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I knew trying to pick the startups that will have huge wins would be hard, but I didn't know it would be this hard. ~Ryan Sarver of Redpoint

Stashed in: 106 Miles, Venture Capital!, Funding, Medium

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Natasha Tiku explains:

For all their court-mandated blogging and self-promotion, venture capitalists keep the details of their decision-making to themselves. But newbie VC Ryan Sarver, Twitter's former director of platform, broke ranks about his first month on the job as partner at Redpoint Ventures.

In a widely-shared post on Medium, Sarver said what really dropped his jaw was not, as we suspected, unsubstantiated valuations and sly M&A manipulation, but rather how little VCs know before investing.

Here's the money quote from Ryan Sarver:

Placing Bets

I knew trying to pick the startups that will have huge wins would be hard, but I didn't know it would be this hard. I've been astonished by the relatively small amount of data we have on which to base our investment decisions.

Here's how it goes: you meet with founding teams a handful of times at most. You get a smattering of stats and financial predictions that may or may not be based on reasonable assumptions. You listen to a narrative about where consumer or corporate behavior is expected to trend. You do whatever due diligence you can. And then, you decide on whether or not you want to work closely, through the highs and lows, with someone for the next seven-plus years of your lives. That's right. Seven years is on average how long it takes to really know if an idea has worked the way you hoped it would.

So that's it. VCs don't get to know much about businesses before they invest.

They go with their guts.

I guess this is why most VCs wait until a startup is already succeeding before they invest:

I think the reality is that while pattern matching is critical, you also can't become too locked into a specific set of patterns as they too change over time. Consumer behavior has changed, platforms have changed, the cost of doing a startup has changed, the profile of an ideal founder has changed. So if you stay locked into the patterns of old you'll miss the next Evan Williams or Drew Houston. Best to balance staying agile with a solid knowledge base to have the best chance of discovering The Next Big Idea™.

This also explains why VCs chase companies that already have investors.

Also, I'm sure Ryan didn't intend to do so but by naming Evan Williams and Drew Houston he perpetuates the stereotype that they're looking for young white men.

What Ryan Sarver looks for when considering a deal:

  1. What is the problem in the world they are solving? I’ve already heard too many teams give bios about themselves and then jump into a really cool technology or beautifully designed product. Instead, I look for them to articulate a problem in the world and work backwards to the solution. Don’t start by showing a pretty solution and find a problem to try to attach it to.
  2. Why are they the team to do it? Arguably this could be combined with the first one because they are so intrinsically linked. You hear a lot of investors talk about investing in people. Of course that makes complete sense. But I like to think it’s more critical to invest in a combined people+problem manner. The best UX designers aren’t the right team to solve a core data science problem and vice versa. The better question is: Are they a great absolute team, uniquely skilled at solving the problem they are focused on solving?
  3. What’s the general size of the market and what macro trends might lead to that market growing? Some people put more importance on there being a large existing market than I do. I have seen over and over again that a seemingly small market can grow dramatically over time as user behavior shifts. So I’m less concerned if it’s a small market to start if we can paint a picture that shows it growing into a big market.
  4. Can you show early product+market fit? A critical part of success is market timing. There are many case studies of great teams focused on the right problem in a big market that still failed because the product they introduced was ahead of its time. When we’re dealing with such compressed timelines and limited information, it’s important to see early indicators of product+market fit.

Problem, Team, Market, Product.

Interesting that he presents in that order because I believe the order of importance is:

Market, Product, Team, Problem.

Because this is a business, not a hobby.

Market size is way, way, way more important than just solving the world's most interesting problem.

"Pick a good market." ~Caterina Fake

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