The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

CHAPTER 18 Diligence beyond Management

“The information required to make decisive investments in disruptive technology simply does not exist . . . it needs to be created through fast, inexpensive and flexible forays into the market.”

—Clayton Christensen, The Innovator's Dilemma

ASSESSING THE MARKET

Successful investors know that there are good ideas aplenty—these are not necessarily good investment opportunities. Market readiness, accetance and competitive dynamics are more important. “We go to great lengths to be tuned into market trends, speaking to people in the industry, understanding the currents and identifying interesting opportunities. If you don't understand the problem firsthand, you don't have insight into creating a solution,” says Roelof Botha of Sequoia Capital.¹

In assessing markets, big data trends have intersected with venture capital investments. Ironstone is an investment firm using algorithms and the big-data approach to early stage investments. Their data say that a start-up's founding team has only 12 percent predictive value, even though most investors rank that as one of the most important factors. And just 20 percent of Ironstone's analysis focuses on the start-up itself; 80 percent is on the market it is entering, because they say start-ups are likely to change course and the market has more predictive power.² “It is much better to look at the contours of the marketplace and how it is shifting. Intuition has not been a great way to pick the next ...