Discover more from Also Blog Posts
How We Do Tech Diligence at Seed
And why returns come from focusing on "what if...", not "yeah, but..."
Tech diligence is one of the most hotly debated topics at seed. Should we have PhDs review the tech and write reports? Should we ask industry experts for their tech roadmaps? Is this IP *truly* novel? How do we validate that? How do we conduct high quality tech diligence and still move with speed? As an early-stage technology investor, I’m constantly asking myself how much tech diligence is *enough*?
After doing this for close to a decade, I’ve come to the conclusion that excessive tech diligence doesn’t reduce risk, and never increases returns. One could even argue that the volume of upfront tech diligence is inversely correlated with returns, but maybe that’s a bridge too far...
In our experience, we’ve found that the best returns come from following the best founders, and the best founders can get even less technical investors up to speed quickly by:
Making technology easy to understand for lay people;
Succinctly articulating the key underlying risks in the tech development roadmap; and
(Quickly) building investor confidence in their execution ability using concrete examples from prior personal or professional experiences.
We’ve also found that following the tech instead of the founders tends to overexpose us to what feels like adverse selection. Companies that lend themselves to expansive technical diligence (at the seed stage) tend to fall in one of three buckets:
Crowded Markets: The tech is in a well-developed area with lots of information available but no breakout solution or company. It’s hard to know what’s novel vs. commodity. Failure Mode: It’s hard to convince follow-on investors why this particular company is the winner.
Science Projects: The topic area is complex without a clear solution or pathway to build a venture scale company. There’s lots of academic research, but no singular company built around that research. Failure Mode: it takes too long to hit obvious tech and development milestones, and follow-on investor appetite stagnates.
Investor Indifference: Lots of time available for technical diligence at seed is usually consistent with scarce investor appetite for the opportunity, and often these situations do not fall in the enviable category of being non-consensus and (eventually) right. Failure Mode: founder is unable to catalyze the capital for the opportunity for any number of reasons related to the team, market, or tech.
Instead of underwriting novel physics, reviewing patent claims, or diligencing system architectures as a skeptic, we take the more optimistic view and underwrite people. We ask questions like:
Has this founder/s shipped complex product (hardware and/or software) before? On what timeline?
Could this founder be solving other problems instead of this one? What is their opportunity cost? How much skin do they have in the game?
Is this founder able to attract and retain a team to design a solution that is novel in the aggregate? Is this one person’s science project or do they have a vision to create something bigger?
If they build what they say on the timeline they say it, how does this solution slot into existing value chains?
None of these areas of focus necessitate us spending exorbitant amounts of time diligencing tech novelty. Instead, we spend our precious time evaluating the leading indicators of technology and company success…the people behind the technology. We evaluate their core motivations and drivers, ensure we have aligned incentives, and invest our time to help them go faster through introductions to vendors, talent, and follow-on capital. We focus on “what if” not “yeah, but.”
Of course, this approach is difficult to put into practice. We do overlay a degree of rationality on evaluation of a proposed technical solution, but our edge is in having developed an intuitive understanding of how much is enough, which allows us to move faster than the average seed-stage investor evaluating technically heavy ventures. We’ve developed a trusted network of experts, advisors, and LPs who can quickly give us insight into the degree of practicality embedded in a potential company’s innovation. Close relationships with technical leaders who have been responsible engineers (“RE’s”) on projects like Starlink’s optical space laser rollout or rapid-response molecular diagnostic testing who can *quickly* get us up to speed on new technologies and their relative market position, without needing to read reams of academic literature, is a key way we differentiate and are able to move with speed and urgency.
Venture is a competitive game, and moving with speed, urgency, and conviction is key to backing the best people and realizing the exceptional returns we expect for ourselves and our investors. Focusing on the “what if”, not the “yeah, but” is the way to success, and honestly, is just a lot more fun :)
(Starlink’s laser crosslinks visualization)