Optimism and skepticism in evaluating startup investments

In a recent interview Marc Andreessen said:

I’m optimistic arguably to a fault, especially in terms of new ideas. My presumptive tendency, when I’m presented with a new idea, is not to ask, “Is it going to work?” It’s, “Well, what if it does work?”

That got me thinking. Andreessen is a smart guy who has a lot of experience with startups and who spends a lot of time thinking about the best ways to invest and build businesses. I don’t agree with everything he says, but when I don’t agree I always stop to think why. In this case I half agree, but think that only asking “Well, what if it does work?” is too simple.

I half agree because asking “Well, what if it does work?” forces you to think about how big something can get and to focus on the upside. The startup investment game is, as we know, all about finding big winners. For us that’s £100m+ exits. For Andreessen I’m sure it’s over $1bn. Thinking optimistically about the upside helps you find those big winners.

However, there’s no point in backing something that has no chance of succeeding, so it’s also important to think about whether an idea will work. In particular, it is important to think about whether the company will deliver it’s plan over the next twelve months (or at least something resembling it’s plan). This has two parts, asking “Does the plan work?” and asking “Can the team execute on the plan?”. Skepticism is helpful when asking these questions.

Time is plentiful when it comes to delivering the upside and it’s reasonable to assume that entrepreneurs can and will figure a way to make things happen – provided there are no fundamental reasons why they won’t be able to (e.g. it requires chip speeds we won’t see for another ten years). When it comes to delivering the next twelve months time is short and there is limited scope for experimentation and re-work. If Plan A fails badly everyone is going to wish they had done something else so it makes sense to think hard about whether it’s going to work. There will inevitably be lots of unknowns but identifying those assumptions up front leads to smarter investments and better plans.

  • http://www.troglo.net Henning Moe

    In practice investors are in the business of selling their money to the most successful entrepreneurs. With an optimistic attitude, investors will attract better companies. We are raising a seed round right now and it is amazing how much more information I share and time I spend with investors that are looking for the upside rather than the holes in our business plan.

  • http://www.theequitykicker.com brisbourne

    True enough. It’s inspiring spending time looking at the upside and energy sapping answering nit picking questions. That said, some investors end up being afraid of asking those difficult questions. That’s a big mistake.

  • http://www.troglo.net Henning Moe

    Very true. The line between optimism and naivety can be a fine one. I think most entrepreneurs welcome the tough questions. We just appreciate them more when the opportunity is well understood.

  • http://www.theequitykicker.com brisbourne

    Yes – much better to make sure there is shared vision of the upside and then get into whether the plan will work.