one start-up might intersect with the orbit of the fund.
They would rather keep plotting your path until they’re certain your start-up has no chance of intersecting the orbit of the VC fund. There’s no long-term upside for them if they make an early decision and get it wrong – indeed, there’s considerable risk, especially in Australia and New Zealand.
No LP blames a VC for letting a great investment pass them by; at least, not as much as they will blame them for making a failed investment.
It takes a lot of data points to be sure, during which time they know they have to appear interested in how your start-up is doing. Eventually they’re sure you’re going to pass by harmlessly, at which point they’ll finally tell you no, and you’ll realise you wasted a lot of time on them.
Maybe you can plot the risk/opportunity path yourself and save yourself some time.
Alan Jones is a Partner at M8 Ventures and Entrepreneur in Residence at BlueChilli, KPMG and QUT CEA Collider