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.

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Building Houston

 
 

Keep your eyes out for a new solar farm that will be constructed in Sunnyside in south Houston. Photo via Getty Images

Mayor Sylvester Turner and the city council have given the green light on a project that will convert a 240-acre former landfill in Sunnyside into a brownfield solar installation.

The public-private partnership with Sunnyside Energy LLC. received unanimous approval on a lease agreement that will move the project — which is a part of the City's Climate Action Plan and Complete Communities Initiative — forward.

"The Sunnyside landfill has been one of Houston's biggest community challenges for decades, and I am proud we are one step closer to its transformation," says Mayor Turner in a news release. "I thank the Sunnyside community because this project would not have come together without its support. This project is an example of how cities can work with the community to address long-standing environmental justice concerns holistically, create green jobs and generate renewable energy in the process."

The solar field, which is anticipated to be installed and working by the end of next year, will be able to power 5,000 homes and offset 120 million pounds of CO2 each year, according to the release.

"We applaud the actions of Mayor Turner and the City Council in taking this significant step," says Dori Wolfe, managing director of Sunnyside Energy LLC, in the release. "It is a strong vote of confidence for this impactful project. All members of the project team realize that this Sunnyside Solar facility will be an iconic statement in the rejuvenation of the community. We are grateful that Mayor Turner has given us his support."

The city's involvement with the company began in 2017 when Houston joined the C40 Reinventing Cities Competition – a global competition to promote sustainable energy projects. As a part of the competition and through the city's efforts on the initiative, powers at be selected the winning proposal from Wolfe Energy LLC, which formed Sunnyside Energy LLC to execute the urban solar farm project.

Per the lease agreement, the city of Houston owns the land and Sunnyside Energy will be the tenant responsible for permitting, construction, operation, and more.

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