Inside the Mind of a Venture Capitalist

By Vyacheslav Polonski

Doctoral student Vyacheslav Polonski (@slavacm) shares some Insights into the investment philosophy of Simon Rothman, Partner at Greylock, following Simon’s talk on campus this term.

Building a startup that has the potential to disrupt the system isn’t easy. Investing in such a startup can be even harder. The renowned investor and entrepreneur Simon Rothman visited Harvard Business School in October to act as a guest expert in the Strategy & Technology class taught by Dr Andrei Hagiu. Mr Rothman met marketplace entrepreneurs at HBS and talked about investments in disruptive businesses.

Mr Rothman is currently leading Greylock’s $100 million commitment to marketplace investments. During the class, he revealed his investment philosophy and discussed his recent investment in the food delivery startup Sprig, which raised $10M in Series A from Greylock Partners, Accel Partners and Battery Ventures in April 2014.

Marketplace businesses like like Lyft, Etsy, Airbnb and TaskRabbit have been at the heart of the growth of the sharing economy, creating value through direct interactions between multiple customer groups. However, from an investor’s perspective, it can be sometimes very difficult to predict the success of online marketplaces, especially if these marketplaces are associated with new kinds of transactions.

Rothman, like other investors, posits that the most important criterion to make investment decisions is the potential of the startup to disrupt the status-quo. Yet Rothman’s investment philosophy goes one step further.

“For a startup in the sharing economy, the entry point is evidently not the end point”, he remarks. This suggests that, given the limited resources available in the early stages of startups, founders should start with a small market, provide a valuable user experience, and then expand both their vision and operations to disrupt larger parts of the economy.

For example, Sprig started by offering a controlled value proposition in the on-demand food delivery sector for locally sourced, sustainable, seasonal meals. By initially limiting the number of menu choices, the startup was able maintain significant margins and deliver high-quality food in under 10 minutes at the tap of an icon.

Rothman notes that this strategy disrupts the usual trade-off between convenience, quality and cost that users typically face in their daily food decisions. In this regard, Sprig has many expansion options that may potentially include further marketplace-like elements. “It was the right team with the right direction with a greater vision ahead”, says the experienced investor. 

Rothman provides hands-on advice on VC investment decisions. In a larger VC fund, one always has to start with a careful analysis of the business fundamentals of the investment candidates: the size and fragmentation of the market, industry structure and competition, operational feasibility and access to resources, defensibility of the market position and barriers to entry, as well as the pricing structure of the business model.

However, this is often not enough to make a multi-million dollar investment decision.”Sometimes it can be just about the simplicity and beauty of the idea,” Rothman says, “If it feels like the future, it is probably worth investing in it.”

The most surprising insight into Rothman’s investment philosophy came up toward the end of the class session. One of the best ways to recognize a good investment candidate is to look at the regulatory pressures associated with its growth, he said.

In this respect, regulatory hurdles can be seen as valuable signals rather than problems. Regulations and laws represent artifacts of the existing system. As a result, a truly disruptive idea is unlikely to fit into the regulatory ecosystem if it wants to enable new interactions, behaviors and new ways of thinking. “If you don’t raise regulatory concerns your idea is probably not big enough” says Rothman. Airbnb, Uber and Sprig are good examples of ideas that profoundly impacted everyday consumer decisions, forcing regulators to re-assess existing policies and legal frameworks.

“These are the kinds of ideas you should be working on, and these are the kinds of ideas we should be funding,” concludes Rothman, “You have to push the boundaries of what is legal and possible, but please don’t end up in jail.”