The concept of judging a business by “lines not dots” has become something of a cliche in the venture capital community. The idea is to evaluate a company, not based on its status today (dots), but rather by the direction and velocity of its development (lines). VCs are trying to judge how fast a company is growing. And the most valuable companies tend to be the ones growing revenue, customer or product milestones faster than any others.
By reviewing “lines not dos”, a VC is evaluating a number of interlocking factors including team, market and product. The fact that a company is growing now, is not a perfect predictor of future growth. A VC still may do other due diligence including understanding the market. The mental model does not necessarily put 100% weight in a decision criteria on current growth. Rather the mental model says that seeing a company more than once gives you more information than seeing them once.
This approach can help VCs develop more accurate assessments of a company, but it can also be in tension with the “need for speed” (i.e. quick deals), which I have discussed in a previous post. In this post, I’ll discuss a few methods of adopting a “lines not dots” mental model that attempt to balance speed .
Methods:
- Short Lines: In a competitive VC market where hot deals may not wait around for long, VCs may make a decision based on a “short line”. They may monitor a company’s progress for a few weeks. For investors, having these short-run insights into a team’s trajectory is better than only considering information as a point in time. Although investors can receive false signals as some founders will manage the timing of information to create the sense of movement.
- Progressive Funding: Many accelerators invest in multiple pieces. For example, 500 Startups invest upfront and may choose to invest more after seeing a company perform. Another example is Hustle Fund which invest a smaller amount quickly and then works with a company before they make a decision about putting in a larger amount. Some VCs think about a follow-on round as a chance for progressive funding. One key difference is the step-up in valuation for the next round can be more significant and reflect the new positive information.
- Earlier Involvement: Another approach some VCs take is to get to know companies at an earlier stage. For example, a Series A fund may look to invest in a few seed deals. They spread the word that they invest at seed and Series A so they meet more companies. They invest in the most promising seed companies. And they have the option of monitoring the company and evaluating again for a Series A investment. Or another example may be volunteering to mentor early founders or judge a business plan competition.
by Miles Lasater with Julian Jacobs