VC VIEW: Seed VCs who rely too much on a startup’s numbers are being dangerously myopic

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NEA, Ben Narasin
Ben Narasin

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I had a thank-you coffee recently with a late stage investor, someone I had introduced to a deal where her firm led an over $100 million round. (An introduction to a hot company in venture earns you a coffee and a croissant.)

While we sipped, she told me an interesting tale of two bosses. Her first boss was a generalist, a “metal detector looking for gold,” and she told me that when investing at the late stage (in established startups doing well) that this approach was very hard for her. It can be hard just to get a meeting with the most interesting entrepreneurs if the investor doesn’t have a lot of experience in the startup’s field, she said, regardless of the significant size of her checkbook and power of her firm’s brand.

But her new “boss” is thesis driven and has her focussed on a small number of categories which allows her to dig deep, get cogent, and become an expert ahead of the rounds she decides to pursue. She prefers this because when investing in later stage startups it is hard to get the entrepreneurs attention if you don’t have a thesis in their space.

I found the conversation fascinating as the best description I’ve heard for the way I pursue my investing is that of the metal detector. I am a generalist, though I tend to avoid cyber security and med-tech as both require very explicit expertise I’m not willing to dedicate my life to, but even that’s not a hard-and-fast rule: I have one great company in the first category and two in the second and two of the three of them are doing exceptionally well.

All of this means I summarize my focus as searching for founders that make me say, “WOW!”

I’ve always believed venture is a blend of art and science: the earlier the stage the more art, the later the stage the more science. It never goes to 100% in either direction but it probably starts at 70/30 favoring art and ends at 70/30 favoring science.

This does not mean early stage investors don’t study, analyze and learn. The best of them (Mike Maples comes to mind in seed) are constantly striving for new knowledge on topics they have not considered before and are diligently analyzing their own performance looking for trends and learnings. They also tend to make a study of successful investing icons – prior and present – for traits of excellence.

Several of the best investors I know have admitted to me that “at the end of the day they are stock pickers.” The stocks they are picking are the founding teams, ideas and opportunities – or as I have said for years about my own criteria: people, people, people, a great idea and a huge market if it works.

Some of the worst investors I know spend all their time in the spreadsheets of the company looking to justify unjustifiable revenue multiples or find some magic in virtually-non-existent numbers. This may be appropriate in late stage investing but is inadequate and dangerously myopic in early-stage, particularly in the consumer segment where there’s seldom adequate supporting data, but only enticing glimpses of behavior.

Those tiny glimpses can turn into something huge with amazing speed (Clubhouse comes to mind recently) and gut trumps raw numbers here more than anywhere else, as one is often required to pay truly stunning prices (Clubhouse did a $100 million valuation Series A and a $1 billion Series B just a few months later) for nascent businesses. Paying those prices can be justified when your gut turns true.

The downside of being wrong is losing the money you invested. While the upside of being right can be virtually unlimited returns, as well as the satisfaction of helping entrepreneurs build successful companies.

Ben Narasin a Venture Partner at New Enterprise Associates (NEA) as well as a prolific entrepreneur. His career spans 25 years as an entrepreneur and 10 years as an early-stage investor. His knack for spotting emerging trends led him to make seed investments in companies like Dropcam, Lending Club, TellApart, Kabbage and Zenefits. He founded several consumer companies before launching his investing career, including Fashionmall.com, one of the first e-commerce companies, which he launched in 1993 and led to a successful IPO in 1999. Narasin frequently writes and speaks about technology and investing, as well as food and wine, a lifelong passion.

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