Well, the process of most VCs leads to 99.4% failure rate (last time I checked) either in terms of providing consistent, monolithic, venture-style returns to limited partners, and/or when the dust of an exit has settled; a comfortable ignorance to the failure of “innovation” to yield renewable socioeconomic value.
Therefore, on the whole, venture capital today is a rebel without a cause, spurred on by a rat-race of make-believe valuations sold to innocent greater-fools, misaligning the deployment of available (usually public) funds away from valuable innovations that could have made this world a much better place. There are few outlier VC investors I like and on occasion still talk to (they call on my advice), but I can count them on the one hand. The grandiose valuations of these days, as the swinging pendulum from the dumb “capital efficiency” VCs deployed en-masse ten years ago, do not hide the fact most VCs have no idea what they are doing. But luckily for them, few others appear to. Itself a self-perpetuating social club ready for disruption, more on that some other time.
So, rather than describing their due-diligence process steeped in mediocrity, let me express mine.
Now, before I dive in, I must tell you the terms I use are from my upcoming book on Renewable Economics™ (some of which I describe on my blog ). The principles that I’ve honed and formalized over many years as a systems builder. First as a programmer, systems manager, project manager, global product marketing, management consultant, CEOx4, board member, venture capitalist, advisor to asset management, and now, innovation economist (by fate). So, my theory on fundamental principles provides guidance as to how to build meaningful socio-economic value (of any kind) to encircle and strengthen our world.
The first part of my evaluation process of innovation revolves around the agreement of its upside. A consensus around the top of the pyramid that represents the company’s socio-economic impact, values, goals, positioning, and ability to execute. If we don’t have an agreement on the mission of upside and the socioeconomic value it supports or builds, I’m out. That decision is generally made in less than 5 minutes. Simply put, innovation in question must improve the evolution of humanity.
As a former technologist, I care less about technology, until technology contributes to a systematic and renewable improvement in human evolution. Technology is never the goal, but merely a means by which socioeconomic value can be delivered. For technology to contribute to human evolution, it must adhere to the principles of renewability (not a cheap slogan). For only renewability, and the relativity theory that comes with it can contribute to the prolonging of sustainability.
When we have agreement on upside or macro, and the timing at which such upside will occur, we will debate the trace-back to downside or micro, back towards the reality of today. That discussion will reveal what the trajectory is by which the entrepreneur believes the upside mentioned above can best be realized, from today. While the agreement on the upside is pretty black and white for me, the discussion about the baby steps to get there allows for much debate and even controversy. This discussion serves as the due-diligence indicator of whether the entrepreneur can think different, can debate fiercely, and knows when to question himself. Contrary to sub-prime investors who use downside protection (the lame-duck chance of failure) as their main intake criteria, I begin my focus on the upside (the dogged pursuit of success) with a realistic trajectory towards the downside, as the impetus to invest.
If I feel right about the objective of upside plus the trace-back to the downside, I will determine what investor expertise or syndicate may be needed to support or supplement the full runway to the upside. Again, this is fundamentally different from most investors in Silicon Valley, who fundamentally misjudge the risk profile of venture and groundbreaking innovation, and reliant on hopeless collusion (yes, investor socialism) cobble together deals of ever incremental downside protection, in the hopes of magically reaching upside. The source of much intermediate throttling and misdirection of innovation – and ultimately – of inherently poor performance by venture capitalists.
Mind you, in the pursuit of upside, the cost of bridging the trajectory from downside to upside is secondary. Or in the words of Steve Jobs, uttered to his developers frequently; “show me a marketplace worthy of $1B or more, and I’ll deal with the cost to get there”. If you believe in the massive opportunity of upside, the cost of downside (within margins) is merely a proverbial cost-of-sale. The key of course here is as an entrepreneur not to have to engage or waddle in syndicates of downside bottom-feeders. I have never failed to raise money for innovations I genuinely believe in, but because many wannabe entrepreneurs roam the streets of sub-priming, I find most deals I run into utterly mediocre and lacking socioeconomic value the world should care about.
I rarely rely on internet searches or supposed experts, except where I see the entrepreneur appearing less experienced in isolated areas. The reason is that real outliers have no precedent, and no information gleaned from hindsight will be an accurate prognosticator of foresight that breaks the norm.