Are we biased Data Junkies?
Investors tend to have a bias, this is not new…
by Saskia Hoebée & Ivan Farneti at Five Seasons Ventures
Already five years ago Tech Crunch published an article highlighting several biases in VC decision making: from the similarity bias (based on the same education and/or previous working experience) to the anchoring bias (based on past experiences), to the information overload bias(bias to the more information a company provides the better it probably is) and of course the gender bias, which is still painfully present in today’s investment environment.
When analysing teams and founders of a new possible investment, we naturally (and sometimes unconsciously) tend to look for a reference, a framework maybe, to positively or negatively reinforce the analysis (and the bias), like if a certain founder-type led to a good investment or not in the past.
One of the possible ways to make some of these biases less subjective is to address them openly (and systematically) in a team meeting. For instance, when we discuss and evaluate the fit with a possible new founder, we try to connect him/her belonging to any of these archetypes we encountered in the past:
- The Product Alchemist — This is the founder who is hyper focused on product, its science, who proudly owns the IP and for whom the only barriers to entry are those created by R&D. These founders need a long-term perspective and patient capital, and investors who speak the same level of intellectual language. Some investors may be less sensitive or trained in deep science and it’s easy to get lost in translation when discussing with the Alchemist. If the communication stutters, so may the will to continue the process to invest.
2. The Data Junky — These entrepreneurs create value with numbers, analytics, optimisation, and continuous improved metrics. They may have a marketing background or be former strategic consultant or even ex-investment banker. These founders lead by talking revenues and multi-level margin structures and are perceived as more predictable drivers of the company performance. One may question if these founders and their approach may produce the breakthrough to deliver the 100x return, but the Data Junkies provide a solid bet for a wide range of investors.
3. Brand magician — The person that excels at communicating the mission, the company values, its purpose, the true meaning of the brand is what we call a Brand Magician. The creator of engaged (online) communities who believe in the extrinsic values of the brand above the intrinsic attributes of the product itself. In the very early stages of a new business, these founders can win hearts and souls of some investors by picturing the long-term vision, even if not expressed in a traditional business plan.
4. The master of the (VC) game — These are the founders with the polished presentation, the investor network who made the warm intro, the rehearsed pitch that aims at creating that subtle FOMO for investors now concerned that “this is the one not to lose”. In a capital market like the one we have been living in for the last decade, the Master of the VC game has been able to raise incrementally more capital, which, for some business, is a good proxy to ensure some level of success. The Master of the Game type of founders tend to click with many investors, yet not all.
At Five Seasons Ventures, we only invest in foodtech and we believe the main reason we get in at Series A/B (rather than at seed or pre-seed), is that we like data. We like when data shows a growing ARR path, or improving cohorts metrics for customer acquisition costs, AOV and retention. We like it when founders pull out an excel sheet to illustrate the repurchase rate of a new food product, and even more when they show they understand why people come back to buy again.
Whether this relates to similarity bias, anchoring bias, information bias, or gender bias — or probably of all of them combined — we realized we are Data Junkies ourselves. During an investment process we ask a lot of questions and require a lot of answers when interfacing with Data Junky founders we enjoy the speed and efficiency of these exchanges. We value the little overhead to get to an efficient “go/no-go” decision and we believe this to be reciprocal, as speed of decision is any founder’s second most important criteria….
So, do investors unconsciously look to people similar to themselves? And if this is the case, how can we make sure we overcome ours or learn to live with it? We’d like to hear your thoughts.
