[The basic concept for this post came from my friend Paul Nadjarian. Paul was previously the Director of eBay Motors and recently started Mojo Motors in New York. The Mojo website is worth checking out if you live in Boston (that is their first beta market). I am not an investor so this is an unbiased plug.]
According to Paul, there are only two reasons that people buy a car: love and fear. Love is easy to explain, but fear takes a few forms. You fear missing out on a good price, you fear being without a car at the end of a lease, or you fear losing the car to another buyer. A good salesperson is able to bridge these aspects and close people quickly.
It is pretty clear that you can take the sentence above and replace the word “car” with just about anything. It works with human relationships and most of the long term decisions we make. It even applies to water, duct tape, and breakfast cereal right before a hurricane. Not surprisingly, both love and fear play a role in the investment business too.
There are a handful of companies we meet every year that are love at first sight. These companies are in a market we know, they have an excellent product or service, and the management team fits our #1 pattern - a team with previous success that regrouped for a second run at the same market.
These companies also take less work and due diligence to get through the partnership. If there is a long discussion it is usually about valuation, because we are not the only firm who loves this company.
If you are an entrepreneur and want to diagnose “VC Love” there are a few signs: immediate follow-up with a list of next steps, more meetings to schedule, and a barrage of email introductions to customers and people you should meet.
The story would not be complete without mentioning that we also invest out of fear. These are usually competitive situations where we fear losing an investment, although there is also the fear of not being part of a hot syndicate. The worst logic in the VC business is a phrase that I used to hear all the time in the Internet bubble: “If we don’t do this deal someone else will”.
There is no hard evidence that the deals we love outperform the ones we fear. If you believe Trevor Kienzle from Correlation Ventures, he will say that VCs can’t predict their winners in advance. However, I believe the companies we have loved right off the bat end up outperforming others. I am curious enough to ask Paul the million dollar question next time I see him: if someone purchases a car out of fear how often do they grow to love it?
@davidweinfeld First impressions are hard to overcome, but I think that the amount of long-term interest and commitment is determined by your relationship with the entrepreneur. If the entrepreneur turns out to be someone that I love working with than the chances are good that I will spend a lot more time in their office, returns calls faster, etc. Although back to your point I have never loved a deal where I didn't really like the team involved. When you spend more time with a company you inevitably end up investing more money into it too. All of this is tied together.
Hi Ian, In the love vs. fear investment scenarios that you have described, do you find the competing emotions influence your level of long-term interest and commitment toward the companies?