Asking the Right Questions

Conviction Building vs. Information Gathering

Asking the Right Questions: Conviction Building vs. Information Gathering

Famed Sequoia Capital Founder Don Valentine once said, “VC is all about figuring out which questions are the right questions to ask". In today’s venture market (which I can only describe as the fastest I’ve ever seen), it’s more important than ever to figure out what are the “right questions” to ask to drive conviction into your own investment process and to do it fast. 

Unfortunately, this is a rarity amongst the venture investors today. VCs invest in opaque, highly evolving companies with limited data. With that, VCs crave any form of data that they can get. Why would you NOT want more data? Investors (across all asset types) are trained to get as much information as they can. The problem is that these data requests can be destructive to the founder’s limited bandwidth and fundraising processes can move blindingly fast. Knowing how to deal with the uncertainty of incomplete information while still developing conviction is a hard transition to make in today’s modern market. The only way to survive is to get the right information as efficiently as possible. We distinguish between these two processes as “information gathering” and “conviction building”. 

“Information gathering” is asking founders for every piece of possible data. Information gathering looks for a reason to invest in a business without a direction or perspective on the business. With that, the process becomes generic. If you’ve ever seen a due diligence checklist, this was likely generated by an information gatherer. If these VCs were analyzing public companies (where information is prevalent and CEOs don’t need to engage in processes), this would be less of an issue, but fundraising can be an incredibly time-consuming and damaging process for startup founders. This is especially true for customer references, where information gatherers can monopolize your customers’ time to learn the market and ultimately send negative signals to your customers if they pass. While the negative implications of this are clear for a resource constrained startup, this overbearing approach can still prove hurtful when analyzing public companies. Surplus information can create more noise than actual signal, ultimately generating little/no value in building conviction, while obscuring what is really important.

“Conviction building” is wholly different. Conviction building starts with a plan on “why to invest”. This can be for a host of reasons, but for us, it generally begins with a given market opportunity that we are researching. Part of our “conviction building” process is to do our homework on a market prior to meeting (we call this a “prepared mind”), rather than learning on the founder’s time. We try to be as transparent with founders about what we need to see from them to get conviction. 99% of the time, it’s not data in the business, but rather a) conviction in them (assessing founder market fit and/or the interpersonal dynamics of working with them) or b) first signs of customer validation to prove our hypothesis around their potential flywheel/moat. Other times, it’s making sure our POV of how the market evolves aligns and complements that of the founder. Rarely is the request “can you show me two more quarters of sustained growth”. As we press the opportunity forward in our own internal process, we ask a few fundamental questions and lay these out to the founder to see if they can help us answer them. This outlines the few key areas we need answers on (what we believe to be the “right questions”) and provides transparency to the founder on what we need answered. Lastly, we never ask for references unless we are deadly serious about investing. These references should be confirmatory, complementing the POV that we’ve accumulated from our own customer/expert networks.

The process of evaluating and diligencing a company is always unique, but the characteristics of “information gathering” vs. “conviction building” are markedly consistent. When I see a down-stream VC meeting with one of our companies saying they "need a few more months of data", I tell the founder to stop spending time on that relationship. This is textbook information gathering with a VC trying to preserve a call option in the event the business becomes successful.  Ultimately there is very little upside of a VC passing too early on the company other than YOUR time, so be careful of accommodating the “information gathering” request. Running an efficient process doesn’t mean giving up on diligence/evaluation altogether (operating solely on “gut”), it simply means doing it in a way that makes the most of both your and the founder’s time. Conviction Builders drive to the heart of what matters - they don’t ask all the questions, they ask the right ones. 

NOTE: For those looking for further reading on how to “increase conviction while simultaneously saving time”, check out this paper by Coburn Ventures