Welcome to October on the Kauffman Fellows Podcast! It’s a new month, and that means we have a new guest host — Kauffman Fellow Renana Ashkenazi (KF Class 25), who is a Partner at Grove Ventures, an Israel-based firm that is devoted to early-stage investments and to building tomorrow’s market leaders. In case you missed it, this season of the Kauffman Fellows Podcast, produced in partnership with Mighty Capital, calls on select Kauffman Fellows as guest hosts who each deliver a mini-series (6 episodes) covering various themes of VC investing.
Renana’s mini-series (running now through the end of the month) is centered around “The Path to Conviction.” Venture investing is a “head and heart” approach, and some investors feel that due diligence is a process where you try to convince your head of what your gut said in the very first meeting. But all the data in the world isn’t enough to do that when what you really want is to feel a true sense of conviction.
Conviction as an investor is something we often discuss at Kauffman Fellows. Often, the best investment opportunities (many of those 100x+ returns), are often the non-consensus deals and non-intuitive ideas and companies. Following the pack because of FOMO usually leads to average or subpar returns, and the best investors actively work to recognize and immunize themselves from a herd mentality.
As you tune into Renana’s first two episodes (with Adam Fisher of Bessemer and Julie Yoo of a16z), you’ll hear how each of them has learned to tune their perception into conviction, not merely writing a check because of a good idea on someone else’s blog or co-investing with other top tier VC firms. Catch each episode below or on iTunes, Spotify, and Anchor.fm.
Adam Fisher, Bessemer Venture Capital Partner, on Achieving Conviction with Early-Stage Startups
In this episode, Renana digs deep into the idea of conviction with Adam Fisher, who is a Partner at Bessemer Venture Capital. He focuses on investments in Israel and Europe across multiple technology sectors, from early-stage to growth and from long-tail to enterprise. You can listen to the full episode above or on iTunes or Spotify. The highlights of this episode are detailed below:
On Adam’s framework for conviction
As an early-stage investor, there’s often not a lot of data to analyze, or a track record to dig into. For many VCs, that leaves people. Who’s running the show?
“Maybe there’s a product, maybe it’s just a direction, maybe there’s some initial business or some metrics that I can look at. But for me, most of that is incidental, anecdotal. It’s not always particularly telling about the future. So I’m left with a few general things. The first and by far the most important is the team,” says Adam.
He continues, “Investors look for different things; just like everyone looks for somebody different as a life partner, or somebody different as a friend or a mentor, I look for something very specific in the teams that I back. Of course, I’m primarily focused on the CEO. It’s someone who has confidence, but not ego, who is a leader, and ideally also a great communicator. Somebody who really knows what they’re talking about. Not necessarily because they’re the expert; sometimes that’s because they’ve been 10 years in that particular field. But oftentimes, it’s because they’re just a quick study. And that usually is very telling about the person’s personality in the future, and betting on a team that can make the most out of the advantages that startups have, which is they have agility, they have the ability to change up anything they want, they can abandon their plan, they can scrap their product, and do something better and more interesting.
I’m also looking for somebody or a team that I think can bring the company to success. I don’t look for teams that I think will be able to manage a public company or teams that can build it into a unicorn; it’s misleading to look for that.”
On the current pace of deals
Today’s VC environment is fast-paced in the extreme. That precludes taking time for due diligence that was expected in the past. That may work for some deals, but not for others.
“The current environment is not healthy. I can understand the very fast speed at the growth stages, where there’s a data room full of lots of data, you’ve got years of history to analyze. And if you have the team, and you’ve done this before you can really make a decision within days.
When it’s happening at the earlier stages it’s not right. That’s not healthy. Again, we’re talking about long-term partnerships. When I invest in a company, I’m looking for a team I want to back and that team is looking for a venture investor that they want to partner with also for what could be upwards of a decade.
So if you’re talking about meeting a company, early-stage, and you’re given a week to decide whether you want to be the first investor, and you may be working with them for the next decade, there’s nothing responsible about that.”
On achieving conviction when confronted with so much uncertainty
Decision-making in VC is complex, involving so many moving parts in addition to the fast pace. Some investors feel that success requires as much, or more, intuition as analysis.
“There’s so much uncertainty in this business, you could easily have paralyzed yourself trying to think whether you’re making the right decision or not. I think what every investor has to accept is that you only have so much information, and you have no real crystal ball into the future. You have some data, you have the team, you have your intuition, and you have to make a decision.
