A quick thought on the venture capital diligence process: As I’ve dug in on hundreds of companies in the last year and a half of working in this job, I’ve found there are two mindsets that I get into when performing research or diligence on a company. The diligence process is one in which I try to build conviction; it’s becoming absolutely certain that this group of developers (and a black lab) are going to build a billion dollar company.
The first mindset is that in which I am utterly excited about the opportunity/team/technology and seek confirming evidence to support my view. It often takes very little for me to get over the proverbial hump on this type of investment, and I overweight evidence supportive of my thesis and underweight that which is disconfirming. The confirmation bias in action.
The second mindset is one of slight skepticism but potential gain. I see an opportunity there but not yet enthralled by it. I pick at the idea, try to re-shape it in my mind, seek out qualities of the team that are positive. It often takes conviction from someone else with an incredibly intelligent perspective on the opportunity/team/technology to get over the hump. Sometimes that conviction builds over time. Sometimes it doesn’t.
My experience and research into the process of investing tells me the second mindset is likely the better one, but the slow build to conviction doesn’t have the same level of satisfaction upon investment. With no personal hype, there is not the same release of endorphins. Maybe it’s all for the better to overcome our irrational natures.