3 Questions Every VC Must Ask In The Investment Decision Process
Will It Work?
Can I Win?
Is it Worth It?
I first heard these three questions from Dick Hale, a former colleague and mentor of mine. Dick is a look-you-in-the-eye, firm-handshake, straight-talking kind of guy who cut his teeth as the long time COO of M/A-Com. Dick has a way of making complicated things very simple, and my favorite expression of his was when he would ask: “Will it work?”, “Can I win?” and “Is it worth it?”
These questions have stayed with me over the years and have become a core part of my investment decision process.
When Due Diligence Isn’t Enough
Venture capitalists are always trying to make sense from the chaos of rapidly changing technologies, innovations, marketplaces, competitive landscapes, business models, management teams, and more. Teasing out that coveted signal to invest from all the noise is challenging and as much an art as it is a science. For early stage investing, classic due diligence is of marginal value because most big ideas are trying to either create or transform a market.
“What you believe is more important than what you discover in diligence.“
After all the research, analysis and diligence is done, it’s often helpful to fall back on a few simple truths, and in my case, Dick’s words of advice. Here’s how I try put into practice these three questions:
Will It Work?
Is there evidence to support that the product, service, or whatever you are building, will work? As early stage investors, we often invest in companies where the product may still be a work in progress. Sometimes we need to suspend our disbelief and rely on our judgment, or that of others we trust, or even on a simple act of faith in the founding team.
However we get there, there must be an underlying conviction that the product or service can be built and will work.
Can I Win?
There is a good chance that whatever product or service it is that you are building, there are dozens of others thinking along similar lines. The hard truth is that your idea is far less important than your ability to execute on it. This is the essence of competition, and competition is the engine of innovation. The best entrepreneurs are the ones that out-execute the competition.
At Avalon, for instance, we look for that special something — an edge from which you can separate yourself from the pack and extend your lead. This could be anything from a uniquely differentiated product, to an early market advantage, to the first to achieve scale or a network effect.
Is it Worth It?
Venture capital is a truthful business, and that truth is measured in the returns we provide our investors. We say “no” to many great ideas and teams because we may see the value of the idea as big enough or we just can’t clearly see our way to an exit. The challenge for you is to understand how the VC’s you are talking to define a worthwhile exit.
There is no common definition of worth among VC funds, and it is often tied to the stage of investment. Typically it ranges from the aspirational “billion dollar idea” to some target multiple of invested capital.
Take for example Avalon’s investment in Simulmedia, a company that brings online and data methodologies to traditional television advertising. Founded by serial entrepreneur Dave Morgan, a pioneer of online behavioral marketing and digital advertising, the company leverages a decade of technology and thought leadership in Internet advertising to make TV ads more relevant for viewers, more efficient for advertisers and more profitable for media owners.
Will it Work? Dave and his team are seasoned pros and have the chops to build the platform. Check.
Can I win? Great team and unique technology combined with wide open playing field. Check.
Is it worth it? Cracking the nut of TV advertising is a billion dollar idea. Check.
These three simple questions have proven their value to me over and over again. They are a great way to simplify what otherwise can be a complicated investment decision, as well as to test our conviction and provide comfort to continue investing when a company hits tough times yet is deserving of continued support.