Several weeks ago I called a good friend of mine, a senior partner at a leading VC firm. I noticed a flagship company, a potential unicorn in the making, is showing imminent signs of stagnation. It didn’t take a Zirra wizard to notice, by the way. Traffic to the company’s website had plateaued, as did their employee count. In addition, customer reviews have become increasingly critical and negative of the quality of the service, Google searches for their brand have started to decrease, and new competitors were showing much better growth signals. It was pretty obvious that the company was atrophying and that the investors should be concerned. So I called my friend and left the following message on his VM. “Hey, I saw a few things about your company”, I said, “I think it’s giving off some bad signals. Call me if you’re interested.”
He called me in less than 5 minutes. He was aware of some of the concerns, but what he was more worried about was what I plan to do with this information. To be honest, he was shocked I knew what I just told him. “How did you know? What do you plan to do with this? Is anybody else aware?” Well, to start with, I was not going to do anything with the information that could hurt anyone. That’s not why I called him or why we do what we do. The scary part was that this information is not very difficult to find if you only care to look, but for some reasons 9 out of 10 venture capitalists don’t bother to. I’m not going to disclose the company name, but rest assured, their visible shortcomings have not been noticed.
I decided to test my theory again and picked a company that was showing fantastic signs. This time I picked one whose traffic went up by 50% over the past year, that hired 100 new employees, whose Google presence showed nothing but positive signs and that – coincidentally – was hammered by the venture capital media for over a year for being in “the dying space of Ad-Tech.” I called one of their shareholders I happen to know very well and shared the good news with him. He was aware positive things were happening of course, but he sounded a bit gloomy. “Hey, why do you care about what people say when you see the truth right in front of you?” I asked, somewhat puzzled. “It kills me to know I may need to raise more money from these people” he said. “They simply don’t bother to check the facts.” End of quote.
I’m not saying venture capitalists are lazy, they are not. They’re not stupid either, that’s grated. As a matter of fact, they spend days and nights trying to make the best investments. The problem is that many of them, 9 out of 10 if I had to guess, are simply not looking at the right problem. Many VCs are spending their entire energy trying to find the new Facebook or Snapchat. The Tier-1 VCs are trying to find the original Facebooks. The Tier 2 onward are trying to find the Facebooks the Tier-1 VCs have missed. The simple reason that they cannot fine these companies is because a one-in-a-million company has a habit of finding you and not the other way around. Looking for the next LeBron is a killer, not just because one cannot find the next LeBron, but because it let’s you get away with having the lackluster roster of the Knicks in the meantime. It’s about your actual roster, it’s about what you are looking to find. And that’s a wrong approach to Venture Capital, and certainly when you can make such a great use of data driven insights and be very smart with a pool of millions of companies that are all looking for investors.
What venture capitalists – any venture capitalist – can do is systematically build a good roster, or a set of portfolio of companies, such that they will end up winning more than losing. No matter who you are, how much money you have, who your limited partners are, as a venture capitalist there is a winning formula for you, one that you specifically can take advantage of. This can be done by anyone who’s not afraid of data driven insights. The rest is up to luck, or God, or whatever it is you believe in. Finding the new LeBron is not a work plan, its wishful thinking, and this wishful thinking is a very poor plan, especially if it ends up with you rejecting 10 companies that could have built a 30% yield on you portfolio if you were not so busy chasing the ghosts of Mark Zuckerberg and Elon Musk wannabes.
It’s very easy to get started. When you meet a company, take a real look at their performance metrics, use technology to scan their competitors, their employee DNA structure, their customer reviews, founder history. Find out the Google trends, the traffic trends, what bloggers and reporters really say. Don’t chase the founders that really impressed the shit out of you in a face to face meeting. These are exactly the LeBrons you should be careful with. Look the opposite direction. Find the founders and companies who would be rejected for an irrational reason, but whose metrics show a real promise for over performance. This should be the basis of your thinking. Do that right and the LeBrons will start chasing you. Jerry McGuire meets Moneyball and both are waiting for you.
I cannot count by now the number of panels I have witnessed or participated in. I love these get togethers, 5 senior partners and one friendly host all dealing with the future of our innovative universe. My favourite part is the closing session.
“So…what are your predictions for 2017? What are the technologies of the future?”
“Oh, I believe we’re going to witness a quantum leap in Artificial Intelligence!”
“Drones are going to become what cars were in the 1950s, everyone will own at least one”
“Behavioural technology will help our brain drift more and more into virtual reality”
Tons of faith, unlimited belief. I keep waiting for the first venture capitalist who would start their 2017 predictions with “I spent the last 3 days looking at data. What I learned was that Ad-Tech is actually blossoming, that self driving cars are not going to break out of Singapore or Silicon Valley before 2025 at the earliest, and that customer service technology represents they most significant immediate opportunity for venture capital.”
I keep waiting. Personally, I never witnessed that. If you’re an entrepreneur and you happen to witness that kind of opinion make sure you stick to the person who said it. Try to make them your investors, because unlike many others, they will help you navigate through reality and not through pied piper dreams.
There are many other reasons why Venture Capitalists stay away from data driven insights. The seniority hierarchy, for example, plays a big part in that pathology. The senior partners are vintage and they do things they way the know and that they have for 20 years, before data was available. The young and ambitious principals and partners are looking to impress the senior partners before they take over the firm, so they copy the same methods the older partners practice. Politics also plays a major role. Data Driven Insights can kill deals a certain partner was promoting by showing the real competitors, performance and market indicators. If there’s one thing faith cannot tolerate it is facts.
Never the less, Data Driven Insights are slowly becoming the leading practice for a few Venture Capital firms. Interestingly, these firms are more easily found at the two extremes of spectrum. Niche VCs who must use data driven insights to grow and super Tier-1 VCs who can employ an army of analysts. But these two represent maybe 10% of the Venture Capital spectrum. The rest will either adapt or die, sooner than they imagine.
Sometime ago we pitched Zirra to a venture capital firm that rejected us. They just couldn’t get what we were pitching and in retrospect I can imagine it had to do with the exact problem we are dealing with. The partner was very nice, though, and he concluded with the familiar Venture Capital Eff-you farewell – “We loved you, now go prove us wrong!”
I’ll conclude this post with my reply to that rejection. I think it summarises my view on the state of the industry in the best way:
“Thanks for your time and response. We’re not on a mission to prove anybody wrong. We think the markets and models around private companies are broken and obsolete and we are focused on building technology and processes that will fix some of it. It won’t happen overnight, there will be ups, downs and inaccuracies, but we will get there because we’re determined, making continuous progress and because the current situation simply doesn’t make sense any longer. Everyone in this eco system, from VCs to Management Consulting firms will either adapt or die over the next decade or so, and we’re all about adapting. “