Money minds

Intuition or analysis: Here's what venture capital investors are looking for in startups

Are investors making decisions based on their gut feeling or by the numbers? Getty images

Conventional wisdom tells us people reside on a spectrum, having a natural tendency to process information in one of two ways. Those on one end of the spectrum process new information with their faculties of intuition, or gut feel; those on the other with their faculties of analysis, or logical reasoning. A fundamental understanding of this framework is valuable in the world of entrepreneurship and venture capital.

If you unravel the personal accounts of well-known entrepreneurs like Steve Jobs, Bill Gates, and Mark Zuckerberg or some of the great venture capital investors like Ben Horowitz or John Doerr, you are likely to encounter the co-founder and long-time boss of Intel, Andy Grove. Many have gone so far as to say that Grove is the person most responsible for creating the Silicon Valley — and in effect the Silicon Valley ethos — that drives American startup culture today.

"The question of gut feeling versus analysis is framed wrong. These are not independent. Gut feel that does not rely on analysis as a sanity check…is likely to be very arbitrary and very likely to be wrong. Analysis that is not answering questions that are raised by somebody's intuitive judgment…is a sterile analysis. So, the best of these things is a synergy between intuition…and analysis, and that synergy is better than either intuition or analysis."

— Andy Grove, 1999

Instead of a spectrum, Grove proposes that intuition and analysis ought to work as a feedback loop, with one continually feeding and reinforcing the other. This framework is critically relevant in the context of entrepreneurship — and specifically in the context of approaching VCs — on two accounts.

The first is that VCs try to understand how these two systems work together in an entrepreneur's mind, and factor that understanding into their evaluation. VCs want to understand the entrepreneur's product vision, empathy with the customer base, personal principles, and prior experience, with the sum of these parts and others providing insight into the entrepreneur's intuitive nature. VCs also want to understand how an entrepreneur leverages data to, for example, develop go-to-market strategy, structure the organization, and improve the product, all of which inform the VC's perception of the entrepreneur's analytical capacity.

As business data becomes ever more available, asking the right questions using one's intuition and developing answers through sound analysis of the data becomes increasingly important. Entrepreneurs who demonstrate they have sufficiently integrated these two systems together will enter the fundraising arena at an advantage.

The second reason Grove's framework is helpful is that VCs also use both analytical and intuitive approaches when evaluating entrepreneurs. Entrepreneurs who have the most success in striking meaningful relationships with VCs appeal to the VC on both fronts.

VCs pride themselves on their ability to make intuitive judgment calls on an entrepreneur, often coming to a decision in less time than it would take to read to this point in the article. They listen to the gut feeling that tells them whether or not an entrepreneur listens intently to questions and responds well to feedback. Likewise, they also enjoy the process of walking through the entrepreneur's analysis of the market opportunity, financial projections, and other data-driven subject matter. In this case, the analysis is more geared towards the business opportunity than the entrepreneur's personal characteristics. Therefore, winning a VC's investment requires an appeal to both the VC's intuitive and analytical faculties.

Part of what kept so many great innovators of the 21st century looking to Andy Grove as a business sage was that he would help guide them through their own psyches as they sought to make business decisions. Today, VCs use the same framework to evaluate entrepreneurs for investment that Grove used to advise them in business. Entrepreneurs who understand the significance of and relationship between the intuitive and analytical faculties — both in the context of building their businesses, as well as in the context of appealing to the disposition of the VC — will approach investors from a position of relative strength.

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Moody Heard is investment analyst at Mercury Fund, a venture capital company based in Houston.

Think about the power of impact investing this Earth Day. Getty Images

For almost 50 years, Earth Day has been recognized as the largest civic-focused day of action in the world. Since April 22, 1970, Americans have sought out ways to be stewards of the environment through planting trees, riding a bike to work, or cleaning up a community garden. While these actions are admirable, other strategies and tools are also available that can have a positive impact on the environment.

Investors are getting behind companies that put environmental, social, and governance (ESG) factors as priorities in their operations. According to a 2018 survey by the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Investment Management, 84 percent of respondents are considering or currently pursuing ESG investing.

ESG policies may include issues such as safety policies, human rights, and climate change. These policies may not be part of the traditional financial analysis but can still have financial applications. Investors have the opportunity to financially support and affect change in companies that are taking the lead on ESG policies. This is impact investing. With impact investing, companies and individuals can shape the future with money that is already slated to be invested.

According to the Morgan Stanley survey mentioned above, more than $22.8 trillion is invested sustainably. As the impact investing movement continues to grow, we are seeing an increase in funds dedicated to social and environmental change. According to the 2018 survey, 77 percent of asset owners believe they have a responsibility to address sustainability through investing. And, 31 percent of the respondents said climate change is their leading focus.

If you are interested in incorporating impact investing into your portfolio, the first step is to choose your social and environmental investment criteria. In honor of Earth Day, you may be interested in focusing on green investing in industries or causes such as clean water and alternative energy. Or, you may be interested in investing in corporations that have made strides in environmental sustainability and clean technology.

Next, determine the best way for you to invest. Whether by debt, equity, or assets, impact investing can involve making the kinds of investment decisions that regular investors are generally making anyway, such as buying stocks and bonds in Fortune 500 companies or broadly diversified mutual funds. According to respondents in the Morgan Stanley survey, public equities and real assets, such as infrastructure and real estate, are the most attractive asset classes for sustainable investing.

A common concern with impact investing is whether investing with a strong focus on ESG will give investors a rate of return needed to meet their investment goals (i.e. retirement, college savings). According to a study by the Global Impact Investing Network, a nonprofit organization dedicated to helping break down barriers to impact investing, 82 percent of respondents said their investments made an impact and 76 percent were pleased with the financial performance. Additionally, another 15 percent reported outperformance across each of these dimensions.

As investors are pursuing ESG practices and investments, a large number of companies are continuing to incorporate measures such as water and energy conservation into their ESG policies. Corporate boards and investors are incentivizing their CEOs to provide high-quality, diverse workplaces that lead to greater employee satisfaction, retention, and productivity while having a social and environmental impact. Whether investing in organizations or corporations, impact investing provides a way for investors to tackle big problems with their money. This Earth Day, on Monday, April 22, you can identify investments that can help you achieve your financial goals as well as satisfying your desire to have an impact.

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Dominic Cellitti is a financial adviser with the wealth management division of Morgan Stanley in Houston.