Conviction

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…

 

Screen_shot_2011-04-21_at_11

 

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. 

 

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28 Responses to “Conviction”

  1. Anonymous Says:

    Hi Eric,
    I remember this conversation at SXSW and I’m really glad you put it into writing. Your name came up today as we referred to you as one of the honest, entrepreneur-friendly VCs which I’ve heard over and over again.
    Keep putting it out there for us and helping us to maintain our conviction channeled into customer validation, the only thing we have complete control over 🙂
    Best,
    Wendy

  2. Eric Paley Says:

    Thanks Wendy for the kind words. Will try to get back to blogging more often. Appreciate the encouragement.

  3. Anonymous Says:

    Great post. In effect it provides a pretty clear framework for thinking about what value an entrepreneur can/should expect at which stage from which class of investor: (a) friends & family (b) angel (c) seed VC (d) VC (e) late stage VC (f) private equity. And by providing that framework it helps make it plain when people are playing their “correct” part in the process and perhaps eases the risk of being inappropriately frustrated by the position of “the other side.”

  4. Anonymous Says:

    This is the best post I’ve read on the blanket “traction” excuse for not pulling the trigger on a deal. This is an honest and logical explanation.

  5. Eric Paley Says:

    myscrawl – that’s right. Each stage of investor expects a different amount of data and is more/less willing to bet largely on instinct. What’s great about starting with friends & family is that they are most willing to bet without any instincts or data on the business and 100% on the person. Great way to get started, refine the business, and build validation to move through the stages and raise more capital as needed.

  6. Eric Paley Says:

    DreMoran – Thanks. In fact, some of the best VCs, that we all admire, will simply not invest without some early traction. They use their instincts but refuse to rely on them without validation. We are more willing to bet toward instincts. On the other hand, unfortunately with some VCs the traction excuse really is just an excuse.

  7. Anonymous Says:

    the contrast to your approach is dst’s $150k-spray model that would blanket your 2×2? if you had the capital base, would you change your perspective (i.e. lower your definition of “conviction”)? any data to suggest which produces better returns?

  8. Anonymous Says:

    One more thing – would founding team determine where you are on the instinct axis? Or can that even be considered a third axis? There’s no doubt Aaron Patzer could raise millions to launch a paper mill.

  9. Eric Paley Says:

    DreMoran – Great point. I think of a proven team as data that builds conviction. Loving an unproven team is another instinctual element. Watching them execute can offer data that validates instincts and moves toward conviction.

  10. Anonymous Says:

    First post of your’s I’ve read – and what a good one!
    Now I’m pissed you don’t write more often 🙂

  11. Anonymous Says:

    An honest post by an investor. I agree with you Eric that most of the time it is the instinct or gut feeling or may be love at first sight .
    For entrepreneurs it is about explaining their concept or vision to the investor in an manner which really clicks. Early or first time entrepreneurs are not very good at it.

    I am going to pitch you soon and would like to see if you fall in love or not 🙂

  12. Anonymous Says:

    Great post Eric. I’ll speak for other portfolio startups in saying we’re honored to have earned the conviction of the amazing team at @fcollective.

  13. Anonymous Says:

    Thanks for post Eric. Insightful. Direct. Honest. Look forward to more.

  14. Anonymous Says:

    Following up from twitter:

    I understand the point you’re making here, of elucidating what is necessary in order to get an investor on-board with a startup concept, or failing that, of achieving metrics that bypass the requirement for  belief. I’ll preface my comments by saying that my issue may entirely be one of semantics regarding the word “conviction.” 

    I’d suggest that the conviction that makes a startup special and powerful is the founders’ belief that there’s something unique and valuable that will grow and provide value to users, in some scale. The conviction you’re describing on the investors’ part, though, is simply that it can be a worthwhile investment. Even in the best scenarios, I don’t think this is a “shared conviction” as much as it is a fortunate converging of interests. This is most clearly shown by the inevitable request by investors for clarification of “exit strategy.” Of course, as investors, they want to know how they get their money out of this thing if it does take off. I’m not at all saying that this is a bad thing; many of the best things in life are driven by rational self-interest. However, to conflate conviction and informed self-interest oversimplifies the dynamic between startup and investor. There’s a bright line between startup and investor epitomized by the fact that if the entrepreneur is actually focusing on exit strategy, he’s probably not worth talking to, while the opposite is true of the investor.

    -Nathan

  15. Eric Paley Says:

    Nathan – Great set of points on a very complicated issue – the alignment between investors and entrepreneurs. I think some of the issues would be great fodder for future blog posts.

