In the introduction to Malcolm Gladwell’s book, Blink: The Power of Thinking Without Thinking, the author tells the story of a marble “kouros” statue purportedly dating from the sixth century B.C. whose style matched that of only 200 other statues known to still be in existence.
An art dealer, Gianfranco Becchinam, was offering to sell the statue to the J. Paul Getty Museum for a cool $10 million-not a bad investment for the Getty if this particular kouros was the real thing. The Getty took the statue on loan and moved with caution in its due diligence. It hired a geologist to take core samples of the statue’s stone and surface layers. The conclusion? The stone, dolomite, came from an ancient quarry on the island of Thasos-and because it took hundreds if not thousands of years for Dolomite to turn into Calcite (found on the layer of the statue), this particular kouros had to be very, very old indeed.
Even though two experts, including one who sat on the Getty’s board, concluded after just glancing at the statue that something wasn’t quite right, the Getty didn’t give much weight to their hunches. Finally, after 14 months of due diligence, the museum was satisfied and bought the piece.
But once the Getty started to show the kouros, more experts said that something about it just didn’t look right. The chorus grew so loud that the Getty went back and re-checked its due diligence. It turned out that the documentation that came with the statue was faked. And the scientific evidence dating the stone? Flawed-nothing a little potato mold on dolomite couldn’t replicate.
How could it be that a few experts who had simply glanced at the statue knew something that 14 months of rigorous due diligence couldn’t turn up? That is the central question of Blink. Gladwell makes the argument that our subconscious plays a very active role in how we make decisions. He describes the lightning-fast decision making in our subconscious as “rapid cognition” and “thin slicing.” By understanding that process and with practice, Gladwell argues, we can use rapid cognition to our advantage.
With that in mind, we began to wonder: What returns might we all have as early stage VCs if only we could be as prescient and intuitive as those art historians and antiquities experts? Can we listen to a pitch and know minutes into the PowerPoint-perhaps minutes after shaking an entrepreneur’s hand-whether a deal “feels” like something we should take a deeper look at?
We at Labrador think that the answer is yes, that we can “blink” and know whether a deal feels right or wrong. Often, the rest of our due diligence merely confirms what we “thin slice” upon first impression. Though it’s often hard to know in advance which information is-in Gladwell’s words, “central to the outcome of a decision” and which is irrelevant (or corrupting)-the ability to recognize the information that matters and the information that doesn’t often separates a good investment from a home run.
For example, the venture firms that first looked at Cisco years ago all said the same thing: The technology looked great but the husband-and-wife founders were a problem. The firms that backed Cisco took that same data, made those same observations, but decided that the husband-wife relationship wasn’t relevant to the company’s success. It was the technology and its capacity for market creation that mattered. Likewise, how many firms passed on eBay on its first run up and down Sand Hill Road? Benchmark “blinked” and saw a huge online community of buyers and sellers-not just a niche swap meet for Pez dispensers.
With Altierre-a San Jose, Calif.-based RFID company we recently invested in with ATA Ventures and Kinetic Ventures-we didn’t have to filter out such hurdles. The company captured our interest on several different levels and we, the three partners, each “blinked” in unison. It didn’t take longer than 30 minutes into the first pitch to know that there was something there in terms of solving a real business problem: It was the kind of large market opportunity that we all like, and all three of us were “blinking” at the same time. That last point was critical because our funding decisions must be unanimous.
This latter point should not be underestimated because all of us “blink” differently. One of our partners likes to see at least one, if not more than one, large-company-polished-executive type on a startup team that has a large-company “look and feel.” Altierre had that. Another likes to see technology geeks who possess domain expertise in a specific technology. Altierre had that as well. And I appreciate scrappy startup guys, the types of entrepreneurs who will make it happen regardless of what’s thrown at them. Altierre had that, too.
