Investors are only as good as the investment decisions they make. Yet for many venture capitalists, future-focused decisions are fraught with backward-looking predispositions.

A venture capital company's success hinges on the future milestones achieved by the businesses comprising a finite portfolio selected from a massive pool. That's why, to identify promising companies, most VCs have a well-defined process for how they vet, evaluate, and decide on where to invest their money. In that way, we're no different at Ascend Venture Capital. We follow a process to evaluate each potential investment in our pool to determine whether an opportunity is right for us.

However, where our process diverges is how founder pedigree is weighed in our calculus. Instead of zeroing in on past successes to drive an investment decision forward, we heavily consider the efficacy of the business concept first — before we even meet the founders.

Based on the unprecedented success of the Ascend family of funds, the efficacy of this method has been proven many times over. Specifically, it revealed opportunities for us to invest in moonshot companies that were being overlooked by other VC firms, particularly those companies founded by women and minority leaders.

We choose to focus on the promise of the business above all else — and you'd be surprised to learn how few do the same. So we wanted to take time to outline our process and what makes it stand out:

How do venture capitalists typically choose investments?

In general, it starts with a process of elimination. The typical VC is inundated with pitches, and most tend to look for reasons to say “no” as quickly as possible. Venture capital investment criteria are often similar to search criteria and might vary widely from one firm to the next. They could range from the procedural (e.g., no companies before Series C) to the seemingly arbitrary (e.g., no round sizes larger than $15 million), but they generally serve a dual purpose: to keep workloads manageable while ostensibly ensuring that optimal investment opportunities aren’t overlooked. 

After filtering out opportunities that aren’t the right fit, VCs will begin vetting potential “smart-choice” investments using a variety of methods. This process could be brief or exhaustive depending on an individual investor’s interest in a particular company. It might consist of reading pitch decks, fielding conversations with founders, talking with other investors, conducting market exploration, or any other activities that give VCs a better sense of the company and the viability of an investment.

Once the list of opportunities has been trimmed further, VCs will do a deep dive on the companies still in consideration. Generally, they’ll set up a data room for each company that contains everything from formation evidence to past transaction documents to historical and projected financial performance. Some data points will populate an investment memo (e.g., unit economic analysis), whereas others will amount to ticking procedural boxes (e.g., founder background checks) for proof of exhaustive due diligence. This process might take place before or after a terms sheet is issued, and it could still lead to a “pass” decision if some fatal flaw is uncovered. The final decision step might include a sign-off from an investment committee, input from a single individual who has considered all the data, or something else — but it essentially boils down to a “go” or “no-go” decision 

What Ascend Does Differently

As eager as most VCs are to find reasons not to invest in a company, many are also loath to completely dismiss an opportunity — an attitude that can lead to endless stress for founders. Rather than an outright “no,” an investor might say “not yet,” extending the research phase indefinitely or letting the conversation flounder altogether. As frustrating as it is, this behavior is somehow deemed acceptable in the VC realm.

At Ascend, we take a different approach to vetting opportunities. Rather than putting company founders (individuals who are clearly some of the busiest people on the planet) through an endless cycle of interviews, product demonstrations, and meetings that might lead nowhere, we take on the responsibility for information-gathering on our own. In fact, we don’t even speak with founders until we're convinced a company could have significant merit. This approach isn’t only a courtesy to the people who could potentially become stewards of our money, but it's also a response to a question that we’ve wrestled with at length: How do we reduce bias in decision-making?

The Quest for Objectivity

Recent PitchBook data reveals that the vast majority of VCs prioritize founder and executive team pedigrees first when evaluating an investment opportunity, followed by a company’s disruption potential. The latter is simply another way of saying market opportunity, which is indeed a critical factor. However, the term “disruption” implies a fast, interruptive force that alters the course of an industry, and it precludes other paths to capturing massive market opportunities. Sometimes, industry trends can be moving steadily toward an inevitable point, and the best way to position a startup could be to build in the direction of those trends. This strategy is analogous to the scene from the movie “Twister” in which the protagonists drive into the path of a tornado to place a bucket full of sensors. It’s not really conjured by disruption, but it still captures a massive market opportunity. 

Semantics aside, it’s vital that VCs focus on market opportunity when weighing the factors affecting investment. More problematic, however, is the disproportionate attention paid to founder pedigree — particularly compared to factors such as business model and path to profitability, which garnered lesser importance in that same study.

In contrast, Ascend makes investment decisions based on the merit of the companies we evaluate. We don’t dismiss founders simply because they don't boast a record of past successes, a vast network of potential customers and funders, rare domain expertise, or other attributes. Similarly, we won’t willingly look past strategic, competitive, or business shortcomings just because those attributes are present. After all, every one of the individuals who have those attributes were once unproven themself, and if the firms that backed them in the beginning believed pedigree was so important, these former first-timers might never have received the funding that propelled them to success — and those firms would have failed to capitalize.

Moreover, the focus on founder pedigree opens the door to discrimination, as the ambiguity of the factors subsumed by this term almost always results in decisions influenced by conscious or unconscious bias. Data from 2017 demonstrated that female founders received just 2% of all VC funding that year (despite controlling around three-quarters of consumer spending). Similarly, more than half of unicorn companies have immigrants at the helm, but these ventures generally receive fewer investment dollars. Little has changed: Black and Latino founders were involved in fewer than 4% of deals in 2019, and female-only founding teams received just 2.3% of venture capital in 2020.

Focusing on What Matters

Although Ascend does consider the collective experience and abilities of the founders we invest in, we simply don’t attach untoward weight to these attributes in our investment decision-making process. Instead, we’ve had success by focusing our discovery on the following key factors, which we consider prior to setting up a meeting with a company’s executive team:

If our research reveals that a company meets each of the above criteria, we want to meet the executive team. Through that process, we consider many of the same attributes that other firms consider, but again, we don’t weigh many of the “traditional” factors as heavily as decision drivers. Instead, we prioritize founders with clear storytelling ability, vision, and flexibility. In our experience, if a founding team can demonstrate these traits personally, they have a winning formula — and we want to be a part of the success that inevitably awaits them.

Are you an investor who wants to learn more? Schedule a meeting with Ascend GP Dan Conner.

Are you a founder who wants to get in touch? Contact us here to inquire about an appointment with Ascend.

Image by Hunter Harritt