Shoot for the moon: how venture capitalists think

Shoot for the moon, reach for the stars. Entrepreneurs are often the pilots of such inconceivable projects, but many times it’s the cash fuel injection that gets them there. Last week at the venture capital (VC) conference Moment 2016 in Tokyo, panellists David Lee from Refactor Capital, Craig Sherman from Meritech Capital Partners, and moderator Gen Isayama of World Innovation Lab spoke about how to identify rockets before liftoff.

“The impact from a society impact should be numbered into terms of a thousand ‘X’,” says David. While home run deals are more about making money, moonshots don’t just make money, they change the world in a significant way. There’s a certain romance to the projects according to Craig. They may be higher risk and require greater capital from the VC, “but it’s part of our jobs.”

To illustrate, David highlighted the passion and purpose in Google’s work for preventing and treating cancer. He notes that Google should expect 100 to 200 failures but won’t see founder Larry Page bothered by the results, “the nature is that one that hits is going to be 100x.”

“If you want to exist 100 years from now, you want your grandkids to know your company, you have to invest,” Craig emphasises. The largest companies in the Japan and the US will not be the largest in 100 years. “Most companies find one thing that they get very, very good at. And that’s what makes them big. The world will need other things, the customer will be asking for other things.”

Riding the solar wind

“As an early investor, whenever I think of moonshot I still think of software,” says David. “Software-driven by cheap, abundant data.” He prefers a founder CEO who is technical and able to match the strategy and strengths of their company with an understanding of advancements in technology. Facebook and Google are great examples of this. “What has the founder said from day one? Is he or she consistent with that vision? And frankly, do they have a track record of executing on that vision?”

The founder should be qualified to take risks. Jeff Bezos of Amazon has been very clear in his plan to build long-term business value. According to David, the successes of voice control system Alexa and hosting service AWS make up for failures like the Amazon Fire phone.

Craig remarks on the first time he met Mark Zuckerberg in 2005, “I joked with my wife that he was so confident at 20.” He had never met anyone like that before. He saw the world completely different and he had confidence in his vision. Zuckerberg looks for the world’s best to add to his team. He “worked his ass off,” even recruiting PayPal president David Marcus to the Messenger platform.

Be irrational

Often times investing in a future moonshot goes against conventional wisdom. David says sometimes investors judge the service to be “sleazy.” Internet – porn. Facebook – hooking up. Snapchat – sexting.

“When everyone says, this is a great deal, we have to feel anxious about it,” expands Craig. Moonshots are often a result of uncommon ideals or someone who has a very strong view of the world. “He’s just doing crazy shit” is often the response. “They are the black swans. They are the ones nobody thought would be great,” David smiles.

From the VC side, numbers back up the importance of moonshots. There is a huge power law distribution in venture capital. Money returned to funds is often skewed to a few companies. Andreessen Horowitz blogs that while close to half of deals lose money, six percent of deals generate 60 percent of total returns.

“It very much depends on the stage you invest,” clarifies David. The earlier the stage, the more pronounced the data curve. But even Craig sees the trend in their late stage firm. When they reviewed their funds aiming for a threefold or greater return, all of them had at least one deal that paid back more than half the fund.

“You are always going for the fences,” encourages moderator Gen Isayama. Investors frequently refer to the “Babe Ruth” effect. Babe Ruth had the most home runs, but he also struck out the most. Make bold bets, take the unpopular side. “Technology investing is a function of your brain and your imagination,” says David. He is constantly thinking, “Is there one world where this thing becomes enormous?”

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This article by Peter Rothenberg originally appeared on Tech in Asia, a Burn Media publishing partner.

Feature image: emreterok via Flickr.