Wednesday, May 15, 2013

De-Bunking Spray and Pray



I had an always inspiring meeting with Dave McClure today which got me thinking about why does everyone use the phrase "spray and pray" as a bad thing.  I immediately Wiki'd "spray and pray" and got the following definition:

"Spray and pray is a derisive term for firing an automatic firearm towards an enemy in long bursts, without making an effort to line up each shot or burst of shots. This is especially prevalent amongst those without benefit of proper training."

A few observations on this.  First, I think it's important to note that if you're going to invest in any seed-stage VC fund, it's critical to be backing a manager you think is making an effort to line up each portfolio company investment.  Whether a seed fund is investing in 100 portfolio companies or 30, each company should be invested in with the same level of due diligence and passion about building a 100x company that will return the fund several times over.  There should be a distinction when rushing to criticize a seed fund with a larger portfolio because there is a big difference between un-thoughtfully investing in tens or hundreds of companies with little diligence and hoping for the next Facebook, LinkedIn or Google, and taking a rifle shot approach to making an investment in tens or hundreds of companies with that same hope.  

The second part of the definition is key as well.  Investing in a seed fund with the benefit of proper training.  Anyone with enough capital can become an angel, and there is no shortage of cashed-out entrepreneurs seeking to raise a "micro vc" fund (see earlier post on why I loathe the term "Micro VC").  However, there is a huge difference between an angel and a venture capitalist.  That key difference is simply managing other peoples' money (OPM).  

I'm trying not to make this a defense of 500 Startups or Dave, but rather simply want to make the distinction between a VC spending OPM wildly by investing a huge portfolio and hoping that the law of large numbers and the passage of time will shake out a blockbuster over time.  After all, there's a reason why Dave is on everyone's list of references, both on and off record, in the seed space...  With the right team and proper training prior to managing OPM in the seed space, a 200 company portfolio can conceivably return the same and/or better performance as a seed portfolio with 30 companies.  

In fact, I'd love to see a seed manager never follow-on its initial investments and invest in every company that it had conviction can return the fund.  #Conviction.  If you place a $2 bet on every horse on a day's racing form to win, won't you end up making money when the 10:1, 70:1 wins once in a day's racing form?  Pick a good trainer to back and your bound to make money, regardless of the size of the field and the racing form.  

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