Conviction and Discipline

Recently, the tweet below from Austen Allred has shown up on a few separate occasions in my feed. One of the responses was from Leo Polovets who is one of my favorite VC’s to follow both on Twitter and at his blog.

His reply led me to this post by another must follow for aspiring VC’s, Charlie O’Donnell, of Brooklyn Bridge Ventures, a pre-seed / seed VC firm in NYC.  Charlie knocks it out of the park on how to execute conviction and the signal it sends to founders as well as other investors so I won’t be attempting to duplicate something that has already been written.

However, I do want to touch on where conviction has manifested itself thus far for us.  As it turns out, conviction isn’t just making (or leading) investments others won’t.  Just as importantly, it includes having enough conviction in your own process to stick with the plan as a firm even when an investment feels like a potential opportunity.

This is a tough balance because it’s also important to remain open-minded to non-obvious opportunities.  It’s early for me, but I think these questions have proven important early-on:

1. Are you willing to pick companies when no one else has yet?
2. Can you stick to a thesis?
3. Will you pass even when a company looks like it could be a good investment?

The first point here is fairly self-explanatory, do you have the conviction to write a check even when others have passed or haven’t yet?  Here, I agree with Charlie, only writing checks when others commit is telling the market “I’m not smart enough to be doing this alone.”

Importantly, this adds more risk to the riskiest stage of VC.  The size of these rounds means there is no guarantee that you’ll be able to get into the round once a lead is established.  Investors who believe early and are willing to take the lead get the deals.

This is common in underserved ecosystems where the seed-rounds are in the $1-2M range. Typically, these rounds only have 2-3 investors comprised of a financial lead and 1-2 investors who write smaller checks but bring additional resources to the table.

Discipline is the sidekick to conviction.  Bearing in mind that opportunistic investments do happen, the challenge becomes remaining convicted in a thesis and/or strategy even when good (not great) deals present themselves.  This is especially when the time between investments is longer than expected or just starting out when the results of the process are to be determined.

As Ray Dalio wrote in Principles, “Maturity is the ability to reject good alternatives in order to pursue even better ones.”  Alternatives, in this case, come in two primary forms: thesis (what I would call industry for us) and stage.

We have two primary objectives at Intelis.  First, we partner with companies that are impacting the slow-change economy.  Second, we invest in the seed-stage meaning if we invest too late it’s possible we are diluted to the point where even a home-run could result in minimal cash-on-cash returns.

It’s common for us to see great businesses in industries where we have little expertise, or within our thesis but later stage preventing us from getting an initial share that makes sense.  It’s easy to fall in love with great founders and businesses, it’s extremely difficult to stay disciplined enough to pass when the fit isn’t perfect.

I’m hopeful our acute awareness of the damaging effects of distraction and indecisiveness from our time as operators continues to translate in this new phase.

Conviction and discipline are so important in practice because they play a large role in the most crucial decision in investing, actually investing.