Driving an SUV, Perception of Risk and Learning per $

I have been thinking about perception of risk in the startup funding market today — and this got me thinking about SUVs…

I have been thinking about perception of risk in the startup funding market today — and this got me thinking about SUVs…

When you drive an SUV you feel safe — it’s bigger, you sit up higher, you feel protected. But, this perception is dangerous. SUV drivers are often reported to be overconfident, tending to overestimate their vehicle’s capabilities and underestimate the risks they are taking with their driving behavior — in addition to more aggressive driving behavior, studies have observed higher rates of cell phone use and lower use of seatbelts among SUV drivers — highlighting that people do dumb things when their perception of risk is inappropriately low — and often pay the price as the risks they are actually taking play out.

As funds get bigger and encourage their partners to invest in opportunities from the very early stage to growth rounds it can’t help but change the VC’s perception of risk and their approach to investments — especially “smaller” investments that fall well below the average dollar commitment they are accustomed to making. Over the next few years we will learn how this affects the way these VC’s “drive” but when you have just been handed the keys to something like OBJs new Rolls Royce, the temptation to turn the music to 11 and push the accelerator through the floor has got to be high.

As a founder, the choice of partner and comfort with the way they will “drive” has always been critical. But, now CEOs not only have to decide if you want to spend your equity to buy the ride from A to B, but you also have to consider if it’s safe — and if the careless, music up, switching 4 lanes driving style will change the way your company operates and diminish your potential as a CEO.

The choice of how much to raise can also be influenced by the source of the capital — both size of the fund and the fund model. This matters because an oversized balance sheet at an early stage company is sort of like driving an SUV — the perceived risk of spending a dollar goes down and you stop maximizing learning per dollar spent (to me, the most important metric to maintain as you scale). With too much capital you can lose focus — get sloppy and slowly lose the sense of urgency that drove the company to success up to this point. I worry when the learning becomes less efficient or less focused — when founders stop wearing their seatbelt and start texting while they drive the company forward.

Even if the termsheet gleams clean, you should worry when the VC’s don’t care about the price or the amount you’re raising. Just like in an SUV, when the perception of risk doesn’t match reality, bad things will happen.