The Merits of Bottoms Up Investing
Venture Desktop, 2020-02-14
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.