Why Am I Passing?
Every day I tell at least one entrepreneur that I am passing on investment in their company. Some times I tell 10. I don’t know what the most in one day is, but it’s probably more than 25. I try to respond to all emails so a lot of these are in the "never were appropriate to pursue" category, but at least one each day is someone that I’ve actually engaged with beyond a cold email that was randomly sent to me.
While I try to give a short explanation – which often is that the company is not in an area that I’m interested in – it gets harder when I’ve actually spent some time looking at the company, like the idea and the people, and find it relevant to one of the investment themes we have active at the time.
Over the years – I’ve come up with a set of filters to quickly turn down deals. This is an important process as I want to limit the time I spent investigating companies that I don’t investment in. Rather – I want to maximize my time working with my existing portfolio companies and quickly / deeply evaluating new companies that have a high chance of us funding them.
My first pass filter has three parts to it. The top level filter is "is this in a theme that I’m currently interested in." If yes, then I try to determine whether or not I think the people involved can create a huge company. If yes, then I often at least spend some time going deeper.
Assume something falls in the "yes – this is interesting / relevant to my current investment themes and yes – I’m at least interested in the people." Before I spent a lot my time (and their time) I try to figure out where this lives in the context of all the other companies we are looking at investing in.
This is where it gets fuzzy for the entrepreneur. You don’t know the other active companies that we are working on. We do. Since all of my partners and I work across all of our deals, we all have good knowledge of the depth of our current pipeline. As a result, I can ask myself the question "is this deal potentially in the top five things we are currently looking at."
If not, I usually pass right away. We’ll only make a half dozen new investments or so a year and we are always looking at many more than six companies that we think are potentially fantastic investments. As a result, if something is merely good (or even great) in our mind, it’s not going to ultimately make the cut, so it doesn’t make sense to spend time on it.
This is one of the benefit of having a fund our size. While we aren’t a slave to a specific annual deal pacing, we’ve learned through the lessons of the bubble the value of having time diversity in our investing activity. To be hugely successful, we don’t have to do every great deal we see. In fact, we don’t have to do every fantastic deal we see.
Now – just because you get through the first pass filter doesn’t mean we’ll do the investment. The cumulative number of "top five deals" we are looking at in any given year might be 50 to 100. We are going to do five or six of them. So we are going to spent real time with a lot of companies that we won’t invest in. This doesn’t mean they aren’t great companies or aren’t great investments – they just aren’t "for us, right now."
We always try to be respectful of the entrepreneurs and pass as soon as we hit the "this isn’t going to happen" point. There are different triggers for each company and it’s not predictable. I imagine this can be frustrating for an entrepreneur because it feels like you are making process with us when we suddenly say "we are passing", but I’d like to think it’s an efficient way for you since we unambiguously take ourselves out of the hunt when we realize we aren’t going to get there. Ultimately, this is better for you since you don’t have to consume a bunch more time with us on a low priority outcome.
As I run out of gas on this post, I’m wondering how entrepreneurs that I’ve passed on perceive this. I know many of you read this blog because you mentioned that to me in our initial introduction. I encourage public or private (whatever you are comfortable with) feedback on this – did you feel like the experience with me was a rational one or an arbitrary one?