In any search for truth, questions are more important than answers. That is because the form and content of the question, to a substantial degree, frames the response. Across the unbroken spectrum of possibility and experience, the questions parse the landscape and produce the language for the exploration being undertaken. Venture capitalists seek a particular kind of truth: From a universe of new companies, which comprise the set most likely to succeed with consumers and businesses, thereby producing users and revenue and, through them, value?
At Social Starts, along with every other tool in our investment evaluation toolkit, we generate a core set of questions each year that we feel properly focuses our search for the best new companies.
In the shift from 2015 to 2016 we have altered our central questions in a way that, I think, reflects some of the key shifts going on in the broader investment landscape.
Our question for 2015 has been: If this were your personal money, and if investing in this company now meant that this money would not be available to support an outstanding company we don't know about yet that will appear in the future, would you still make this investment, at this dollar level and on these terms today?
We have found this question compels the team to think about the real impact, positive and negative, now and in the future, for every investment decision we make. We have actually, at the 11th hour, walked from investments when this question shattered a bright but brittle enthusiasm for a company.
However going into 2016, we felt this question didn't fully explicate the essentials. In recent years, as moment-of-inception investors, we had the luxury of focusing primarily on the upside. Investment funds have been relatively widely available for the early stage, and the prevalence of acqui-hires meant that we could reasonably expect to at least recoup our initial investment on weaker companies.
But now, those verities are clearly changing. Investment money is getting more scarce at the early stage. Series A investment requirements just keep becoming more challenging, which means A rounds will recede in time. The desert between first money and the A rivals the Sahara, ever growing. And acui-hires are becoming, at least for the moment, near-extinct. Yahoo, the biggest acui-hirer is in trouble and has stopped the practice. Google has greatly slowed. We have begun seeing companies that in the past would have landed somewhere face planting or being sold for pennies.
So, for 2016 our core questions have been expanded: If this were your personal money, and if investing in this company now meant that this money would not be available to support an outstanding company we don't know about yet that will appear in the future, would you still make this investment, at this dollar level and on these terms today? Who will acquire this company, why, when and for how much? How high is our confidence that this team, with this product and the current investment money can produce the product to attract the customers to produce the revenue and/or generate future investment so the company can survive to the point of acquisition?
Our center has shifted, strongly, from potential to survivability. Without the latter we don't think companies will now have the maximum potential for the former. As such, we are reframing our search for venture truth around that new realization.