April 21, 2011
The currency of the startup and venture capital community is conviction. Startups are born out of the conviction to leave a job and start a company that most people think will never get a customer. They are built on the conviction of talent to join a startup, that has little or no traction, purely based on the promise of the future. In our case at Founder Collective, our conviction is challenged every day as we decide when to take the leap and put our capital and energy behind the vision of an entrepreneur, that wants to change the world, but is at the starting gate. Given this daily challenge, I spend lots of time thinking about where conviction comes from and how founders can convince others to share their level of conviction.
Founder Collective is a seed fund, and some of our investments are made based on little more than a founding team and an idea. At the other extreme, I’ve tracked some of our portfolio companies for over a year, until they had early customer traction, before I had the conviction to write a check. We invest when we have conviction about a company. That can come pre-product, but sometimes it requires not just product, but early customer data to get us to the finish line. Unfortunately, conviction is not a trivial thing to achieve. No doubt this is really frustrating to some of the entrepreneurs that meet with us and don’t get funded. I find myself in some meetings saying to the entrepreneur that I like where they are going with the company, but don’t have enough instinctual conviction to invest at this stage. I frequently need to see some early traction before investing. Inevitably I get a frustrated look from across the table, which often leads to the very blunt response from the entrepreneur, “but I thought Founder Collective is a seed fund. I won’t be looking for seed funding when I have traction.” This is one of my least favorite conversations, and I try to reconcile my feedback with the fact that we do many of our investments with little to no customer traction. It is true that the more data we need, the less likely it is that the company will still be at a phase in which a seed fund like ours is a fit. On the other hand, I’d say that more often than not, our seed funding is in companies that have some minimally viable product and early customer data upon which we can get an idea whether customers are engaging and buzzing about the product. I don’t think the investor process to get to conviction is that different than the entrepreneur process to get to conviction; the challenge is at the pitch stage, when VC and founder are at vastly different points in the conviction process. I advise entrepreneurs to take investors through their own process of getting to conviction. What made them want to drop everything to build this business? Hopefully that process was a good combination of instincts and various forms of customer validation of those instincts. Entrepreneurs driven completely by instincts will typically struggle to find an investor who equally shares conviction purely based on the same instincts, unless they share similar experiences that shape how they think about the opportunity. It’s way more effective to frame instincts as hypotheses and then show interesting early customer development data that helps validate the hypotheses.
Struggling to communicate the combination of instincts and data leading to conviction, I created the chart below to make it a bit more concrete. Insert your own MBA 2×2 joke here…
The idea here is that some things are so instinctual for me that I need virtually no data to get excited. That doesn’t excuse the need to start validating hypotheses, as instincts can often be misleading, but I can invest in those companies pre-product. Other concepts don’t resonate so deeply that I can make a bet without some early customer data. There are some startups on which I was extremely skeptical at first meeting, but data has clearly convinced me otherwise, and I could easily invest later despite my early skepticism. Perhaps, as a seed investor, I’m too late at that stage. In many cases, I’ve had the opportunity to back those entrepreneurs after they’ve gotten early traction. More often than not, when I don’t invest, it isn’t because I believe that the startup is fatally flawed and won’t be a success; it’s because I don’t yet have equal conviction to the founder. Ultimately, I can only bet based on my own convictions, and I think that’s also a good thing for founders. I don’t think founders should want money from investors that don’t yet share their conviction.