    For what it’s worth, I don’t ever talk to entrepreneurs about exit strategies. I personally hate to see the “exit strategy” slide in a company PPT. I want to collaborate with founders to create important companies that make an impact on their respective industries. If we do that well, we’ll create lots of value together and both return on our investments (human and financial capital) over time.

  16. Anonymous Says:

    Great post and well written.

    One thing I would change regarding the combination of instincts and data is that in the startup world the entrepreneurs’ instincts are bit more important than data. Its a very dynamic world for startups and most likely the entrepreneur will need to maneuver the company through the changing conditions in the market regardless of having good initial data and a very clear route. I see many startups with smart entrepreneurs that knew how to completely shift the company’s original direction because of market conditions and succeed. That said, its much more difficult to asses entrepreneurs’ instincts as its not something you can quantify like data. I think that this post reflects in a very good way how investments are also based on emotions.

  17. Anonymous Says:

    Eric, this was really a great honest post from an investor. Sadly it also highlights the problem I am facing. I have the prototype and the business plan, but traction require money (more than FFF can provide which is why I need funding) and I am a single unproven founder. I am well aware that most investors give you a “no”, and I have had my share, but it seems from your blog that in my scenario “no” is all I will ever get. My question is how can an unproven founder get funded?

  18. Anonymous Says:

    Eric, this was really a great honest post from an investor. Sadly it also highlights the problem I am facing. I have the prototype and the business plan, but traction require money (more than FFF can provide which is why I need funding) and I am a single unproven founder. I am well aware that most investors give you a “no”, and I have had my share, but it seems from your blog that in my scenario “no” is all I will ever get. My question is how can an unproven founder get funded?

  19. Eric Paley Says:

    Mnielsen – Thanks for the comment. I hope my blog post didn’t suggest that you cannot get funded as a first time founder. That wasn’t my intent. It is certainly really hard to get an investor to the finish line. My thought process here is that you need to help translate your conviction to the investor by sharing why you’re so excited in terms of instincts, but also through the data you’ve assembled to validate your instincts. I wrote another post on what first time founders can do to overcome the challenges called Stuck On Ramen. Check out: http://epaley.posterous.com/stuck-on-ramen

  20. Anonymous Says:

    Erik, thank you for the response and the link to the other very useful post. I think the hardest part is that I have done the “right” thing. I have bootstrapped my startup but that is not something you can use as an elevator pitch and is only useful once you get in front of the investor. As my product is a “middleman” between supplier and customer I need more than Family/Friends/Fools can offer to get the content needed to get traction. I have always been the one implementing the ideas wherever I worked and did so extremely well. However the network part I have done poorly because I would rather spend the time improving our products than chatting with executives. This is coming back to haunt me so my main task at the moment is to try to create a network and hope that I will get an in before I have to give up on the idea. I guess I am a little surprise that there is no forum for ideas-that-need-money-before-traction. I saw a quote somewhere stating that starting a social site could be done with bootstrapping and FFF alone but a pharmaceutical company naturally needs money before it can have traction. I feel I unfortunately belong more to the latter category which is my struggle.

  21. Anonymous Says:

    Great piece Eric. It reminds me that everyone makes decisions based upon emotions, however those emotions are further rationalized by logic.

    Dating Example: (from a woman’s perspective)

    EMOTION: He makes me feel good and has swagger.
    LOGIC: His confidence would make him a good father. My friends and family will love his swagger. He makes a nice income which would provide me and our children, and can live a lavish lifestyle I’ve always dreamed of with travel, jewelry, and that purse I’ve been dreaming about since 1997.
    DECISION: Date then Marry.

    Matt

  22. Anonymous Says:

    Interesting post. Love the distinction between instinct and data as validation. My only follow up question: where does the strength of the founding team play in the calculus (or does it at all)?

    Does it contribute to “instinct”?

  23. Eric Paley Says:

    I think that strength of the team also cuts across instinct and data to influence conviction. Some teams have no experience, but my instincts (right or wrong) are very positive driving conviction. Other teams have lots of data (past experience) supporting my conviction on the team.

  24. Anonymous Says:

    Very Great posting and well written..

  25. Anonymous Says:

    very nice posting…


  26. […] very early in a company with no traction does require incredible intelligence, it requires incredible conviction. Savvy entrepreneurs know that to find the investor that has that conviction is going to be tough […]


  27. […] very early in a company with no traction does require incredible intelligence, it requires incredible conviction. Savvy entrepreneurs know that to find the investor that has that conviction is going to be tough […]


  28. […] very early in a company with no traction does require incredible intelligence, it requires incredible conviction. Savvy entrepreneurs know that to find the investor that has that conviction is going to be tough […]


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