Venture capital is like a game of poker: you have a certain number of chips to play and you aim to win with the best returns. For many rounds, you might pass on and for some, you keep going and end up losing the money played until then. However, there are those rounds where you feel like you have the best cards and you keep upping up your bets until hoping for that one major win.
The same logic drives venture capital. Investors examine the company in detail and decide either to invest money or pass on the opportunity. Sometimes they pass on a huge win, but sometimes they manage to stick with a jackpot long enough to cash in a huge pile of money. However, placing the bets is not easy. Knowing beforehand that a company will be a winner is impossible – as success cannot be quantified in a reliable way.
Some investors prefer to consider their investment strategy to be fact and number based, rather than admitting that a gut feeling steered the decision.
There is no mathematical process to calculate which of these thousands of startups pitching, will end up being the next unicorn. Feelings are the incalculable aspects that affect the investment decision. These gut feelings or hunches investors get can be related to the product viability, team dynamics, market development or valuation multiples or to any aspect of the investment thesis.
The fact that feelings play a role in an investment decision is something no investor would deny. However, the opinion on whether feelings play a large or small is something that can be debated – as calculating feelings is something that can’t be done. In addition, some investors prefer to consider their investment strategy to be fact and number based, rather than admitting that a gut feeling steered the decision.
In early-stage venture capital investments, it is often the team that plays a key role in the investors’ decision-making process. As not all young companies have revenue, and many of them do not even have a viable product yet, the team is what the investors invest in. This is a testimony for the fact that feelings do steer the investing process: the teams cannot objectively be evaluated in any way – personalities, skills, capabilities, emotions, experience, worldview, team dynamics, passion and motivation cannot be objectively measured. Of course, there are personality tests that can say whether team members are compatible with each other or not but sketching a complete picture of an individual, let alone a team can be impossible.
In reality though, those tests are nearly never even executed before any investment decision. The aspect of evaluating the team is generally based merely on CV’s and observing the teams dynamics in real life. The latter gives the investor a hunch, or in other words a feeling, of whether the team is capable of growing the company to glory. So, as long as the team plays a major role in early-stage investments, so does also the feeling of the investors.
Investors, do you agree?
By Julia Jutila & Lara Jasim