Should the Best Investment Decisions Be Unanimous? Does Disagreement Yield Better Returns?

Onstage yesterday at Disrupt SF, Reid Hoffman and David Sze of the venerable VC Greylock Partners talked about how they actually choose the startups they back, as reported in TechCrunch.

Sze said the firm conducted a study of partners’ voting patterns and decided to change the process by which it decides on investments. Apparently the team observed that when everyone thought backing a company was a bad idea, it was indeed a bad idea. More surprisingly, if all the partners loved the startup, “the returns turned out to be very mediocre.” The problem, Sze suggested, is that those ideas are probably “too easy.”

The investments that resulted in the biggest returns? Those were “the ones in the middle, where there’s a lot of debate and it’s not completely clear.” In those cases, Sze and Hoffman said they’re looking for something to tip the firm in the startup’s direction, like passion and experience.

“Almost every great investment has a contrarian check,” says Hoffman. The best investments are the ones where “a lot of people will think that’s a bad investment but you will think that’s a good investment.” A good example is LinkedIn — when Greylock backed the professional social network, Hoffman (who co-founded the company) said it was dwarfed by other social networking sites.

Sze added that Greylock seeks partners with a combination of “analytics and instinct” that can continue its tradition of seeing gold where others see garbage, like with Airbnb. 

Focus on Early Stage Companies
Greylock announced on Tuesday it has raised a $1 billion fund, its 14th. The fund will focus on early stage startups like its last fund, where 120 of the 140 or so investments were in seed or A rounds.  Greylock will still consider some Series B rounds and “invest selectively” in late-stage growth rounds.

Founded in 1965 near Boston, Greylock is one of the nation’s oldest and most respected venture firms. Its presence was most focused on the East Coast until it made successful and relatively early bets on companies such as LinkedIn, Facebook and Workday. In 2010, it moved its headquarters to Silicon Valley.



From the GreylockVC Blog:

Today, we announced our new fund.  On one hand, Greylock has a deep history of venture operations – being founded in 1965 with one of our founders being a co-creator of the beginnings of venture capital.  On the other hand, we re-located our headquarters to Silicon Valley in 2010 as part of the insight that the best investment opportunities were here. 

So, our new fund combines the historic and the new.  Our firm invested in some of the earliest venture capital, in companies like Continental Cablevision and Prime Computer.  But we realized through a set of investments in both consumer internet – like Linkedin (LNKD) and Facebook (FB) – and enterprise– like Workday (WDAY) and Palo Alto Networks (PANW) – that Silicon Valley was accelerating its creation of industry-transforming companies.  Moreover, in order to be the best partners with entrepreneurs, our experience showed that the right background for venture investors was a foundation in operating and experience, from founding to scale. 

 

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