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Venture Pattern Matching

Denzel Washington Eli

Venture bloggers occasionally write about our process,  This post continues on the theme, how do VCs really make decisions that result in investing in a company.

A core trait of human nature is pattern matching past experiences to predict future experience. Listening to Blink by Malcom Gladwell, on the way to and from skiing last weekend may be partly responsible for this post. When talking with my partners or potential syndication partners it is very common to define a deal in terms of comparative references. Company X, has a similar model to company A and we all know how that turned out… Whenever we evaluate an investment opportunity we are constantly pattern matching to our previous experiences (25 deals over 12 years) and countless (100s) of deals that we didn’t do, including a number we wish we had.

Don’t worry if your deal does or doesn’t fit the patterns of a particular venture investor.  Patterns don’t govern if an investment will be made, sometime themes do but that is a different topic.   Patterns can provide you with a convenient way to harvest valuable experience.   In the give and take discussion, explicitly ask "does my proposal pattern match, positively or negatively on other deals you have been involved with".  My prediction is you will learn things that will help your business regardless of the outcome of any particular investment discussion.   If you keep hearing about the same problem or challenge to the model or strategy you are pursuing you will have learned something very important.

daybreakers download A CEO of a recent potential investments was presented with a challenge by the input our patterns provided. If his deal follows the patterns we have seen in a number of similarly structured companies, we expect that it will take twice as long to meet his projections and take considerably more money to attain his goals then he currently is planning to raise. This of course puts the CEO in a difficult spot.  Going to other potential investors and saying "hey these guys think it is going to take twice as long and cost twice as much", is a problematic fund raising strategy. By asking leading questions in future investment discussion the CEO can validate or not the issues raised in our meeting.

The irony in this discussion is we passed on the deal with the strongest pattern match in the set, it took twice as long, it cost twice as much and handsomely rewarded early investors…

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