Nuance is Critical to VC Investing

I've been thinking about this for a while now, and I figured it's time to put it down on paper (so to speak).

As it's commonly known, successful growth investing (VC or PE) is driven by pattern recognition.*  Part of the pattern recognition is a keen perception of nuance, what is slightly different that will make this successful that rendered the other opportunity unsuccessful. It's rarely a glaring difference, and more often than not, the difference between success & failure so subtle that it's barely noticeable.

Ralph Waldo Emerson famously quipped "The line between failure and success is so fine that we scarcely know when we pass it - so fine that we often are on the line and do not know it."  The most successful investors are those who can understand the fine differences between now & then, this or that, and more importantly gainsboro or charcoal.  If everything was simple & straightforward, or black & white, then anybody could do anything.  Obviously, that's not the case.

As an investor, not only is it a necessary skill to understand this level of detail, this level of nuance, but to be able to articulate it to your colleagues, your partners, your investors, and everyone you need to communicate with.  As importantly, in VC/PE, most deals are heavily structured, so further conveying the nuance oriented thinking to the term sheet is critical to driving a desired outcome, and to mitigating failure.

Most of the great investors I've worked with have a keen ability to quickly synthesize what's important and what's not.  And, more importantly, quickly identify the nuanced differences from past patterns they've seen.  They are then quick to succinctly & concisely express those nuances to support their investment thesis.  

The adage of betting on the jockey or the horse is way oversimplified.  Successful investors bet on the skilled jockey that's on the perfect horse in an ideal race where the wind conditions are just right, the feed was properly mixed, the temperature is appropriate, the sun is facing east, the soil is just so, the other horses are misguided, the other jockeys weigh too much, and countless other details.

Great investors, like great entrepreneurs, are obsessed with quality, with detail, with nuance, and those that consistently perform well are those that can appreciate & understand the differences between gainsboro or charcoal.


* I use the term growth investing instead of value investing, as nuance detection may be less critical to successful value investing.  Skills are quite different, possibly the subject of another post down the road.