- Pattern Matching
- Description
- Pattern Matching is when an investor uses patterns or experience from the past in order to make decisions about the current investment. You can think of it as reasoning by analogy or using the benefit of experience to recognize similar situations. It can be used for attributes of the business like seeking to serve a certain market which may or may not be desirable. It also can be used to recognize certain founder “types”. In the simplistic form it can mean the founder worked at a certain company or went to a certain college. At one point, the term had a more neutral connotation and now has a fairly negative connotation implying the perpetuation of systematic bias. (As a side note, Venture Patterns is an attempt to catalog the recurring patterns so they can be discussed and selected carefully as they apply not blindly followed.)
- Benefits
- Make Better Decisions – using the benefit of experience to recognize patterns and reason about the future is an important cognitive skill and can help one avoid mistakes in multiple areas of life.
- Less Financing Risk – If a portfolio company is expected to need further capital beyond the current round, then it is important to believe that the company will have a good chance of raising that capital. By being aware of patterns that other VCs are using in decision-making, it can reduce financing risk.
- Short-term Mark Ups – In the short-term VCs are incentivized to have portfolio companies show an increase in valuation in the next VC round. The companies that fit the patterns that other VCs are seeking may be more likely to raise money at higher valuations.
- Trade-offs
- Risk of Bias – In using Pattern Matching, there is a risk of increasing bias into the decision-making process. Particularly in reasoning about what makes a good founder, it is important to be careful not to make assumptions.
- Risk of Identifying a Non Causal or Incomplete Pattern – A pattern could be misidentified so that it is not actually the core of the issue that causes the desired outcome. Or the pattern could be incomplete in that the category is too broad or is missing an important component that makes the pattern useful and predictive.
- Risk of Applying the Wrong Pattern – A pattern could be inappropriate for us in this situation or even would have been appropriate in the past but the world has changed and it is no longer helpful.
- Reducing Critical Thinking – Overdone Pattern Matching can reduce critical thinking and beneficial skepticism. A particular risk is stating patterns as laws or maxims rather than more accurately stating them as a collection of data points that may or may not be predictive.
- Examples
- On VC was quoted by NYTimes as saying that he could be tricked into investing in any founder who looked like Mark Zuckerberg (founder of Facebook). While he claims it was a joke indicating he believes the opposite, the quote became a symbol of the problems with Pattern Matching for use with founders (based on stereotypes about looks, race, age and gender).
- Description
