Building Conviction: Why Great Investors Must Move Beyond Bad Pattern Recognition

There are a lot of average to poor VC track records out there and bad pattern recognition/not doing the hard work is a common driver of poor performance.

When I first became an “Operator-turned-Investor” almost 16 years ago, I thought that making good investment decisions collapsed to an exercise in pattern recognition. In fact, I was told this explicitly by many successful Investors. See everything. Look for patterns. Then invest, analyze, learn, repeat.

Fast forward 16 years and 220+ funded companies firmwide and I have a very different perspective about what it takes to be a great Investor. And one of the main pieces of advice I would give to the “younger me” is to do the necessary work to avoid bad pattern recognition.

While this sounds obvious, it’s a concept that’s worth internalizing. The key is to know when to trust previous patterns and when to ignore them which is anything but a simple task. Sometimes art needs to override science and intuition needs to override history. And in most cases, the “why now” is the reason for breaking historical patterns.

I’ve seen bad pattern recognition around “Failures”:

Some investors won’t fund a startup in a space that’s produced marginal outcomes in the past based on the pattern recognition that outcomes are commonly a result of an industry’s structure.

I’ve seen bad pattern recognition around “Competition”:

Some investors won’t fund a startup when there are successful late-stage startups and incumbents in the space based on the pattern recognition that the opportunity is limited because momentum is real and winners win.

I’ve seen bad pattern recognition around “Location”:

Some investors won’t fund a company outside of a major tech hub based on the pattern recognition that hiring talent as a company scales is much more challenging in all but a few cities.

I’ve seen bad pattern recognition around “Team”:

Some investors won’t fund a first time Founder based on the pattern recognition that first time Founders have thin networks, they need help hiring talent and they don’t have experience raising capital.

I’ve seen bad pattern recognition around “Investor Signal”:

Some investors won’t fund a startup when there are other startups in the space that have top tier investors on their cap tables based on the pattern recognition that these institutions crown the winners.

In today’s environment, bad pattern recognition is increasing in frequency because many less-experienced VCs were trained in the super cycle to chase consensus based opportunities with quick mark-up potential vs. playing a 7–10 year multi-turn game that builds sizeable and durable companies.

And to these less experienced VCs I’d offer the advice: “Do the work to build your own conviction.” Borrowing someone else’s conviction or solely relying on historical patterns aren’t drivers for top decile performers so just DO THE WORK (expect to post a ho hum track record at best).