Do investors invest based on data, gut or both?

22nd November 2018 Off By binary
Do investors invest based on data, gut or both?
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VC ‘gut feeling’ — what does that actually mean?

There was an interesting tweet thread started by Semil of HayStack about why he passes on some investments; personal, gut, intuitive feeling. I’m a big fan of him, his investments and his advice, so I wanted to expand on my thoughts around this.

At the early stages when startups are a little more than an idea, possibly pre-product, or has some revenue and mostly the just founding team, what makes someone invest? Here is a list of things that I assume most investors consider when they meet with a founder that is practical, data-driven and based on experience:

  • Team — this usually is the most important as we need to believe in you that you can execute and do what you say. You’ll “figure it out” when the time comes.
  • Market opportunity — who are your competitors, what else is out there and how big can this be? The “if we get just 1% of the market” thing
  • Exit — If they build this, will someone acq them or could they IPO? Aka can I make money investing.
  • Terms — reasonable and mostly favorable for all parties.
  • Data — everyone has their own way; reports, reaching out to their network, financial models, similar companies etc.

Then there are all the reasons going through an investors head that they might mention and question but there are always the intangibles.

  • Not interested in the industry /market— why did you take the meeting then? Sometimes it’s a warm intro, a favor, you’re just bad at saying no or just felt pressured to meet. We dont invest in fintech, bio/health etc but people still want to meet. It’s unfortunate sometimes but happens
  • Kind of interested but it just doesn’t excite them
  • The team is OK but you dont want to fully come out and say it
  • You just dont like the idea and believe it will happen
  • They just started raising and you dont want to be the first to commit. This is a larger industry issue.
  • You had a bad experience/investment similar to what they’re pitching and want to stay away from it
  • You want an arbitrary amount of more traction — some investors have minimums of what you need.
  • Not OK with investment terms and not investing enough to change it. We dont invest in notes or SAFEs, only priced preferred equity.
  • You have a similar-ish investment already in your portfolio, so kind of a conflict of interest
  • You’re looking at similar companies and like another one better. To be clear, there is no sharing of any information when this happens.
  • Gut feeling and intuition is the wishy-washy part that lots of investors deal with. Basically trying to handle the FOMO because no one wants to pass on the next big thing. Hard to articulate but you would never tell a founder that your “gut” doesn’t like them.

There are countless reasons why an investor may or may not invest in your company but should always look for all the reasons to invest. I know that raising capital is a tiresome and sometimes painful process, something we want you to finish ASAP as well.

Paul Graham (Co-founder of YC) tweeted this too — the problem is double-sided. Sometimes it’s us, sometimes it’s you, sometimes it’s both.

Numerous professionals have written about this topic and there are a few studies as well that you can read through from someone a lot smarter than me.

https://hbswk.hbs.edu/item/is-gut-feel-a-good-reason-to-invest-in-a-startup

Why Early-stage Investors Tend to Trust Their Gut - Knowledge@Wharton

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Do investors invest based on data, gut or both? was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.

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