Moreover, Altierre was already a model of success, based on positive “blinks” from the past. If this sounds like venture capital 101 it is-and yet it isn’t. Though many firms could have looked at Altierre in just the same way, many didn’t. Beauty is in the eye of the beholder. What gets in the way of their own “blink” is their own rapid cognition. (Does Altierre trigger a negative or positive blink based on past experience?) And what will the subsequent due diligence checklist tell them that their own subconscious can’t or won’t? Yet, in this regard, there’s an axiom we’ve found all too true: If you need to know the unknowable, you’ll never make the investment.
The First Hour
If we can assume for the moment that 80% of all investment decisions are made within the first hour of looking at a deal, then due diligence ultimately becomes the exercise that either confirms or rejects your initial “blink.” Yet, without even an initial spark of interest in a startup, no amount of due diligence will ever overcome a doubting intuition. VCs know this, as do entrepreneurs.
“You know going in, even from the body language, whether someone is going to invest; the rest of it is just a validation exercise,” says Sunit Saxena, CEO of Altierre. “You’re either looking for the fear or the spark. … I can’t even recall one situation where we didn’t see a spark at first, but then saw it later. Yet, if there’s fear, the fear of making even the slightest wrong move, then the due diligence is all about looking for just the right answer to validate those fears.”
Saxena says that when he pitched Altierre to other VCs it often didn’t take more than 15 seconds to know that they wouldn’t invest. In contrast, during the first meeting with ATA Ventures, Saxena spent several hours with the partners explaining the business, even though he was allotted less than one hour to make his first pitch.
“It’s a pretty easy blink actually,” Saxena says. “You walk into a firm and a guy’s sitting there eating a meatball sandwich and you ask yourself, How can I work with a guy who’s eating a meatball sandwich while I introduce myself?'”
Ultimately, entrepreneurs know it’s about getting all partners to “blink,” even if they “blink” in different ways. At a recent board meeting for another Labrador portfolio company, the conversation focused on both the timing of the next investment (pre- vs. post-product launch) and the investors the company should target. While the timing question clearly influenced the projected valuation and the potential amount to be raised, the more interesting discussion focused on a categorization of potential investors.
VCs were broken down into “fall in love” types (the kind of people who rely more on “blinking”) and “Missouri” types (people who don’t make decisions without rigorous analysis and metrics). If we were choosing to pitch for funding pre-launch (i.e. prior to any hard data proving the full business model) we should pitch to the “fall in love” types. Then, after the launch, we would pitch to the “Missouri” types.
In evaluating a recent pitch from Pictopia, an Emeryville, Calif.-based startup that specializes in e-commerce for digital images, we “blinked” and yet we didn’t. That is to say, two of us “blinked” and had a good feel for the deal from the start, while our third partner had doubts. Where was the defensible technology? Why couldn’t anyone else do exactly the same thing? It wasn’t a strong enough “blink” to pass, but it was clearly strong enough to check ourselves and make us dig deeper. Finally, after reviewing a large due diligence package, making our calls and constructing our own financial model of the business, our “Missouri” partner’s brain said we should invest.
All Together Now
Complementary “blink” chemistry among partners is essential for partners to save each other from making bad investments. We each bring years of different company-building experiences that fuel our subconscious pattern recognition.
In fact, after taking a look at nearly all of our investment decisions over the years, we discovered a fascinating fact: When we all “blinked” as one-that is, when no partner gave in to the logic or passion that another one or two saw in a deal-positive results usually appeared down the road. Yet, when even one partner fought intuition, ignoring his own “blink” for the myriad reasons that play into partnership decision-making, more often than not disaster lay ahead.
Can VCs “thin slice” companies? Absolutely. Should they do so in lieu of due diligence and their own years of better judgment? Absolutely not. It’s the willingness to combine the two that betters our odds.
Larry Kubal is a Partner at Labrador Ventures. He is the firm’s representative with portfolio companies Akira Technologies, Aperto Networks, Proficient Systems, Savage Beast, Soligence, and Teraburst Networks. He may be reached at