Most VCs are momentum investors

Edited excerpt from The Hacker’s Guide to Investors by by Paul Graham:

This is how most venture investors operate. They don’t try to look at something and predict whether it will take off. They win by noticing that something is taking off a little sooner than everyone else. That generates almost as good returns as actually being able to pick winners. They may have to pay a little more than they would if they got in at the very beginning, but only a little.

Investors always say what they really care about is the team. Actually what they care most about is your traffic, then what other investors think, then the team. If you don’t yet have any traffic, they fall back on number 2, what other investors think. And this, as you can imagine, produces wild oscillations in the “stock price” of a startup. One week everyone wants you, and they’re begging not to be cut out of the deal. But all it takes is for one big investor to cool on you, and the next week no one will return your phone calls. We regularly have startups go from hot to cold or cold to hot in a matter of days, and literally nothing has changed.

Notes:
(1) Cf. There are only two ways to raise money for a startup.
(2) Implications for startups: Don’t raise money if you don’t have momentum in your key metrics, or you’re at an early enough stage that you can “sell the dream”.
(3) Cf. What one early stage VC looks for when he meets companies.

3 thoughts on “Most VCs are momentum investors

  1. Great quote! Btw, I think no. 1 actually qualifies as value investing – as they don’t look at market performance, but at the economic performance of the company.

  2. Pingback: Why VCs push startups to scale prematurely | A Founder's Notebook

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