Venture capitalists are continuously looking for innovative companies and products that span across all industries: from fintech companies to consumer goods; some pique interests more than others.
As a student studying finance, a core lesson from my undergraduate curriculum has been this: ‘personal preferences have no significance in financial markets’. This explains why markets move the way they do, why bonds and stocks trading on exchanges converge to a consensus price, and why the Law of One Price holds. Investors’ own personal preferences towards a type of financial asset have no significant effect on what the price of the asset will actually end up being in the market.
The same idea holds when it comes to venture capital. As my team and I have worked through many diligence processes, at times I catch myself favoring one company over another simply due to my own personal preferences. For instance, I might see more value in a company if I think it fits better into my personal life, or if I’ve encountered the specific issue that a company is solving with their product/service more often in my own life. However, following this unconscious bias in a venture capital setting can be detrimental, as these biases can act as blinders when discussions about the company’s negatives arise. It’s imperative that venture capitalists always conduct a thorough diligence process to obtain a holistic view of the startup company and understand what the pain point their product/service is mitigating, and if it is scalable. Ask, “Do others face the issue that I face, or does the issue only affect a small population of those closest to me?”. Just because I see the benefit something could have in my life or in the lives of those around me, does not mean that the company is an immediate winner or that you should invest.
That being said, personal preferences aren’t entirely out of the VC space. The unique points of view, perspectives, and interests that every venture capitalist possesses can be meaningfully applied to VC work when they’re used to find new deals. The diligence process becomes exponentially more meaningful when it’s driven by an analyst’s interests.
One’s unique personal hobbies and interests can drive the search process, but don’t allow it to drive the investment decision. Always apply strong efforts when conducting thorough research and engage in discussion with a team before making an investment decision.
Author: Jenna Bosell