Bites At The Apple, Sharpshooting, And Shots On Goal

More often than not, I believe it is largely impossible to predict the shape of an outcome when making an initial venture investment. Investors, of course, will conduct significant due diligence, investigate sources, study trends and the competition — and much more. But, at the end of the day, the future is unknown and needs to unfurl naturally. The insight and data venture investors have to work with increases as a company matures — the earlier the investment, the more unknown the outcome is.

I’ve been thinking about this nearly immutable law of investing lately, specifically, as I crudely demarcate three distinct areas of investing: I/ Venture Seed, or before the Series A; II/ The Series A and Series B rounds; and III/ Venture Growth. Within each category, I believe there is an inherent tradeoff between information at the time of investment and the ability to approximate future value creation.

As such, I see a distinct strategy and style available to investors in each of the three segments. Briefly, Seed investors who keep their funds small have the benefit of having more “shots on goal”; Series A and Series B investors who typically take board seats with larger but moderate fund sizes still have a decent number of shots on goal but have to be much more precise with their shooting aim; and Venture Growth investors and the larger platform funds have smartly scaled to cover all stages and have “multiple bites at the apple” — if a larger fund misses on the next Uber at seed, or the at Series A or B, their flypaper can theoretically catch a piece of that next Uber at the growth rounds, and with the web and mobile penetration worldwide, the addressable markets and headroom even for growth companies is still enormous.

I do not have much experience with evaluating Venture Growth deals — but as the larger VC platforms have scaled, their funds have matured to the point where they have multiples bites at the apple. The conventional wisdom is to wonder if these firms are getting too big — the counterargument is equally as valid, with technology seeping into every sector and spreading across the world, and with private markets bulging, new companies are able to raise enough capital where they can directly challenge and overtake incumbents rather than waiting for them to acquire them.

I also don’t have lots of direct experience with Series A or B deals. From what I observe, these rounds are now incredibly competitive as the goalposts for Series As and Bs have continued to move further out, and the prices of these deals can be orders of magnitude past the seed round prices. In Series A and B, investors often have to be marksmen or markswomen, sharpshooting with incredible precision to hit the right targets. While individual investors may invest in 5-7 companies per fund, their fund partners may do the same, giving the fund more shots on goal.

Seed is what I know. While I get to observe multistage investing in my role as a Venture Partner with Lightspeed, seed is where I spend my time. In seed, assuming fund sizes are kept in check, can afford a manager many shots on goal. The extreme of this is a “spray and pray” approach. The other end of the spectrum are seed funds which concentrate positions upfront and behave more like Series A and B pickers. There is no “right” approach.

For me, I like having shots on goals. I have been very fortunate in selecting some seed investments since I started. But I would never say that I could have seen the shape of the outcome when I invested — well, there was one company that I knew would be a billion-dollar-plus company, but I had no idea about the others. In those moments when you’re investing at seed, you know the loss ratio is going to be high given just how hard it is to get to the Series A. Increasingly, the bar to hit Series A has gotten even higher. Having more shots on goal helps spread out the effects of the loss ratio.

But, most important, when I started out investing, I was very lucky to get lots of smart advice. One successful VC told me, paraphrased “Take more shots on goal. You want to be in companies that people recognize. They won’t remember the ones that didn’t work.” In the time that I’ve been investing now (nearly six years), I have been offered the chance to dabble in Series A or even beyond. While tempting at times, I concluded that I need to play the game that I know and feel comfortable with — and to have the ability to have some extra shots on goal. In assessing myself as an investor, I don’t think about having multiple bites at the apple, nor do I think about being a sharpshooter and picking the exact right startup out of the thousands that could be worthy of that Series A or B check. But at seed, which is much more fluid and collaborative, there’s comfort in knowing we have more shots on goal. In an uncertain and random world, it feels like the right anti-fragile approach that fits me best.