August 31 2009
by Scott Johnson

The imperfect VC process

Picking companies to invest in is not that different from running the admissions process at Princeton.  The likelihood is high that you will admit some problem students and deny admission to the next Michael Dell.  This is how the process was described to me by an unnamed college admissions professional:

There is a set of applicants in a very, very small pile that are no-brainer admits.  These are the truly exceptional students that everyone wants at their college without question.  Admissions offices at the top schools actually compete for these students.  Todd Hixon, my partner and the sharpest tool in any shed I have ever run across, may well have been in that pile.  The rest of us, comprising the remaining 99% of the applicants, get split into two roughly equal piles.  The “just not going to make it” pile and the “pretty impressive” pile.  That is a lot of impressive applicants to sort through for the remainder of the freshman class, and only one in ten will ultimately be admitted.  And generally that will be for reasons other than academic achievement.  “There are too many pre-meds this year, so the bar gets raised and we had to cut some great applicants.”  Or “the field hockey team needs a good goalie.”    Or “the drama program needs a new male lead.”  So predicting admission for any one student is really difficult, and the process appears arbitrary at best from the outside.

My point here is that picking early stage investments is a similarly imperfect process.  If you are told “no” by a venture firm, please don’t let that discourage you.  Yes, it feels arbitrary and is therefore frustrating and irksome.  And there is always room for improvement in how anyone communicates a business opportunity to prospective investors, so always be working on that.  But we say “no” to great entrepreneurs sometimes, and “yes” to some we later regret.  We do our best to avoid that, but in a world of imperfect information, false negatives and false positives are inevitable.

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