VC Cliché of the Week

This week’s cliche comes from Rob Shurtleff, a VC with Divergent Ventures in Seattle. Rob wrote me a month or so ago suggesting I discuss "moving the needle".

This is a cliche I hear all the time. People use moving the needle as a test of whether to do something or not. If it won’t move the needle, they don’t do it. It’s a proxy for return on investment of time and money. If the return isn’t significant, the investment of time and money in a project doesn’t get made.

In the VC business, you hear this cliche a lot in discussions about whether a potential investment can impact the outcome of the fund. Smaller upside deals don’t move the needle so they don’t get made. Everyone is looking for the big winner.

I have two issues with this line of thinking.

The first is that I believe VC fund sizes have gotten very large requiring ever bigger winners to move the needle. When I started in the business 20 years ago, a $100mm exit, generating $20mm in value to our fund was always considered a big win. For many of the VC funds today, that would be a yawn. And that’s a problem because for many entrepreneurs, a $100mm exit is plenty big, particularly if they can figure out how to hold on to 20+ perecent of the company before the exit happens. The $100mm exit moves the entrepreneur’s needle but not the VC’s. That’s a problem.

The second issue is that I believe it’s hard to determine how big the outcome of a deal can be early on in its development. I have been involved in plenty of situations that started out with a relatively small, but well concieved, opportunity. And the entrepreneur built from there, either with product extensions or acquisitions. So there’s more than one way to move the needle in a venture deal. It’s a tricky problem. So we prefer to think about the end markets we want to be involved in, the people we want to work with, and efficient market entry strategies and let the needle moving problem take care of itself for the most part.

Moving the needle is a good framework to use to make decisions in business for the most part. But it can cause you to leave good opportunities on the table for others if you aren’t careful.