Venture capital investment strategies are increasingly falling prey to superficial "box-checking" exercises, leading to both poor investment outcomes and missed opportunities, according to Dan Gray, Head of Insights at Equidam. Gray argues that investors' overemphasis on founder attributes and credentials, particularly in early-stage funding, narrows the scope of what is considered a viable opportunity. This approach, detailed in a recent social media post, highlights two key pitfalls: the "Great Man Fallacy" and "Overfitting."
In his tweet, Gray stated, > "The quest for scale has turned much of venture capital into a box-checking exercise. Investors simply ask whether an opportunity meets the criteria of 'legible', so that it may attract downstream capital at an attractive multiple." He further explained that this often means emphasizing founder attributes and credentials.
The "Great Man Fallacy" describes investors assuming a company's success is solely due to a founder's intrinsic qualities, rather than recognizing these qualities develop alongside success. This can lead to overlooking promising founders who don't fit a pre-conceived mold, such as a young Jeff Bezos or Elon Musk. "Overfitting" occurs when investors adopt anecdotal "folklore" about founder attributes based on spurious correlations, which simplifies deployment and reduces career risk. These habits, Gray contends, "produce predictably bad investments, and missed opportunities, because they narrow the aperture of what is considered."
Academic research supports Gray's critique. A 2016 study by Gompers, Gornall, Kaplan, and Strebulaev found that 53% of early-stage VCs ranked founders as the single most important factor in deal selection, significantly outweighing business model (10%) or market (6%). However, subsequent analysis by Diag Davenport in 2022 indicated that algorithms predicting good outcomes leaned on product characteristics, while those predicting bad outcomes heavily relied on founder background, suggesting investors systematically overweighted education.
Gray advocates for a more holistic approach, urging investors to view "entrepreneurs as designers of problems worth solving," a concept borrowed from a paper by Mattia Bianchi and Roberto Verganti. This perspective suggests that the most crucial creative act of an entrepreneur is identifying and framing a problem. As Peter Thiel, co-founder of Founders Fund, has noted, "I don’t separate the ideas and the business strategy and the technology that much from the people. It’s all some sort of a complicated package deal." This integrated view suggests that the "atomic unit of entrepreneurship is not the founder, nor the idea, but the unique alchemical mix of both."