And that’s not easy for a lot of people. It’s a lonely position to be in. And it can be nerve-wracking. And as I said, it can lead to paralysis. So what we do as investors is that we use various types of mental frameworks to convince ourselves that we’ve got a handle on the risk, or that we know how to narrow the risk. Or that the potential is worth the risk. It’s explaining to yourself why despite all the risk and uncertainty — you feel comfortable with this.
Everybody develops their own frameworks; it might be thesis-driven, might be trade team-driven. It might be their own various ways. But that’s how you get to the point of making a decision in the face of so much uncertainty.”
Julie Yoo, Andreessen Horowitz Partner, on Cultivating A Prepared Mind
In this episode, Renana chats with Julie Yoo, who is a General Partner at Andreessen Horowitz and leads investments in healthcare technology. Julie shares how her experience in multiple business arenas has honed her belief that getting to conviction is highly predicated on having a prepared mind.
You can listen to the full episode above or on iTunes or Spotify. The highlights of this episode are detailed below:
On her framework for reaching conviction
As a previous founder with a product background, Julie has learned to decipher when a different approach to decision-making may be necessary.
“Product people tend to be very comfortable making key decisions very quickly based on limited information. So that motion in general is something that I’ve been very comfortable with for my entire career. Now, the difference when you’re doing investing versus being a product person, for the most part, is that investment decisions are generally irreversible. So when you make a decision to invest in a company, you have to be mentally prepared to sign up for a 15–20 year ride, potentially,” says Julie.
She continues, “Therefore the nature of how you go about making that decision needs to be tweaked relative to how you might make a product decision, which, you know, for the most part, is reversible in the sense that you might ship something, it could totally fall flat on its face.
I think great decisions and getting to conviction are highly predicated on having a prepared mind. There are many schools of thought around, ‘are you thesis-driven? Are you more opportunistic? Do you index more in the founder versus the market?
I have my own journal for thinking about spaces and articulating what I believe is possible or not in those spaces. What spaces are conducive to supporting massive companies being built? And that helps with when you go into these meetings with founders, where the process is moving super quickly, you have a backdrop, a chassis onto which you can then react to what you’re hearing from this individual company, and then also just be open to being wrong. You have in your mind the ‘Seven Pillars’ of your belief, and if you’re right on four of them, but you’re proven wrong on three of them you still have some legs to stand on, again, to make that decision in a relatively efficient fashion.”
On how a prepared mind can enhance conviction
In a competitive world, founders often are selecting their VCs, so VCs need a USP too. One approach is preparing the mind with research.
“There’s nothing like a founder being able to pitch their vision and get a response that actually denotes an understanding of that vision. And so I think that’s both a sales tool in addition to being a decision-making tool,” says Julie.
On her numeric scale of conviction
If what gets measured is what gets managed, applying self-evaluation is another tool for measuring conviction.
“I’m very careful to literally wake up every day, and we have a numeric scale on which we measure conviction. If that number is not trending upwards, not even staying flat, it has to be trending upwards during the course of doing the work, that’s a signal to me that it’s likely that I’m not going to get there.”
Julie describes the scale as “ironically, qualitative in terms of tying your conviction level to a number.”
She continues, “When doing diligence, we are very precise about what is the one key question that we’re going to focus on in the next 24 hours, that we think has the most likelihood of changing our mind either way. And so we can be very targeted about the nature of the work, we just want to be efficient, obviously, with our time and not do every possible type of diligence under the sun, but really, really focus on the thing that we think is going to move the needle. So in that sense, you should, with every card that you turn over, be trending either up or down relative to where you were 24 hours before”.
On how the speed of deals has changed her approach
In addition to a prepared mind, setting expectations early is crucial in maximizing value in meeting founders.
“We’re much more proactive about having that conversation upfront because you generally have a sense after that first meeting as to whether you want to lean in or not. And if you are feeling like you want to lean in, we’re always very clear. We always spend five minutes at the end of the conversation, just sharing more about the firm because the founders always have questions about the firm, and us as partners, but also just talking through our process to say, ‘Hey, listen, if you’re looking to have us make a decision in the next 24 hours, it’s highly unlikely that we’re going to get there. You just need time to do that, so I think a big part of it is just setting expectations upfront in the process.”