The Merits of Bottoms Up Investing

Venture Desktop, 2020-02-14

Premise(s)

  • Everyone’s looking for a crystal ball:

o   LPs ask VCs for a picture of the future to justify investment

o   VCs invest in startups based on their mandate

o   Startups sell the future to downstream investors.

  • It’s all about the story and the narrative.

But is it So?

  • Is it really possible (esp. in 2020) to create a consistent fully explanatory perspective on the future?

  • The future (as described in the top-down approach) is outside the investor’s control.

  • Errors accumulate, making the future not so actionable.

  • Not to say that acting upon forecasts needs to be quick, otherwise others would reap the benefits first and the consensus will be reflected in the share prices.

  • Sustainable investment is about less intellectual competition and more about structural and behavioural advantages built over time.

  • Looking from a TAM (total addressable market) perspective [top-down], it’s easy to ignore opportunities to evolve based on real user needs.

Bottom-up Investment Approach

  • Benchmark Capital: our job is not to see the future, it’s to see the present very clearly.

  • It’s better for an entrepreneur to offer a deep explanation of the current state of the world.

  • It’s “investment in purpose” and “tactile reality”.

  • Complex systems always grow from a simple system that worked; they can’t be developed complex from the start.

  • Complex systems have unpredictable outcomes; the ones ahead (alive) are adaptable, innovative and long-term.

  • Investment in Venn diagrams that already exist, not waiting for separate circles to overlap. I.e. don’t hope the future will look like X, find one. Example: technology + adoption now, not hoping user tastes will eventually change.

o   Investment in lookalike markets where the circles haven’t intersected yet may be a waste of money.

  • Being here and now for end users (“liquidity quality”) and working through word of mouth is more sustainable and scalable than thinking in terms of things to do between Rounds A and B.

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