The decision process of a venture capitalist

welcome my name is sanic bazooka I'm an assistant professor at insa in the Entrepreneurship department today with us Randy Komisar senior partner at Kleiner Perkins welcome oh thank you thank you for having me Annie how does the decision process look like to say we invest in this company so we have a team of associate partners junior partners who spend a lot of time sourcing so they're out there actively finding interesting projects in bringing them in we also have a number of projects which come in through email every day nothing comes into mail or fax any more so everything's coming in through email and as a partner what I will do is review the companies that my junior partners think are important for me to review if something comes to me through the e through email I will generally refer to my junior partners to vet out first get a sense of whether this is something we should spend time with and and if it comes to a trusted source somebody who knows me well who has recommended the project to me I'll take the meeting directly so if a trusted source I'll meet with them first if it comes in another way usually I'll have an associate partner meet with them if the associate partner thinks that it's an interesting person or an interesting project then I will take a meeting and usually that meeting is just me and the associate partner and the entrepreneur if we then think it's interesting we have two different paths that we follow one is we can fast-track it and say look let's present it to the investment group the the general partners to decide whether or not we want to proceed with this in a aggressive way or we can take a slower track which is to do some due diligence maybe get a subcommittee of the general partners together to ask the key questions that we need to be resolved and then put together a package that addresses those and then present that to the partners then the partners vote usually there's a presentation by the entrepreneur to the full partnership after which we as a partnership meet and tabulate what we think are the strengths and the weaknesses of this project and the strengths of the weaknesses of the team and then we we vote but it's interesting to stand what that vote is that vote is not a majority vote rules it is instead really more like a set of opinions so if I'm the lead partner and I brought it this far it means I've got conviction then if my partner's maybe feel like my conviction is misplaced they may illustrate for me all of the problems that they see in the deal they may say that they would not do the deal if it was their deal I still have the choice to do the deal in spite of the fact that my majority my partner's may decide that it's a deal that they wouldn't do I need to take into account their points of view but I may decide to do the deal anyway if I do there's a lot of responsibility on my shoulders because I've done it in in conflict with the best opinion of the partners but but the majority does not necessarily rule and in fact in art we find is in our best investments usually come in very close calls or significant conflicts amongst the partners if all the partners agree yes or no it's usually not a good decision why is them I think it's because the best ventures usually challenge the status quo and status quo thinking in ways that create natural skepticism and so we've got a lot of smart people around the table and if we're not creating natural skepticism usually the idea isn't disruptive enough a disruptive idea is going to create some natural skepticism amongst a number of people when I did nest when I did RPX in the patent space in neither case that I have a majority of the partners supporting me in doing those deals but nevertheless I had permission to do them and both of them turned out to be quite lucrative for our limited partners it's really a little bit this Peter Thiel has kind of advocated this wrongly this kind of a contrarian question right tell me something you believe to be true others believe to be false so it's we you encourage this basically these kind of ideas by setting up a certain voting structure that's right okay in fact it's important to realize how we go about the voting structure there's a lot of different ways that these venture firms operate in the valley some will do a literally a vote around the table and they'll tell you the votes some will do an anonymous vote we actually do something which I brought to the partnership when I came some 12 years ago now that that I think is the best way to get the best opinions around the table and that is rather than asking for a vote the first thing we do is a chart on the board of the pluses and minuses the risks and questions and so everybody around the table before indicating what their opinion is share their views of the strengths and weaknesses so even if I if even if I my my predilection is against the deal I will be indicating what I think the strengths of the deal are so that everybody around the table sees the same data and then exercises their judgment so what it does is it it takes out of the process the notion that somebody may have a different set of facts or a different set of experiences than everybody else around the table it unifies the facts that we're looking at and then recognizes that people may have different judgment but not different facts so there's there's some research by by nd Buu which looks at when it happens that partners kind of make an individual investment where the partnership does not invest does that happen is that a very common thing does that happen at Kleiner Perkins that you as a partnership would say not for me and then you as an individual would say I still go for it we don't do that at Kleiner Perkins which we feel it's a conflict with the interests of our limited partners we feel like it is inappropriate for us to allow a partner to vote to make an investment separate from the partnership so we we discourage that in fact it hasn't happened while I've been there except in special circumstances where we've allowed a partner to be part of an investment but not to take a different position contrary to the investment can you I love it a little bit why that is a conflict of interest well because we see it as the fact that as a partnership we have an OP fiduciary obligation to maximize the returns to our investors and we want all the investment we do not want there to be a sense of schism between the partners in terms of what we think the portfolio should look like we can have different opinions but we all have to it to embrace one portfolio give me give me a feeling fo that for your motivation as an investor right there's obviously a financial dimension to it but you look at an investment and say like hey this is gonna take off this is gonna be great we're gonna make a bunch of money would it be fair to say that there's also like I don't know their technological fascination that you kind of want to foster kind of certain areas can can you elaborate a little bit on what kind of gets you to invest in a business or gets you excited about something well I think every investors idiosyncratic I'm probably more idiosyncratic than most I I I frankly do not look first and foremost at whether the adventures gonna make me a lot of money that is not my first criteria my first criteria is does it solve a meaningful problem does it is it going to make a difference is it going to have impact that is going to get me excited enthusiastic about working hard on the project and it's going to make me proud of the project successful so I will not invest in a company even if the company has a very very strong likelihood of making money if it's doing something that I don't care about in particular I won't invest in the company if it's doing something that I disagree with so first and foremost I look for problems to self that's the first criteria big problems where I can have an impact number two is I look for people who share my values and who I believe I can make a positive and constructive contribution to in their own development as leaders and as as entrepreneurs so I need to find that chemistry with the founding team even if I if they're solving a big problem if I don't have that chemistry where I feel like I share their values if I'm going to be willing to take that distress call at 11 o'clock on a Sunday night if I don't feel that level of engagement with the person I won't do it third I need to find value of value creation not a business model but value creation and the reason I differentiate between value creation and business model is it's my job to create a business model I'm a student of business models that's what I bring to the table is the application of business models to a unique value proposition so I look for big problems people who I share values with and who I believe in and a and a proposition where I can create significant value and and hopefully develop a business model around that the the way you describe this is you work with people you like who you have a joint and joint value system and so on and and so I wonder it in most cases it still happens that the mentor goes nowhere right the met them at the venture fails how often does it happen that you continue to work with people on like new ventures or later on or bring them into other ventures is is that a frequent phenomenon or well in my career I've tended to work with the same people or with a small group of people who are one to one degree separated for almost 30 years there's always new people coming into the fold but by and large if I have that relationship with them if they're doing interesting work if they continue to have interesting ideas I continue to work with them on whatever they're doing thank you so much this was a great this was a truly great pleasure thank you for inviting me INSEAD is a fantastic experience I've I've really enjoyed it and I'm looking forward to tomorrow and thanks for this discussion you

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Length: 10min 53sec (653 seconds)

Published: Sun Oct 16 2016