Monday, August 09, 2010

The Bayesian / Fibonacci VC

For a while I worked for a venture capital firm in California. The partners there were fantastic and I learnt a great deal from them and about how venture capital deals come together. Since I was a geek at a major VC firm I got access to all the startups in the area I was covering (at this time this was web services).

But I observed one amusing piece of VC behavior that you should watch out for: they sometimes act like a Fibonacci sequence in motion. Although VCs do a lot of technical and financial analysis on the startups they are considering investing in, and they spend a great deal of team digging into the team, they also, by nature, have to change with the times.

Part of changing with the times is continually updating their knowledge of the computer software and hardware marketplace and the trends that are being created in the minds of leading thinkers in Silicon Valley. That means they are constantly updating their view of the world by some hidden Bayesian process. They have some prior view of the world which is updated by talking to people. And since they are VCs they get to speak to the best people.

But they also sometimes go Fibonacci: the thing they are talking about now turns out to be some combination of things they recently heard. I saw this happen once in an amusing fashion where the CEO of a company told me that VC X had been asking him about whether he had 1/1 meetings with his team members. It seemed like an odd question.

I happened to know that the CTO of a different firm had told VC X that in his company 1/1s were non-existent and that this was creating a team morale problem. VC X had no reason to think that there was a problem in the other firm, he was just acting on f(n-1) (or perhaps f(n-1) + f(n-2)).

So, next time you are in front of a VC and he says something totally out of left field consider that he might have gone Fibonacci instead of Bayesian on you. You can probably ignore what he's saying. Or you might have just got an unexpected insight into one of the other firms that VC is dealing with.

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