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.

------

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

Trending News

Building Houston

 
 

Here's what interactive, virtual events to log on to this month. Getty Images

Despite much of the state returning to some state of normalcy, larger groups are still not encouraged to gather quite yet in order to avoid an uptick in COVID-19 cases.

With that in mind, here are over 10 Houston innovation events you can attend virtually via online meetings. Be sure to register in advance, as most will send an access link ahead of the events.

June 2 — How Fashion Brands Optimize E-Commerce and Sustainability During a Pandemic

Kim Roxie, founder of LAMIK Beauty, moderates a panel of e-commerce startup founders for The Ion to discuss modern issues the female founders are facing.

Details: The event is at 5:30 p.m. on Tuesday, June 2. Learn more.

June 4 — Startup Growth After COVID-19 with Sputnik ATX

Curious about what business and startup growth may look like post-COVID-19? Join Sputnik ATX Partner Joe Merrill via General Assembly for a discussion on how to grow a business and raise a round during a pandemic.

Details: The event is at 3 p.m. on Thursday, June 4. Learn more.

June 6 — Enventure Basecamp: Business Building Workshop

Our community-driven business building basecamp series returns this June to support a local innovator construct their healthcare venture.

Details: The event is at 9 a.m. on Saturday, June 6. Learn more.

June 9 — Pulse Check-Today's Funding Landscape

Today's current crisis has changed the mindset of many industry strategic partners, investors and overall stakeholders. From pivoting investment priorities, to identifying new areas of innovation, the investor landscape is constantly shifting.

For small to medium sized biotechs, it can be hard to keep up with promised milestones while also planning and anticipating the future of their companies. How could companies be preparing for not only the short-term but for years to come? What should be prioritized in the coming months? Who is still investing? How can they find the right partners for them as they move forward?

Details: The event is at 11 a.m. on Tuesday, June 9. Learn more.

June 9 — VC Ask Me Anything Virtual Event featuring The Artemis Fund

These livestreams, which will include audience Q&A, will tackle the big questions on everyone's mind, like how founders should adjust in the face of the pandemic and what fundraising will look like once the pandemic loosens its grip. Click here to stream.

Details: The event is at 2 to 3 p.m. on Tuesday, June 9. Learn more.

June 11 — Energy and Utilities: Drones, Connectivity, and Operations of the Future

Preparing for the future can be confusing. How can you keep up with industry and regulatory advancements, or know when to invest in new technology? That's why we teamed up with Southern Company to share how they're preparing — and how you can, too. Join Skyward and Southern Company for a discussion about energy and utility operations of the future and practical steps you can take now to prepare your enterprise.

Details: The event is at 1 p.m. on Thursday, June 11. Learn more.

June 11 — Venture vs The Virus: Texas Halo Fund IV

The Houston Angel Network presents Episode 3 of Venture vs The Virus. During this virtual event you will hear from the managing directors of the Texas Halo Fund on the launch of their new fund and the investment opportunities they are seeing as a result of the health crisis.

Details: The event is at 2 p.m. on Thursday, June 11. Learn more.

June 11 — Intro to Fundraising in FemTech & AMA with Juliana Garaizar and Dr. Barreto

Are you raising capital for your FemTech startup? Join us VIRTUALLY for an overview from venture capitalists and investors at Intro to Fundraising in FemTech & Ask Me Anything!

Details: The event is at 2 p.m. on Thursday, June 11. Learn more.

June 16 — Women in Tech Summit presented by Accenture

Capital Factory will host a virtual Women In Tech Summit dedicated to increasing diversity in the entrepreneurial and tech community while making its coworking space an inclusive environment for all.

Attendees can look forward to a special keynote guest, insightful fireside chats, discussion sessions, a startup showcase, Epic Office Hours, and panels on relevant topics facing the tech ecosystem.

Details: The event is at noon to 5 p.m. on Tuesday, June 16. Learn more.

June 17-19 — Virtual Rice Business Plan Competition

This year's Rice Business Plan Competition, which was planned for March 26 to 28, was canceled due to COVID-19, but the Rice Alliance for Technology and Entrepreneurship has decided to offer up an alternative: A virtual RBPC. Forty two student teams will compete over three virtual events.

Details: The event is from June 17 to 19. Learn more.

June 23 — Virtual Fireside Chat: Fredrik Tukk, Maersk Drilling

Join The Ion for a chat with Fredrik Tukk-Head of Innovation Scouting at Maersk Drilling about how organizations can benefit from innovation

Details: The event is at 3 p.m. on Tuesday, June 23. Learn more.

June 24 — The Ion Startup Demo Day

Top tier mentors, local investors, and personalized pitch feedback for participating startups -- nothing's changed but the address. Whether you're a serial entrepreneur or just looking to get involved in the community, this event is for YOU.

Details: The event is at 6 p.m. on Wednesday, June 24. Learn more.

June 30 — TMC Accelerator for Cancer Therapeutics Info Session

The TMC ACT team will answer questions including who should apply to TMC ACT, what are the timelines, and what value to expect.

Details: The event is at 3 p.m. on Tuesday, June 30. Learn more.

Trending News