Finding High Quality Venture Capital Investments Requires Left and Right Brain
. . . . A big part of this (selecting high quality investments) is also knowing and trusting the source of the opportunity. Most high-quality VC investment opportunities come to the VC through trusted sources—an attorney, accountant, broker-banker, tax advisor, consultant, or entrepreneur who has a prior relationship with the VC. The referral source often knows what will interest a particular VC as to industry focus, stage, and investment dollar requirements, as well as knowing if a particular entrepreneur is “backable.”
Very few investments that are actually made come in blind over the transom. The old adage from Chicago politics not to hire anyone “that ain’t sent” applies to VC investing as well. To find opportunities that could become successful investments, we listen carefully to trusted sources that have experience reviewing venture capital investments and often investing in them as well. Referral networks assist greatly in knowing whom to trust.
Knowing what to trust can be a bit trickier and brings into play both right- and left-brain cognitive skills. The left brain has traditionally been viewed as the seat of logical processing. Logical data processing for venture capital investing requires a robust and reasonably accurate data set as well as effective linear processing skills. Processing speed, beyond a point, is not very relevant, as accuracy and resulting insight should be valued over speed. Often it’s better to wait than to hurry, as new data comes to the fore and sheds new light on the investment.
Right-brain processing is all about intuition. It is important to understand, though, that true intuition is based on experience. What one might call intuition, but which is separate from experience, is usually just wishing and hoping. That’s not a smart basis for important investment decisions.
In VC investing, the logical processing work is mostly about deciding what data are most relevant to the decision to be made. Is the market size most important, or is what matters more the market growth rate, the superiority of the technology, the drive and persistence of the entrepreneur, the degree of difficulty in securing funds, the amount of funds required, speed to market, ability to scale quickly, potential for strong and sustainable leadership position, first-mover advantage, or some particular combination of those variables?
. . . Experience is especially vital. Unfortunately, experience is often gained by losing a big pile of money. It is estimated that it takes at least $15 million in losses to train a successful professional VC investor.
The individual investor doesn’t need to go through such a process of accumulating experience through costly losses, though some choose to. We believe that for most individual investors, it makes more sense to hitch your wagon to a professional venture capital firm with an experienced team with a meaningful track record.
Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund