CareerAde.com | Refresh Your Career

May/10

7

How to think like a Venture Capitalist

Often there are nuggets of wisdom from other professions or careers that you can leverage in your own career or life.
One of my favorite nuggets is a technique I learned when I worked in venture capital.
Venture capitalists, like John Doerr or Vinod Khosla, are investors in start-ups that risk a lot of money on a bare concept or idea and – if things go well – make a fortune for themselves and their investors. Examples of such investments are Google, Intel, Sun Microsystems or even simple websites like Mint.com.
Venture capitalists must weed through literally thousands of investment ideas that people pitch to them before they find a diamond in the rough like Google. In fact they will invest in hundreds of companies and only a handful of them will be true blockbuster successes.
For that reason, the best venture capitalists are true masters of managing the funnel: weeding through thousands of ideas effectively without wasting too much time on the duds, and carefully betting their time and mental focus on the most attractive ideas.
In particular they use a technique that I call “finding the weakest link”. This technique allows them to very quickly test the validity of a very complex idea. I think this technique is useful in many situations in life and worth knowing about.
The technique
1. Spell out logic chain
2. Find weakest link
3. Test weakest link
4. If fails, kill idea, if holds true test next weakest link
5. Repeat until entire logic chain is successfully tested
Every investment opportunity venture capitalists come across is based on some sort of logic chain – a set of assumptions and conclusions that all must hold true for the idea to work out.
For example, if my idea is to become the internet’s premier source of tuna sandwiches, my logic chain (in a much simplified form) probably sounds something like this:
In order for my tuna sandwich website to succeed:
I need to be able to make tuna sandwiches that customer really enjoy AND
I need to be lower cost in making tuna sandwiches than anyone else AND
I need to be able to ship my tuna sandwiches for very low cost to my customers before my sandwiches spoil AND
Customers need to be willing to wait for my sandwiches to be shipped.
If I would pitch this idea to a venture capitalist, he would develop a logic chain and then try to guess which assumption is the weakest link – which assumption is most likely not true. There is no science to making that guess – it is based on experience and intuition. For the example above, the VC might have a hunch that customers really don’t want to plan their tuna sandwich consumption ahead of time and won’t want to wait for FedEx to deliver the sandwich.
Next the venture capitalist will do his homework to try to verify that weakest link.
So in our example, the VC will try to talk to several tuna sandwich connoisseurs to see if his hunch is right or wrong. If is hunch is right – and the assumption is wrong and busted, he will realize that he broke the logic chain. The idea is no longer viable and he will drop it. If the connoisseurs surprise him by saying they would totally wait for a day or two for a great sandwich, he will then identify the next weakest link and pressure test it.
If he tests all links in the value chain to his satisfaction he will consider the idea for investment. If one of the links fails the test, he will move on unless he can think of a way to fix the problem.
The takeaway
So aside from getting you excited about having a tuna sandwich for lunch, why should you be interested in this technique? I think it is very helpful approach whenever you need to make a choice and important decision in your career. It will allow you to get to the right answer very quickly and ensure that you don’t waste time on dead end paths. Examples:
Picking the right market for your new product
Hiring the right person
Choosing the best strategy for your marketing plan
Picking the next best career move

Background

Often there are nuggets of wisdom from other professions or careers that you can leverage in your own career or life.

One of my favorite nuggets is a technique I learned when I worked in venture capital.

Venture capitalists, like John Doerr or Vinod Khosla, are investors in start-ups that risk a lot of money on a bare concept or idea and – if things go well – make a fortune for themselves and their investors. Examples of such investments are Google, Intel, Sun Microsystems or even simple websites like Mint.com.

Venture capitalists must weed through literally thousands of investment ideas that people pitch to them before they find a diamond in the rough like Google. In fact they will invest in hundreds of companies and only a handful of them will be true blockbuster successes.

For that reason, the best venture capitalists are true masters of managing the funnel: weeding through thousands of ideas effectively without wasting too much time on the duds, and carefully betting their time and mental focus on the most attractive ideas.

In particular they use a technique that I call “finding the weakest link”. This technique allows them to very quickly test the validity of a very complex idea. I think this technique is useful in many situations in life and worth knowing about.

The technique

  1. Spell out logic chain
  2. Find weakest link
  3. Test weakest link
  4. If fails, kill idea, if holds true test next weakest link
  5. Repeat until entire logic chain is successfully tested

Every investment opportunity venture capitalists come across is based on some sort of logic chain – a set of assumptions and conclusions that all must hold true for the idea to work out.

For example, if my idea is to become the internet’s premier source of tuna sandwiches, my logic chain (in a much simplified form) probably sounds something like this:

In order for my tuna sandwich website to succeed:

  • I need to be able to make tuna sandwiches that customer really enjoy AND
  • I need to be lower cost in making tuna sandwiches than anyone else AND
  • I need to be able to ship my tuna sandwiches for very low cost to my customers before my sandwiches spoil AND
  • Customers need to be willing to wait for my sandwiches to be shipped.

If I would pitch this idea to a venture capitalist, he would develop a logic chain and then try to guess which assumption is the weakest link – which assumption is most likely not true. There is no science to making that guess – it is based on experience and intuition. For the example above, the VC might have a hunch that customers really don’t want to plan their tuna sandwich consumption ahead of time and won’t want to wait for FedEx to deliver the sandwich.

Next the venture capitalist will do his homework to try to verify that weakest link.

So in our example, the VC will try to talk to several tuna sandwich connoisseurs to see if his hunch is right or wrong. If is hunch is right – and the assumption is wrong and busted, he will realize that he broke the logic chain. The idea is no longer viable and he will drop it. If the connoisseurs surprise him by saying they would totally wait for a day or two for a great sandwich, he will then identify the next weakest link and pressure test it.

If he tests all links in the value chain to his satisfaction he will consider the idea for investment. If one of the links fails the test, he will move on unless he can think of a way to fix the problem.

The takeaway

So aside from getting you excited about having a tuna sandwich for lunch, why should you be interested in this technique? I think it is very helpful approach whenever you need to make a choice and important decision in your career. It will allow you to get to the right answer very quickly and ensure that you don’t waste time on dead end paths. Examples:

  • Picking the right market for your new product
  • Hiring the right person
  • Choosing the best strategy for your marketing plan
  • Picking the next best career move

(Photo:Unhindered by Talent)

RSS Feed

4 Comments for How to think like a Venture Capitalist

How to think like a Venture Capitalist – CareerAde.com – ReLogical | May 7, 2010 at 10:46 pm

[...] reading here: How to think like a Venture Capitalist – CareerAde.com You can leave a response, or trackback from your own site. Printed from: [...]

Roger Raffee | May 7, 2010 at 11:36 pm

emt training | May 8, 2010 at 1:09 am

What a great resource!

TomPier | May 8, 2010 at 1:13 pm

great post as usual!

How to manage head-hunters >>

Find it!

Copyright © 2009-2010 by CareerAde.com
All rights reserved

Theme modified from jQ 2.5 by Devolux