Swinging for the fences
October 15th, 2007
Allen Morgan of the Mayfield Fund offers tips for entrepreneurs that I found to be very useful. Here is an excerpt:
One thing almost all VC’s look for as the gating item in their investment decisions is market size. Size matters; bigger is better.
Why is this?
A baseball metaphor is usually employed. VC’s, especially early-stage VC’s, get paid to hit grand-slam homeruns (achieve out-sized investment returns). In order to do this, VC’s must “swing for the fences” each time they “step to the plate” (invest). The bad news: in early-stage VC, as in baseball, if one swings for the fences every at-bat, one strikes out a lot.
One might reasonably ask: why don’t VC’s just “play it safe” by attempting to hit “singles” and “doubles”, with fewer strike-outs? The reason is perhaps not obvious. Early-stage VC’s don’t use the “home-run every time” strategy just because they like high-stakes gambling (though some are high-stakes gamblers outside of work). They operate this way because, in early-stage investing, it is damn near impossible to tell (with any consistency) which startups will succeed and which will fail. One strikes out just as often hitting for a single as for a home-run — so one is better off trying to hit a grand-slam every time.
In the VC business, it is received wisdom that no company can become large and successful unless it’s addressing a large market. In VC land, it’s not unusual to hear something like: “Even good teams fail in bad markets; even bad teams have a shot in good markets.” Obviously, there are many other factors that determine success or failure of a startup, but addressing a large market is a necessary (but not sufficient) one.
Full Article Here
