VC Minute – quick advice to help startup founders fundraise better.
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Pattern matching is at the core of venture capital decision-making, and it’s a double-edged sword.
While it helps investors make informed choices, we all know that it can also perpetuate biases and limit opportunities for underrepresented founders.
Early-stage funds, with little data to go on, have to pattern match across dozens of variables.
I’ll give you an example. There are two patterns that we see all the time. First-time founders tend to turn on revenue too late, endlessly updating the product without charging for it or taking it to market. Then, ironically, second-time founders who learned that lesson turn on revenue too early with barely an operable product and churn through early customers.
Another critical aspect to understand about pattern matching is recency bias. The more recent the pattern, the more heavily it weighs on decision-making. This is an inherent part of human nature.
Recency bias is its own double-edged sword. A fund with early breakout success will lead them to seek out more opportunities that match that success. Likewise, an investment that’s gone bad recently will cause that investor to shrink away from anything that reminds them of that founder or that company.
The more recent, the successes or failures, the more heavily they weigh on the investors.
The problem is that you never know which way the wind is blowing. Can you guess where I’m going with this? That’s right. Ask questions.
First, understand the VC’s perspective. Ask them about what they’ve seen recently in your industry. Ask them about their recent successes or failures. Their answer should inform the next step.
Next up, leverage your unique story. Emphasize what sets you apart from typical patterns. And then play into their positive recency bias, or separate yourself from the negative.
After that, use data to support your pitch. Provide evidence to back up your claims. It might be customer feedback, but nothing speaks better than early traction metrics that demonstrate your unique value proposition.
And finally, educate. Be prepared to educate VCs about your market if it’s less familiar to them. In episode 41 “Too Risky”. I talked about the difference between risk and uncertainty. Sometimes pattern matching occurs as a result of the VC’s comfort with the level of risk or their discomfort with the level of uncertainty.
Be the expert that you are and explain the nuances and opportunities in your field.
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